U.S. Markets closed

Edited Transcript of GRT.J earnings conference call or presentation 22-Jun-20 2:00pm GMT

Nine Months 2020 Growthpoint Properties Ltd Earnings Call

Jun 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Growthpoint Properties Ltd earnings conference call or presentation Monday, June 22, 2020 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Estienne de Klerk

Growthpoint Properties Limited - CEO of South Africa & Director

* Lauren Turner

Growthpoint Properties Limited - Head of IR

* Leon Norbert Sasse

Growthpoint Properties Limited - Group CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Alexandre Ayoub

* Charles Boles

* Chris Reddy

* Francois Du Toit

Renaissance Capital, Research Division - Insurance and Real Estate Research Analyst

* Mahir Hamdulay

* Mahir Humdulay

* Sheldon Kisten

* Alistair Anderson

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Growthpoint FY '20 Pre-close Update. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the conference over to Mahir Hamdulay. Please go ahead, sir.

--------------------------------------------------------------------------------

Mahir Hamdulay, [2]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the Growthpoint team for the FY '20 pre-close update. Before we proceed into the Q&A, I'd like to hand over to Norbert Sasse, Group CEO of Growthpoint, to provide us with a brief introduction and some commentary on the update that was released earlier this morning. Thank you, Norbert.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Mahir, and good afternoon, everybody. I'm going to take the document as read. I think it was circulated and posted on the website earlier today. So I don't intend going through the document in any amount of detail. Certainly, if you've got any questions around specifics in the document, please feel free to ask those at the appropriate time when there'll be time allocated for questions.

I know Mahir has got a bunch of questions, so he'll get the ball rolling. But before I start, just to briefly highlight something in the document, we had a little gremlin, I guess, that crept in on the -- some of the numbers in the tables where we provide information on the April, May and June, billings and collection stats.

So in the months of April or rather in the month of April, you can see the total collections is shown as ZAR 735 million. If you rather to cross cost that line, you see it doesn't quite cost the numbers about 761-ish. So in fact, the 71% collection is slightly better. It's at about 73%. It doesn't change fundamentally the message, I guess, that we're trying to give with these statistics. And equally, the June number in the total column, we're showing ZAR 795 million. But if you cross cost that, it's about ZAR 803 million. So the 83% is about 84-odd percent.

So just in case anybody spotted that, I think Lauren will update the document post the call, and we will post the document with the correct numbers on the website. Just to elaborate a little bit, clearly, everything is and remains terribly fluid. As you see on a daily basis, we see new changes to regulations. We see new dynamics emerge in the market. Our customers are having varied experiences. We're dealing with requests on an hourly basis. The relief requests are being considered and the decisions are being taken literally on an hourly basis. So very, very fluid. In fact, this morning, we were on a Growthpoint Australia Board call and the State of Victoria, Melbourne area, government have extended not per se, the lockdown, but if you want the request for people to be working from home, everybody was getting themselves ready to start returning to the office from June, July, certainly early July onwards. In fact, the Growthpoint team, we're looking to start back in the office in the 1st of July. And government have extended -- the local government have extended the work from home prescriptions until the middle of July. So things are -- there've been a couple of new cases that have emerged in that market. And so they've actually regressed a little bit.

So just to highlight things are -- not only are they as challenging as they've ever been, but the -- they're also as fluid and dynamic, I guess, as they've ever been. As I said, I'm not going to go through the document in detail. Hopefully, people have had a chance to read through it. And I do think that we've come to the end of, let's say, the 3 most impacted months in terms of the COVID experience with hard lockdown. And from here, we are hoping that things will slowly but truly start normalizing. And we're not obviously suggesting that we'll be back to any sort of level of normality in the short-term but certainly, the extreme disruption of April, May and June, both operationally and financially, is hopefully behind us, and we're looking forward to improved conditions going forward.

Mahir, with that, I'll hand over to you for questions.

--------------------------------------------------------------------------------

Mahir Hamdulay, [4]

--------------------------------------------------------------------------------

Thank you, Norbert. And operator, if you don't mind just announce in the instructions, if participants would like to join the call. I'm going to proceed with my questions after that, and then we'll take questions from the line.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Mahir, I'll hand back to you.

--------------------------------------------------------------------------------

Mahir Hamdulay, [2]

--------------------------------------------------------------------------------

Norbert, maybe if we can start off with the billing and collections. Just in light of the discussions that have been ongoing between the clothing retailer group and the property industry group. Last week, TFG announced that they've come to an agreement, effectively agreeing 25% rentals relative to the proposal that was put forth for the month of April. Can you provide some commentary on that? I mean, has that been a sort of broad-based agreement you have come to with landlords? And in terms of the ongoing negotiations, where decisions haven't been reached with the remaining constituents of the clothing retailer group, where do you expect that level to settle?

