Diversified real estate investment trust (Reit) Redefine Properties says its local assets lost 10% of their value while its investment in Polish fund EPP was down 19%, after hard lockdown restrictions locally and dividends withheld by offshore investments significantly dampened results for the year to August 2020.
The group’s tenants that own restaurant and entertainment centres couldn’t trade during the lockdown, while others struggled to pay rent. Office vacancies also rose as some tenants failed to reopen their businesses.
Redefine made a loss for the year of R16.67bn compared with a profit of R3.5bn in its 2019 financial year.
At the end of August, the group’s local businesses were worth R65.4bn and its offshore assets R15.6bn.
Rental relief packages to support the sustainability of tenants were worth R318.5m, while the provision for credit losses increased by R310.4m.
CEO Andrew Konig said asset values were unlikely to drop steadily in 2021.
“I believe we have set a new floor on our asset value to sustain value creation going forward, having recorded core asset valuation writedowns of R9.8bn,” said Konig.
Keillen Ndlovu, the head of listed property finds at Stanlib, said the results reflected “a very tough environment with every measure showing deterioration, from LTV (loan to value), interest cover ratio, cost to income, vacancies, net asset value and distributions.
“Redefine is on a journey to simplify its operations and requires a patient investor,” he said.
The group has been trying to strengthen its balance sheet for months by lowering its relative debt level or LTV, which measures the ratio of a company’s debt and its assets. Redefine’s LTV was at 43.9% at the end of August 2019.
Reits are trying to decrease their LTV ratios to sit within a 35%-40% range as a high LTV can indicate poor financial health, according to analysts.
Redefine sold assets worth R13.4bn in the reporting period, but that could not prevent its LTV ratio from hitting 47.9%, far off a target of 40%, suggesting the company is facing some financial stress.
CFO Leon Kok said LTV had been the group’s main priority in the reporting period.
Kok said the destructive impact of Covid-19 had a negative effect on asset valuations, increasing the LTV by 7.8%, negating the improvement initiatives. More work needed to be done to bring the LTV under control.
“Work on the LTV is therefore not yet done, and to achieve a sub-40% LTV by August 2021 will require further initiatives,” he said.
“A clear pathway has been set to achieving this target, involving further optimisation of the property asset base, limiting the cash outflow from dividends, as well as the completion of the sale of our interest in Journal’s two student accommodation properties in Australia,” he said.
In the interim, Redefine’s board deferred the decision on the declaration of a dividend until February 2021, saying it was “working on a mechanism to ensure there is no adverse impact on LTV from the payment of a dividend”.
Distributable income per share in the year to August fell 49% to 51.50c, from 101.00c last year.
Craig Smith, head of research at Anchor Stockbrokers, said Redefine and its peers were working on balance-sheet management.
“It has been apparent for a long time that Reits need to focus on repairing balance sheets. Sector fundamentals have been under pressure for some time and this is why many Reits have performed so poorly over the past two to three years,” he said.
“Covid has contributed to the weakness in a meaningful way, but markets are forward-looking, and for the first time in over a decade there is a positive funding spread, with the yields on many quality assets now higher than the cost of debt.”
Redefine’s share price was up 1.27% to close at R2.40, giving the company a market capitalisation of R13.9bn.
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