Hyprop on the up? – Moneyweb

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Welcome to the 80th episode of The Property Pod, South Africa’s premier property investor podcast. On this weekly Moneyweb podcast show we gain insider insights from leading executives, analysts, developers and entrepreneurs in the country’s expansive property industry.

On this week’s edition, we are talking retail property, as there seems to be an uptick in deal-making or mergers and acquisitions in the SA shopping centre space. Retail property stocks too have been affected by poor sentiment in the listed property sector, but most have recovered in terms of footcount and trading densities following the Covid-19 fallout.

There was a big deal announced last week with Rosebank-based Hyprop Investments buying Table Bay Mall in the Western Cape for just over R1.6 billion. In addition, struggling Rebosis sold some of its malls recently and Vukile is finalising the purchase of BT Ngebs City in the Eastern Cape.

Read/listen:
Hyprop buys Table Bay Mall for R1.6bn
Keillen Ndlovu on listed property being ‘out of favour’
Hyprop delivers double-digit distributable income growth

But we are talking about the big Table Bay Mall deal on the podcast with the CEO of Hyprop, Morné Wilken. The deal is Hyprop’s most significant local acquisition since Wilken became CEO and for the group in years.

We also get an update from Wilken on how the fund is doing, and on its credit rating upgrade by Global Credit Ratings (GCR) last week.

Highlights of his interview appear below. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts. 

Hyprop’s newly acquired Table Bay Mall in the Western Cape. Image: Supplied

Highlights

On Hyprop’s big Table Bay Mall deal … That’s quite a sizeable acquisition, and we reported that it’s somewhat of a surprising deal. But how did that come about, has the group been looking at this asset for a while?

“We are constantly reviewing our portfolio and looking for new opportunities. Our capital allocation is in line with our priority focus on increasing our exposure in Eastern Europe as well as the Western Cape. Given the type of assets in our portfolio, there are really limited assets we will look at in South Africa. Table Bay was a unique opportunity.”

“I know the Zenprop team from some other dealings we had with them before, and therefore we started to have this discussion around [the] Table Bay Mall [acquisition].”

“I think it’s a unique opportunity for us to acquire something like this. It’s a premier retail property at a fair market value.”

“It’s in a very strong growing catchment area, and it’s very much in the early stage of its lifecycle. We do think there are [some] quite low-hanging fruits to improve the performance of the mall initially, and then obviously long term we will have a whole repositioning strategy around the mall; and we have the team to drive that.”

“So I’m quite excited about this opportunity. What it also does is it’s a new asset and it complements our portfolio because a lot of our assets are [somewhat] older, and therefore we are quite excited about this opportunity.”

Hyprop already own several properties in Cape Town, including the Western Cape’s biggest super-regional mall – Canal Walk. Are you looking at more acquisitions in the province? What’s got you so keen on the Western Cape?

“I think potentially after this acquisition [Table Bay Mall] we will actually recycle some assets and then focus on selling out of Africa [Hyprop has a small portfolio outside SA], and actually creating value out of the new acquisition to settle it down.”

“So buying further opportunities in the Western Cape I don’t see as a possibility. We are looking for other opportunities in Eastern Europe, and maybe if we get something that works for us there, we will consider that. But nothing on the radar as yet.”

You mentioned ‘recycling opportunities’ … I’ve asked you on a number of occasions, at various results, whether you are in a position to talk about what might be up for sale in the Hyprop portfolio?

“Well, I think it’s well known in the market that we are in the process of selling our Africa investments. Hopefully we can get some traction on that because we’ve got about R1.5 billion of capital tied up in that investment, and you can actually redeploy much better in opportunities like Table Bay Mall …”

“We are in discussions on one or two assets. Unfortunately, I can’t disclose them still. As soon as there is a bit more certainty around those, we’ll definitely come to the market about it …”

“As I said before, the focus [is] to increase our Eastern Europe portfolio and Western Cape portfolio is actually a priority, but … we’ll be very selective on new opportunities …”

“Obviously all our decisions will be made to ensure we maintain a healthy balance sheet and make the right long-term decisions. So I don’t think we will change our strategy in terms of our diversification. Maybe timing-wise we would like to recycle assets before we go and redeploy the capital somewhere else.”

The Reit [real estate investment trust] space is under more pressure with interest rates adding to your business woes. But, by buying a billion-rand-plus asset, Hyprop is showing some expansionary optimism as it were in the SA market. What are your thoughts on that?