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [3]

--------------------------------------------------------------------------------

Happy to take that, Norbert, if you want to.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [4]

--------------------------------------------------------------------------------

Yes. Thanks, Estienne. I'll just quickly give just a comment on the little tables, the 3 tables that we've included on collections, April, May and June. Clearly, you can see sort of an improved trend emerging from that. And you might -- June, May actually look a little bit better -- clearly looks better. But you have to understand these numbers, I guess, is that we get to a point on our system where we close off April. So April numbers have been static now for the best part of, I guess, almost 2 months.

So similarly, the May numbers are static. I forget the exact date of the month that's sort of the 26th or 27th of the month. We closed off that month. And we print the number for that month. So June -- some of the June numbers will obviously include collections as they relate to May and April. So it's conceivable that you can have more than 100% collections in June as they relate not only to June numbers, but also to the arrears of May and April. So just so you would understand, some of the way these little tables work and the way the numbers are working.

On the specific question relating to the property industry group and their initiatives and the dealings we have had with the major clothing retailers, I'm going to hand over to Estienne to answer that.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [5]

--------------------------------------------------------------------------------

Thanks, Mahir. So just with regards -- I think your question was specifically directed as to the clothing retailers. And where we've got to with them, originally, as the property industry group, we agreed certain -- amongst the landlords, we agreed guidelines for landlords to follow. And then ultimately, it was up to the landlord and the various tenants to then tidy up and agreed specific transactions. Now each one of the clothing retailers, actually, their businesses aren't all quite the same. And as a result, it was probably the best strategy to -- for each landlord to do his own thing. But as a collective way where we've got to is that we pretty much targeted -- finished transactions with 4 of the 5, I think there's 1 remaining. I'm not going to mention specifically who it is. And where there's still a few little items of concern is just there are certain stores that only opened on the 1st of June, and the guys are still trying to work out exactly what's a reasonable view for May. And I think generally, there was a -- when you look at these percentages. So if you look at TFG is 25% as an example, percentages can be a little bit misleading. So if you recall, our guidance was as the PI group was 30% plus rates. And anyway, ultimately, what TFG provided for, and that was for the full lockdown period, just for interest sake. So that period is 55 days. And TFG have actually offered 25% growth, if you'd like, but just for the April period. So they actually have left March out of that calculation. So in effect, it's not too far off the guidance ultimately.

And then there is still a negotiation around May, which I think we've nearly got there, but broad strokes where we've got with many of these guys between a range of 100% where the guys have paid a full rent for May. And I think the lowest was about 87% or I'm just going on memory. So let's say, a broad range between 87 and 100-plus rates and recovery. So the principle for us is very important as the industry to ensure that rates is always a separate amount, and it does get a bit complicated between gross leases and net leases. But I think, hopefully, that answers your question.

--------------------------------------------------------------------------------

Mahir Hamdulay, [6]

--------------------------------------------------------------------------------

Just another observation on the table that have been provided. For example, if I look at retail billings for the month of April through to June, it appears as though the billing, the value is actually reducing. Is that because the billings now include the -- was it the negotiated agreed upon deferments and discounts, and the reason in terms of the lease agreement?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [7]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [8]

--------------------------------------------------------------------------------

Every month we're passing credits, and those credits are a combination of deferrals and discounts. And I think the idea would be, and we are busy working as the SA REIT Association will be passing around to all the REITs, let's call it, a standard way of reflecting it for their year end, but the idea would be to provide to the market detail in terms of, let's say, just let's take our example of the [ZAR 388 million] exactly what the split is between discounts and deferrals.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [9]

--------------------------------------------------------------------------------

I think, Mahir, if I can draw your attention to the -- probably the healthcare column, that's probably most pronounced there and visible there. May billings was ZAR 25.9 million and collections was ZAR 13.5 million and relief granted was ZAR 14.5 million. But then in June was ZAR 14.2 million which now effectively took -- takes into account the ZAR 14.5 million of relief that was then almost like debited against the revenue line, if you want for the month of June. So that's probably where you can see it best.

So yes, as the -- given April as a starting point. And this was probably our more normalized billing month pre any major impact was April. Bearing in mind rentals are due first of the month. So ZAR 1.035 billion was the total, let's call it, pre-COVID reference point for want of a better description. And the total dropped to by about 8% to ZAR 951 million in May, and that already started reflecting the relief that was granted for April rent but processed in May. And June is ZAR 957 million. So your observation there is correct.

