Johannesburg - Property loan stock Hyprop, which concentrates on retail shopping centres, had an excellent 2007, and though it admits the outlook is more challenging, expects healthy growth again this year. But looking further ahead, it's less clear how it can sustain its growth rate.
Distribution last year was helped by a couple of one-offs, like the yield-enhancing acquisition of a stake in the property unit trust Sycom, and grew 20% to 270c a unit (225c).
Like-for-like income growth at the shopping centres was 14% and, taking into account office properties, 12.5% for the entire portfolio. CEO Pieter Prinsloo says growth in distribution should revert to 12%-14% in 2008.
In terms of the asset portfolio, the R1.29bn Sycom acquisition in effect balanced the R1.135bn sale of the previous 46% interest in the SA Retail fund.
But as SA Retail was sold for cash, whereas Sycom was mainly financed by the issue of units and the transfer of part of the interest held in Resilient, the transaction boosted liquidity. Long-term borrowings fell by R236m, while cash and near-cash holdings rose by R60m and short-term investments by R500m.
Overall, net borrowings fell from R1.1bn to R312m, slashing gearing from 16% to 3.6%.
Expansions, extensions
Hyprop spent R46m on expansions to existing centres, and a further R48m is already under way for completion this year. The 90%-owned Stonebridge Shopping Centre, on former AECI land at Modderfontein, is scheduled to open in October. Abland owns the other 10%.
Further extensions are planned at The Glen and Canal Walk, as well as a four-star 132-room hotel at Hyde Park, all to come on stream in 2009 at a total cost to Hyprop of R653m.
Given Hyprop's strong balance sheet, it should have no difficulty financing these projects as well as its share of the R565m total cost of Stonebridge.
Valuations of the core shopping centre portfolio rose by between 11% and 28%, and gross rentals per sq metre grew by between 9.6% and 11.5%. Vacancies, as high as 10.1% in 2001, fell from 2006's 1.1% to a marginal 0.8% - in practice, a fully-let position.
Shortfalls
Looking ahead, visitors to the centres, ahead of 2006 levels until August, have since shown shortfalls in every month. But retail spend has continued to rise in money terms - which is what matters to Hyprop - even if inflation in food and, to some extent, clothing has eaten into volumes.
That, plus the additional trading space, should allow Hyprop to meet this year's targets. Longer-term growth is constrained by the physical limits to expansion of its existing centres and the fact that it is not an active developer but dependant on whatever projects others put its way - like Stonebridge.
Growth by acquisition is discouraged by the low - and hence earnings-diluting - valuations potential vendors are attaching to their portfolios.
On the other hand, Hyprop will hardly want to stand aside from the wave of consolidation currently being experienced by the listed property sector.
The fact that it's managed by Madison, whose Wolf Cesman and Marc Wainer are directors of Hyprop, and has as its largest unitholder Madison-managed Redefine, may be relevant factors here (see my my Broadstrokes column, on February 26).
Hyprop has achieved average growth of distribution of 9.9% over the past 20 years, and 10.7% in NAV. For the past five years, the figures have been even better, at 17.9% and 29.3%, respectively.
But this latest period may have a mini-golden age, with a return to the mean happening sooner rather than later. Apart from anything else, the impossibility of bringing vacancies down further will on its own have a dampening effect.
That seems to be the market view as well as, in spite of a 40c gain today, to 4 300c, the unit price is still 3.3% down over the past 12 months. This makes the premium to stated NAV of 3 996c the lowest for some years - indeed, before the deferred tax charge required by accounting practices, it's actually at a discount to what Hyprop considers its true NAV, of 4 993c.
And a historic yield of 6.3% is one of the lowest in the sector. Though this in part reflects the excellent record, put everything together and you have to conclude that Hyprop will have to do some serious strategic thinking if it is to maintain its market leadership.
- Fin24