Financial Director's report

Laurence Cohen, FD

Highlights

Distribution growth up 7,6% to 213 cpu

Net income from shopping centres up 7,2% to R606 million

NAV per unit up 9,5% to R68,56

Total assets up 6,8% to R23 billion

Condensed statement of comprehensive income

Introduction

Hyprop has delivered a strong set of results with the regional, large regional and super regional malls in particular exhibiting resilience. We continue to maintain a sound balance sheet and have successfully further diversified our sources of funding. The growth in distribution is testament to a world-class retail portfolio and in line with our objective of providing sustainable income growth and capital appreciation to investors over the long term. Overall, Hyprop is well positioned to take advantage of increased tenant demand and maintain the high quality of our shopping centres.

FINANCIAL PERFORMANCE

Distributable earnings from shopping centres grew by 7,2%, despite dilution from the Rosebank Mall redevelopment. Canal Walk achieved a strong performance with distributable income up 10,2%. Similarly, distributable earnings from Hyde Park were up 10,9% period-on-period. The marginal decrease in distributable earnings from offices of 6,4% was due to a once-off rental guarantee received in the prior period.

Rosebank Mall is undergoing a R932 million redevelopment with final completion expected by September 2014. Despite extensive planned vacancies and the related disruptions to trading, the centre achieved distributable earnings of R20 million for the period. The dilution in distributable earnings was in line with budget and is expected to continue for the next 12 months, while the centre remains under construction.

Income from listed property securities reduced due to the disposal of the investments in Vunani and Acucap during 2012. Income from associates of R4,2 million includes the first dividend from Atterbury Africa of R1,4 million. Hyprop has a 37,5% shareholding in Atterbury Africa, which is jointly controlled by Hyprop and the Atterbury Group. For the period under review, Hyprop increased its investment by R226 million to R337 million (USD34 million). Hyprop’s initial commitment is R750 million.

The reduction in net interest paid is primarily due to asset sales of R524 million during 2012.

Costs were well contained with the property cost-to-income ratio improving to 34,4% (31 December 2012: 35,4%), while the total cost-to-income ratio at a fund level improved to 34,6% (31 December 2012: 35,4%). Total arrears at 30 June 2013, comprising normal arrears, legal cases and outstanding tenant deposits, improved to R17,9 million (31 December 2012: R19,8 million) and the total allowance for doubtful debts was R9,0 million (31 December 2012: R10,2 million).

	Revenue spread				Total net income

As indicated in the diagram above turnover rental is only 1% of total revenue, which supports the contractual and predictable nature of Hyprop’s revenue stream. Municipal cost recoveries, which include rates, electricity and other utilities have grown from 13% of total revenue five years ago to 23% at 30 June 2013, in line with the excessive increases in utility costs over that period. Hyprop has implemented several initiatives to reduce the consumption of electricity, details of which can be found on page 42 of this report.

Property portfolio

⁽¹⁾ Rosebank Mall - transferred to development property from September 2012
⁽²⁾ Southern Sun Hyde Park - sold 2012
⁽³⁾ Sycom (30 June 2013) - held-for-sale

Investment property

Investment property was independently valued by Old Mutual Investment Group South Africa using the discounted cash flow method. The investment property portfolio showed good growth of 6,7% to R19,8 billion, after a fair value adjustment for the period of R1,2 billion.

The increase in the valuation of the shopping centre portfolio by 6,8% to R17,9 billion was driven primarily by income growth and reductions in discount rates and cap rates, supported by strong demand for quality shopping centres.

NET ASSET VALUE

The net asset value per combined unit (“NAV”) including deferred tax at 30 June 2013 was R68,43, representing a 28,5% increase on the NAV of R53,25 at 31 December 2012. The substantial increase in NAV per combined unit was primarily as a result of the elimination of deferred capital gains taxation, following the conversion to a REIT on 1 July 2013.

South African REITs are not subject to capital gains taxation on the disposal of investment property and on the disposal of listed property securities that are constituted as REITs. Accordingly, at 30 June 2013, Hyprop eliminated accumulated deferred capital gains taxation applicable to the investment property portfolio and the investment in Sycom. The deferred capital gains taxation was eliminated through the statement of comprehensive income, and resulted in a material increase in earnings, headline earnings and net asset value per combined unit.

Excluding deferred taxation, the NAV at year-end was R68,56 (31 December 2012: R62,59), a 9,5% increase on the prior year, primarily due to an increase in the independent valuation of the investment property portfolio. The closing combined unit price of R78 at 30 June 2013 represents a 13,8% premium to the year-end NAV, excluding deferred taxation.

BORROWINGS

Net borrowings at 30 June 2013 of R5,1 billion (31 December 2012: R4,9 billion) equate to a gearing ratio of 22,9%, down from 23,1% in 2012. The lower ratio is mainly due to the increase in valuation of the property portfolio.

Hyprop views the ideal gearing level as being between 30% and 40%. However, increasing gearing is dependent to a large extent on corporate activity, particularly acquisitions. In the absence of significant acquisitions, it is not likely that the gearing ratio will reach these levels.

At year-end, interest rates were hedged in respect of 87% (31 December 2012: 82%) of borrowings, at a weighted average rate of 8,1% (31 December 2012: 8,4%).

Hyprop increased its debt capital market (“DCM”) issuance in April 2013, with the conversion of R648 million of existing bank debt to DCM funding. This brings total DCM issuance to R1,6 billion, or 31% of total borrowings.

The maturity profile of Hyprop’s various debt facilities, fixed rates and swaps are depicted in the below graphs.

DEBT MATURITY PROFILE			FIXED INTEREST RATE EXPIRY PROFILE
BANK FACILITIES AND DCM FUNDING

Appreciation

Hyprop’s change in year-end resulted in two year-ends in the last six months, materially increasing the financial team’s workload. I would like to thank them for their dedication and commitment in this regard. I also wish to extend my appreciation to the board of directors for their continued advice, guidance and support.

Laurence Cohen
Financial Director