--------------------------------------------------------------------------------

Mahir Hamdulay, [10]

--------------------------------------------------------------------------------

Okay. Estienne, maybe I'll direct this question to you because it also relates to some of the commentary that was received in terms of the negotiations between the property industry group as well as the clothing retail in particular. And the question just is with regards to the leases that are currently in place. So based on what I understand that the negotiations that happened as a consequence of COVID, it wasn't meant to encompass sort of existing leases and potentially the amending terms for leases going forward. But my question is, whether or not at a specific landlord versus tenant level whether you have already been engaging with potentially revisiting terms of leases going forward, given the potential affordability constraints, you are likely to see in the retail sector, in particular. And also the pressure that we've been hearing from the retailers in terms of escalations and the likes. You can provide some commentary on that please.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [11]

--------------------------------------------------------------------------------

Yes. So I think it's quite a complex question, but I think there are a few aspects that I'll maybe just summarize. I think firstly is the perception that there's been massive escalations in rental, I think, is maybe skewed by the fact that we collect municipal rates and other recoveries on behalf of the municipalities. Now these guys have been getting incredibly aggressive in terms of their escalations and even still municipalities are getting -- looking for double-digit increases in rates and taxes and municipal recoveries. So that perception, I think, has come through because you see on your statement, obviously, month-on-month the bill growing, but a large part of that growth is effectively municipal rates that have compounded in often double digits for the past 10 years.

I think that's the first thing to understand. And that we are communicating that with big retail clients. And with most of the clients so they get a bit of a better understanding of that. And hopefully, collectively, as an industry, we'll be tackling that with the Ministry of Corporative Governance. You could have seen in the most recent, and I do suggest that all readers -- all folks on the call, try and get hold of the latest SAPOA newsletter and there's some very enlightening statistics as to what's happening in those municipal rates.

I think the second principle was that turnover rental as unpopular as that was in the super cycle. It was the answer to every retailer's problem in the latter part of -- certainly the first part of the lockdown period. So everybody was very keen to move to turnover rental scenario. And as an industry and as the property industry group, we took a stand specifically that we would not go there as an industry. And the reason why we decided that is because, fundamentally, it changes the nature of your lease agreements fundamentally and structurally, for us as an industry, it will be disastrous. We do have examples where tenants are on turnover rental. And over the years, those tenants have abused this privilege by opening new stores continuously and diluting and cannibalizing the existing trade from their stores.

So I think that's the first thing. And then also the sources of capital that we're looking to attract as a industry don't want such a variable sort of scenario. And clearly, in this environment, turnover rental won't really work for us as landlord. So I think that was the second kind of key principle.

In terms of dealing with several requests and looking at agreements, generally, the position was taken that we're not changing lease agreements and we're not changing the structure of those lease agreements. And that these lease agreements are in force and are enforceable, irrespective of the position that rent is merely an optional payment. This is actually not true, believe it or not. And what we have done as an industry is certainly in the lockdown period, I would argue that we were slightly on the back foot from a legal perspective. And then I'm talking about specifically lockdown Level 5, where traders couldn't operate at all. There, the law is a bit gray, but ultimately, where we got to was that there are services being delivered by the industry in the form of providing space for -- to store goods, providing all the rental of the tenant installations, et cetera, and security and cleaning and all those wonderful things. And as such, there is relief due to the tenant and the law is just not very specific on what that level is. But I think more is where we've got to is more or less where from a -- if you look at the settlements we're making with the big tenants, that's more or less where we think the legal position would have probably gravitated towards.

As soon as those tenants are open and trading, even partially, the legal position changes in favor of the landlord. Very clearly, the tenant has occupation, the leases are applicable, et cetera. But I think as an industry, we've been rather on the front foot in terms of trying to deal with these issues proactively, and we have been negotiating transactions with the tenants. The reality is I think that very quickly moves into June where tenants are fully trading for a couple of months. Ultimately, the lease applies and the industry really can't afford infinitely to provide discounts, et cetera. We've also got a business to run several -- certainly in the private side, not the publicly listed companies. The private guys have much more leverage. And as such, there's quite a bit of systemic risk.

So we, I think, generally, most of the larger clients on the retail side, recognize that, and they've generally started paying their rent now. So I think we are emerging out of that. And I think in a nutshell, we're not looking to change the leases. Clearly, as those leases are coming up, it's quite a tough negotiation as we have set out in our document.