“I think I share [your] sentiment. We are concerned about the state of the SA economy – the ongoing corruption, lack of service delivery, especially in Gauteng, and the collapse of infrastructure. And therefore, it is a bigger focus for us in the Western Cape.”

“But at the end of the day we are a South African fund, so our focus is on South Africa, and where we have a diversification strategy into Eastern Europe to mitigate some downside risk in SA.”

“But we also think you must invest counter-cyclically. Maybe interest rates are quite high now, so if you look at assets in these situations, I think you can actually buy better-quality assets … But when you tick the boxes of whether it’s the right investment in a tough economy, I think it actually will just perform much better in the good times.”

“Therefore, I think our focus is always sell in the good times, acquire in the bad times, but unfortunately that’s not always possible.”

More positive news coming out of Hyprop was your recent credit-rating upgrade by GCR. How important is this for the group?

“It is very important to us. Since we [the new management team] joined the group about five years ago, our focus was to improve our rating, and the team has done excellent work and I think it’s paying off. We reduced our loan-to-value, or LTV, we created real euro equity in the Eastern Europe portfolio, and settled some of what we would call euro equity debt. We spread our debt maturity profile quite nicely.”

“The other thing that was key for us was to improve liquidity and increase our revolving credit facilities; we’ve got R2.3 billion of resolving credit facilities that are undrawn at the moment. Then the other thing that’s also important is to increase the unencumbered assets in our portfolio – which is very positive from a rating perspective.”

“So I think the hard work is starting to pay off, and we are very excited about it.”

Hyprop seems to be on the up. The group has had somewhat of a turnaround, as I mentioned, in terms of dealing with the Hystead side of things overseas, and a better-performing local portfolio as we’ve seen in your results recently. Can you give us an update here as that definitely contributed to the rating agency upgrade?

“Yes, it definitely played a role in simplifying the group structure – and the key thing was to liquidate Hystead. So what we did was we actually acquired four assets directly from Hystead, the assets we thought [are] the valuable ones, and we sold what we will define as the non-core assets.”

“All these sales, which are very good, actually happened very much in line with our carrying values. That actually supports our property values – that they are intact – so we are quite excited about it.”

“What is quite good about this whole strategy, as I said, is it’s part of a diversification strategy and really just to mitigate some downside risk on South Africa.”

However, from the results this year, Hyprop put out [a warning] that next year will be tough. What’s behind this forecast, and is it mainly around concerns around higher interest rates?

“Yes, I think our negative guidance we’ve given where we see a -10% to -15% is purely driven by the increase in interest rates.”

“[However], one of the key things we have done, which we communicated with our results presentation, is we refined our hedging policy to further improve the mitigation [of] interest rate cycles in the future. We are quite positive that we will go through this cycle, and hopefully rates will start coming down again.”

Read/listen:
Hyprop delivers double-digit distributable income growth
Profile: ‘CEE’ what Pieter Prinsloo is up to …
MSCI Trading Density Index: Super-regional shopping centres continue to lead the charge with 16.2% growth
Top landlords ditching Gauteng for Western Cape where ‘returns are better’
One more Sarb hike on the cards – Bank of America

Will we see further investments or acquisitions from Hyprop in the next year or two? I know you spoke about that a little bit, but perhaps you also want to talk about planned capex on your existing assets, like Canal Walk? 

“I think the focus for now will be to sell Africa and sell some of the mature assets before buying further assets. We definitely want to bed down the new acquisition and unlock value where we see fit. We will keep on looking for new opportunities. Obviously, if you find the right thing you need to plan around it.”

“In terms of our capex going forward, the normal capex will be covered by our 75% payout ratio, by keeping the 25% [for use on capex].”

“The key thing for us in terms of what we will call ‘super projects’ – and those include the extensions we are planning at Somerset [Mall] as well as Cape Gate – obviously the big thing for us is to upgrade the food court. We will do that on a case-by-case basis, but luckily the extensions are going to be quite yield-accretive for the fund. So it’s positive if we start deploying capital in those investments.”

You talked about the food court. Is that in Somerset Mall or Canal Walk? And with all this investment locally going in the Western Cape, are thinking about moving Hyprop’s head office from Rosebank to the Cape Republic (chuckle)? 

“The food court [upgrade] is at Canal Walk. The [planned] extensions are at Cape Gate and Summerset Mall …

“For the time being we will remain in Rosebank.”

Listen to the full episode here.

You can also listen to previous episodes of The Property Pod here.