--------------------------------------------------------------------------------

Mahir Hamdulay, [12]

--------------------------------------------------------------------------------

Just one final question on billing before I open up the line for questions. Can you provide some detail on the collections at the V&A for the month of June? I know it was running at around 50% in your last update.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [13]

--------------------------------------------------------------------------------

I'll take that. Yes, I just spoke to David Green a little bit before the call. And so the Waterfront is running at about 55% so a slight improvement. Obviously, as you're aware, weight into retail is quite heavy at the Waterfront. So retail collections are in the order of about 40%, office and industrial rental collections have been very solid and are at high 90s. And then the challenge, I guess, sits with some of the supporting retail and at the hotel, within the hotel industry, clearly for the months of April and May, occupancies were pretty much 0. And on that basis, hotel rentals you see they have also been pretty much 0. So hotels remain very weak. David told me to tell everyone that certainly as tourism industry, and he sits on many of those bodies -- tourism bodies. The industry is advocating and agitating for an opening up of international tourism in September, October this year. And so as to try and at least salvage some of the, let's call it, the summer trade that we're heading into. And but clearly, not expecting that tourism will return to pre-COVID levels until probably second or third quarter -- third quarter probably of '21. So whilst tourism hopefully opens up and is allowed again from September, October, we fully appreciate that we're not going to be reaching anywhere near pre-COVID levels until probably late '21.

--------------------------------------------------------------------------------

Mahir Hamdulay, [14]

--------------------------------------------------------------------------------

Operator, do we have any questions on the line?

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Yes, we do. The first question comes from Alistair Anderson from Business Day.

--------------------------------------------------------------------------------

Alistair Anderson, [16]

--------------------------------------------------------------------------------

Just 2 questions. On Wednesday, we've got the medium-term budget. I'm just wondering what growth point things would kind of help the industry and the company to come out of that budget? And then the second question is, are any of your anchor tenants, particularly in the office space, are now seriously talking about cutting, I suppose, their space requirements going forward because of this depressed economy and the COVID problem?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [17]

--------------------------------------------------------------------------------

When you say banker tenants, I don't know if you are talking about banks specifically or, let's call it, low...

--------------------------------------------------------------------------------

Alistair Anderson, [18]

--------------------------------------------------------------------------------

Anchor.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [19]

--------------------------------------------------------------------------------

Anchor. So look, I mean, not to my knowledge, we're not having any significant, let's say, discussions in terms of the leases, large anchor tenants wanting to reduce space at this time. It's fair to say that as a general rule, the message from the 3 sectors is that whereas in April and May, the bulk of the requests and queries were coming through for rent relief in the form of either reduction or deferment. More and more the kind of queries that are coming through now into June are indeed for, let's say, some reduction of space where some of the smaller tenants, in particular, are struggling and are clearly having looked forward for the next 6 to 12 months and realizing that maybe their cash flow is going to be very constrained and therefore, looking to reduce space. So there's been a change in the emphasis, if you want, of the engagement with the customer base. But to my knowledge, Alistair, unless you know differently, there aren't any of the large anchor sort of office tenants that have approached at this time for reduction of space. In relation to the...

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [20]

--------------------------------------------------------------------------------

Yes, I mean, then it is those are large, let's call it, large brands that have been reducing space, that was already -- that was a pre-COVID sort of scenario where they had certain financial challenges. Some of these are pretty public. And we've already been dealing with those prior to COVID. But I wouldn't say subsequent to COVID anything adding.

I think your other question was on the medium-term budget speech. Alistair, you are aware that the SA REIT Association tax and regulatory committee has made a request to the JSE and National Treasury to potentially offer some regulatory relief as it relates to distributable earnings payouts. And clearly, a good news would be as if they would agree to some of that relief. And yes, we'll have to see where that all lands. The JSE have been particularly helpful. They've even completed a public process. I think they said they received a record amount of people offering their views on the specific relief requested. And we'll have to hear what the thinking is from National Treasury, hopefully closer to the time. They have indicated that they are considering our requests.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question comes from Sheldon Kisten from Kagiso Asset Management.

--------------------------------------------------------------------------------

Sheldon Kisten, [22]

--------------------------------------------------------------------------------

If I could just refer you to the commentary about Capital & Regional, you guys speak about collections being approximately 50% for the March quarterly billing period. Firstly, if you could just confirm that this billing period is for the months of January, February and March? And if so, could you just walk us through why it's so low given the lockdown or the restrictions just started, I think, toward the end of March in the U.K.?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [23]

--------------------------------------------------------------------------------

I'll take that. So in fact, it's not for January, February, March. It's for March, April and May. So again, it's monthly or it's quarterly in advance. So in South Africa, we charge, obviously, at the first of the month -- monthly in advance. In the U.K., it's quarterly in advance. They've got the strange, strange system. It talks to a 14th century calendar, I don't even know what it is, but the date is -- I think it was 23rd of March. And now the next billing date is the -- I think it's the 26th or 27th of June. So that's literally a few days away. So it's quarterly in advance. And I guess that's why you would have seen such a weak number for that March quarterly billing.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

The next question comes from Chris Reddy from Mazi.

--------------------------------------------------------------------------------

Chris Reddy, [25]

--------------------------------------------------------------------------------

The question is more focused around (inaudible)

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [26]

--------------------------------------------------------------------------------

Chris, Norbert here. Sorry, I don't know if it's just me. I couldn't hear you.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [27]

--------------------------------------------------------------------------------

Yes. His line is breaking out.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [28]

--------------------------------------------------------------------------------

You've got a really bad line. You're breaking up. I wasn't able to hear anything actually.

--------------------------------------------------------------------------------

Chris Reddy, [29]

--------------------------------------------------------------------------------

Sorry, can you hear me now?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [30]

--------------------------------------------------------------------------------

It's still breaking up. Just go.

--------------------------------------------------------------------------------

Chris Reddy, [31]

--------------------------------------------------------------------------------

(inaudible) I'll get back to you.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [32]

--------------------------------------------------------------------------------

Chris, can maybe e-mail me, and I will read it out. And then [May] take another question.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

The next question comes from Francois Du Toit from Renaissance Capital.

--------------------------------------------------------------------------------

Francois Du Toit, Renaissance Capital, Research Division - Insurance and Real Estate Research Analyst [34]

--------------------------------------------------------------------------------

So just if I aggregate the difference between what you've billed and collected, it amounts to ZAR 700 million. Do you think that ZAR 700 million will be for effective as arrears, assuming there's no (inaudible). Obviously, there will be some further collection in June, but assuming there's no further collection, would that all go through as arrears in effect do you anticipate being able to collect on most of that ZAR 700 million effectively? Are those mostly rents or deferments rather than concessions? That's the first question. And the -- do you expect further concessions for July rentals? So should we expect a billing level in July to return towards the what we saw in April, which you described as close to normal?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [35]

--------------------------------------------------------------------------------

Francois, Norbert here. I'll give that a go. So yes, I mean, you did the calc, you get to about ZAR 700 million. So 2 things there. I think clearly, we're still processing a lot of deferment and rental abatement requests. So -- and those requests will obviously be, let's call it, debited against turnover and taken out of arrears. So we don't see the arrears number as being as high as ZAR 700 million. I actually have got no feel for what that number could be. But certainly, arrears are going to be elevated and at record levels, certainly higher than we've ever seen. The highest level of arrears we've ever seen was at our June -- sorry, at our December '19 half year, which was just over ZAR 100 million. And we certainly see this number is going to be significantly higher.

Now also, relevant is the final determination of how we're going to be accounting, I guess, for this relief. To the extent that we are able to reverse the, let's say, the billing against turnover, then obviously that won't go into the arrear. If we don't reverse it against turnover then certainly the arrear will -- then your arrear could possibly would be as high as the ZAR 700-odd million. So final discussions with auditors are happening at the moment from an industry perspective as well as our own finance team. And again, whatever the arrear number is, we're going to have to do a credit loss assessment exercise and provide against that. And that, again, is way too early at this point in time for us, I guess, to give any steer on whether a provision of 25%, 50% or 75% whatever the number is, that needs to take place against that.

So clearly, we would expect that those tenants where we have engaged actively in negotiations on deferments and rental reductions that we would be expecting to receive over a period of time, whatever the deferred rental is that we've agreed to. And yes, there will be some credit loss within as we're not expecting that every single center deferred rent that we offered as customer base will ultimately be paid. But for those that are in arrears and have not engaged or we have not done a deal with, there we would expect to receive those arrears unless at the end of the day, the tenant goes into liquidation or business rescue.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [36]

--------------------------------------------------------------------------------

The arrears number probably for year-end will be less than ZAR 300 million.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [37]

--------------------------------------------------------------------------------

Yes. My personal feel is that somewhere between ZAR 300 million and ZAR 400 million is what that number will be. And -- but yes, it really is a very rough guestimate at this point in time. Only further concessions, again, as closer to the discussions and negotiations with some of the retailer groups. My personal view is that, I think, probably on a much lesser -- to a much lesser extent. There will be ongoing discussions and concessions. And as I mentioned earlier, the message from the teams is that the request from customers and tenants is less about relief and reduction and deferment right now. It's more about reducing space. So do I see the number recovering back to ZAR 1.035 billion, let's call it, pre-COVID level of billings? I don't see -- personally see that. We see it being higher than the ZAR 950-odd million level, but not back up to the ZAR 1.035 billion level.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [38]

--------------------------------------------------------------------------------

Mahir, it's Lauren. If I can just read out Chris's question, I think Norbert might have answered some of it in Fancois' last part. But Chris is saying, given rising infections across the globe as economies open up, how are you planning on navigating a longer period before we get back to a normalized scenario, if we actually do get back to a pre-COVID level. What type of additional assistance can you provide to clients across the various sectors, retail, office and industrial?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [39]

--------------------------------------------------------------------------------

Tricky question. I mean, clearly, I don't think we're anticipating pre-COVID levels, certainly, I'm not personally seeing pre-COVID levels. In fact, for a long while. I think -- my premise is a sort of base case almost is an economy that contracts by between 7% and 10% in 2020 and only recovers maybe 2% or 3% of that by the end of '21 at best. And by the end of '21, you're still circa 5% down on pre-COVID level. So I think we are anticipating a very, very slow recovery of, obviously, the very tumultuous 3 months. So we see an improvement of the last 3 months, which were the worst case, but not, to my mind, not back to pre-COVID levels for quite an extended period of time to come, certainly not even by the end of '21.

So it will be an ongoing engagement with our customers around the specific circumstances. I think if one thing became clear to me in all the industry discussions, debates that have been taken place, whether it was trying to agree industry-wide, let's say, relief with the banking industry with BASA or whether it is industry relief with the retailers on a, let's say, industry -- from an industry holistic perspective, it becomes very clear. You can't have any, let's say, general approaches to these things. It becomes a detailed discussion between you and your customer and between you and your banker, bilateral discussions. And I think whilst the industry initiatives have certainly set the playing field and is a very, very important aspect of what's been taking place over the last couple of months. And I think that perhaps it was a bit ambitious to think we could have an industry wide, even on a JSE -- opposed to the JSE on the payout ratio scenario to think that you could have one industry approach that applies to everybody, I think, perhaps we were a little bit optimistic. And at the end of the day, it's going to be down to bilateral discussions between you and your customer, you and your banker and you and the JSE.

--------------------------------------------------------------------------------

Mahir Hamdulay, [40]

--------------------------------------------------------------------------------

Norbert, maybe can I, sorry, ask a follow-on question. I've received some questions. And just to your point on when you think about sort of the negotiation with the bankers, payout ratios and the like, do you mind just elaborating in terms of how you are thinking about this, given the current liquidity situation, your need for capital going forward?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [41]

--------------------------------------------------------------------------------

Yes. Sure. So here, Mahir, I think what we've done is break it down into maybe short-term crisis management and what liquidity or sources of liquidity have we got in the event of an absolute crisis, i.e., if collection rate starts reducing to below 70% and starts going to 60% and 50% and that kind of dynamic. And what sources of liquidity have we got to tap into in that instance. And I think there are probably, I guess, 2 emergency avenues, and I'm not suggesting that these are even on the cards for contemplation at the moment at all. But they -- we do believe that they can be tapped if and when needed in an absolute crisis scenario. And that would be a smallish capital raise. And we do have approval from our shareholders to do up to 10% -- sorry, up to 5% of market cap. So that can potentially give some emergency cash -- can be a source of emergency liquidity if at all needed. As I said, just to reemphasize, it's not the case. We're not considering that. And alternatively, asset sales, are there some assets that we could sell, and we do think that there are some assets without being specific. There are some assets that are, to our mind, quite liquid. And again, it could raise quite a significant amount of cash in an absolute crisis situation.

We estimate that if that were to be the case, we can perhaps access up to ZAR 5 billion of liquidity in an absolute crisis situation. And that would be on the assumption that the debt markets and equity -- sorry, the debt markets are completely closed, i.e., we can't get any further debt funding from banks, which is clearly not the case at the moment. And we've been very successful in the last couple of months in terms of raising additional finance. And also that the debt capital markets are completely closed. And that, again, is not the case. We've actually just been able to tap the debt capital markets for a bond refinance. And in fact, we took more from the bond market than the actual debt refinancing itself that was needed.

So that's the short term. The longer term, I think, is, again, that talks probably more to strategy for the group as a whole. And what the outlook is for valuations and what the outlook is for LTVs. And then also in that regard, I guess, the whole debate of payout ratios comes into vogue. As we say in our conclusion of our announcement, at the moment, I guess everything is up for discussion at Board level, including the topic of payout ratio and a reduction of payout ratio. We did comment at our half year results that whilst some of the competitors in the market had already decided to reduce payout ratios, we had not been contemplating that yet at that time. Obviously, subsequent to then, we've gone into lockdown, we've experienced the last 3 months. And it would be fair to say that at the moment, everything is being evaluated and looked at. And we'll try and find a balance between not necessarily wanting to pay tax on the one hand. On the other hand, retaining some capital through reducing the payout ratio to assist with short-term and medium-term liquidity and shoring up the balance sheet. So trying to take a much more balanced approach and considering payout ratios in the context of probably more the medium to longer term, let's say, balance sheet positioning.

--------------------------------------------------------------------------------

Mahir Humdulay, [42]

--------------------------------------------------------------------------------

Norbert, if I can maybe ask a follow-up question to that. In terms of your consideration at this stage, what are you penciling in or expecting in terms of a property reduction in values or a range, if you can provide us?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [43]

--------------------------------------------------------------------------------

Yes. In terms of range, no, absolutely. I think we've obviously had numerous investor interactions over the last couple of weeks on last month. And I guess, our hypothesis is that valuations clearly are going to come under pressure. As a broad range, we believe that you could be looking at a 10% to 20% range over the next 12 to 24 months, probably more than 24 months as opposed to 12. And if I were to try and, let's say, give a view on what's going to be driving those valuations down, I'd say, it's principally income and lower income levels. If I have to have a stab at a weighting, I'd say, 80% of the valuation reduction is going to come -- is going to be due to and attributable to value -- to income assumptions and maybe 20-odd percent of the reduction would be attributable to changes in discount rates and cap rates and those sorts of -- some of the other key drivers in the valuation process.

So we've seen the South African risk free rate obviously bounce around dramatically. That's sort of a starting point, I guess, for the buildup of a discount rate. And I think I looked at this morning, it's sitting at about 9.29% as the South African 10-year bonds, where it's been as low as in the low 8s and it's been as high as 12%. So assuming it settles at these sort of levels, 9%, 9.5%, I think, the risk premium should probably be added or managed a bit higher. And as a consequence, yes, that will have a negative impact on valuations. But my sense is only going to be about 20% weighting of the overall movement in valuations will be attributable to, let's say, cap rate and discount rate movements. Clearly, and its actual evidence at the moment is close to 0. There are no real trades of property. So the ability to go and mark-to-market, if you want, on a benchmark against actual live trades is almost impossible. So it remains a very theoretical exercise. And I do think that within that range, you'll find some companies who start off with a -- maybe a bit more of an aggressive valuation, maybe historically have been a bit more aggressive on the evaluations, those companies, to my mind, can see valuations drop between 15% and 20% over the next 2 years and companies that have been a little bit more conservative, and I'll put Growthpoint into that camp maybe a 10% to 15% drop in valuations over the next 2 years.

Just to add Mahir to your -- to Mahir, to your comments on solvency and liquidity. We're not particularly concerned about solvency. We think solvency remains -- we've done the stress testing. I mean, valuations have to drop by the 30% before we hit our covenants, which is 55% LTV. Interest cover ratios, I think income has to drop by something around 40-odd percent. So we're not particularly worried about solvency. But in the short term, I think we've got liquidity covered. But that is clearly remains the more challenging of that debate of solvency and liquidity. Solvency remains the one that is -- sorry, liquidity remains the one that's a bit more testing.

--------------------------------------------------------------------------------

Mahir Humdulay, [44]

--------------------------------------------------------------------------------

Not to labor on too much to the point, but given that you've dealt with liquidity and you're happy with solvency in the near term, and you've indicated that the payout ratio is more a medium-term decision. I mean, is this potentially an indication that we could see dividends sort of in line with the historical distribution of payout policies materializing in the near term? So...

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [45]

--------------------------------------------------------------------------------

No. I think maybe not. Maybe my explanation there of near and medium got a little bit confused. But I think certainly, from whatever the next dividend declaration date would be, which is around September, that's the time for the release of the results and the Board meeting. I think reduction of payout ratio will definitely be a consideration as early on as the next dividend declaration, which is in September.

--------------------------------------------------------------------------------

Mahir Humdulay, [46]

--------------------------------------------------------------------------------

Thank you. I have a few more questions that came through on my side. So maybe I can just run through them quickly. In terms of rental levels, given the evidence that you provided for renewal rates, is that a fair representation of where reversions are likely to go in the future, if not, how far off or sustainable are market rentals relative to currently in terms of premium portfolio?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [47]

--------------------------------------------------------------------------------

So again Mahir, my view is, and I think, again, it's premised by my outlook for the economy. And I did make some of the comments before on some of the other updates with the investors, both debt and equity investors over last month or so. I think we've got a couple of dynamics at play. Obviously, there is the very COVID-specific dynamics. And those with on the retail front, I would argue include the likes of online retailing and the fact that online retailing, I think, would have increased dramatically. And the take-up of online retailing would have increased dramatically during the period of lockdown.

In fact, we've got a small investment in a company called OneCart that safely aggregates online purchases from a number of retailers. So if you wanted to buy something from Zulzi, Checkers and Dis-Chem, you can do it all on this one platform, and you'll have one person come and deliver all 3 of those items for you to your door within 2 hours. Those guys saw order levels jump from, I think, 6 -- 4,000 to 8,000 to 27,000 orders during April, May and June. So that's an indication to my mind of the use of online. And I think that's here to stay. So lot of people who would have experienced that would maybe continue. So that dynamic got accelerated a bit.

I think that sticking to retail, the idea of spending 3, 4, 5 hours at a shopping center and browsing around and going to the restaurant and then to the movie and then to wherever I think that dynamic changes. And I believe shopping becomes a bit more of a focused experience where you head to the center, you've got your list, you buy whatever you need, and you get out of there. So I think you see a bit of a deterioration in the performance of the larger format shopping centers. And your smaller community neighborhood type of centers actually perform, to my mind, quite well.

And then there's obviously the impact of the overall economy on the consumer, which that worries me much more. And there, it's fair to say that thousands of people would have lost their jobs, very few people are going to be getting increases and bonuses and share prices have obviously been depressed. So the consumer is going to come out of this much, much, much poorer. And therefore, focus of retail spend is going to be much more on a nondiscretionary items and nondiscretionary stores that provide things that -- the supplies that customers really need as opposed to what they might want. So high-end fashion jewelry, those kind of things and the restaurants, I think, are going to take time for a while to come.

And on the office side, there's the work-from-home dynamic. And whilst that is also, I think, a dynamic that's here to stay. I feel that, that gets -- there's a counterbalance on that, to my mind, what the need for distancing -- of social distancing within the workplace. So whilst not everybody is going to be working from the office anymore or they might be working from the office temporarily or 2 days a week, and that might require less space via tenant. The other -- the counter to that is that those that are working from the office might need a bit more space between them. Again, I'm not that worried about that dynamic. I'm much more concerned about the overall SA economy, which, if it does contract, 7% to 10% is going to be devastating on the large -- on all major corporates. We've already seen them announce -- some of them announce retrenchments and scaling back on some of their space. So I think that dynamic is much more negative. So the -- to answer your question, those dynamics of COVID specific as well as the specificity ones that add to the weak economy, in general. I would say that a lot of -- certainly, we've seen office rentals revert negatively for the best part of 2 to 3 years already. And I do think that there's probably a bit more to come. But in the short term, I think that -- and we've seen retail reversions have only been negative now to -- on our book anyway for the last 6 or 12 months. And I think that retail probably has a bit of catch-up and given that it's a sector that has been most impacted, I see that retail negative reversions are probably going to be overtaking that of office in the short term.

Industrial, also trending negative. It can't avoid the overall economy. And -- but, let's say, the supply demand dynamics are not as -- we're not as out of quota when COVID set in. There was a much better balance. I think national vacancies were only 5% to 6-odd percent. So whilst it won't be weak of -- just it won't be as weak as retail and office. So I see retail reversions probably overtaking, office remaining at these kind of levels and then industrial sort of holding up a bit better.

Maybe just the last comment on retail is obviously the impact of Edcon and to the extent Edcon does ultimately going into liquidation. I don't know what happened this morning, there was the vote on the -- creditors vote on the business risk to...

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [48]

--------------------------------------------------------------------------------

I think it's at the moment...

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [49]

--------------------------------------------------------------------------------

Oh, it's happening right now. Okay.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [50]

--------------------------------------------------------------------------------

This morning, there was an urgent application for liquidation, which was -- the urgency was waived and cash came out.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [51]

--------------------------------------------------------------------------------

So creditors are voting on the business rescue plan right now, and it all depends on the outcome, I guess. If either way, business rescue or liquidation, Edcon overhang is net negative for the retail sector, which again exacerbates, I guess, the supply demand dynamics in that sector and leads me to believe it's going to be the weaker one of the lot.

If I answered your question, Mahir, it's a very long speech today, but I think, hopefully, I've covered a lot of the questions.

--------------------------------------------------------------------------------

Mahir Humdulay, [52]

--------------------------------------------------------------------------------

No, you did. Thank you. Lauren, for the other questions.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [53]

--------------------------------------------------------------------------------

I've just got 2 questions. One is from Michael Swingler from Oasis as a follow-up to your valuation explanation. He would like to know if asset valuations to decline more significantly in order for transaction volumes to pick up across the SA property industry, it seems to be the global trend in property markets.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [54]

--------------------------------------------------------------------------------

I think that's right, Michael. The only sort of, I don't know, comment that I would offer as well is that the banking sector at the moment, I think, are very focused on their existing customer base. So if you're a cash buyer and you've managed to get cash from somewhere, I think, yes, I think there's probably a bit more downward pressure on valuations to happen before you see any meaningful action on the acquisition and investment side. But if you are needing to tap into bank funding, I think that's going to be a lot more challenging. The banks are totally preoccupied with their existing customer base, and obviously their existing customers would -- one would argue know the particular assets better than anybody else. And to get new bank funding for assets that an existing customer of the bank is looking to dispose of and you're just transferring that asset into the hands of a new owner, it's going to be a bit more challenging. So I think liquidity in the market generally for acquisitions is going to be constrained, just given the -- where the banking sector is on managing their existing exposures with their existing customers looking at refinancing existing loans. We know that, obviously, the question of relief on covenants, that's -- those kind of discussions are taking place. And -- so I reckon that activity there remains fairly, fairly muted for a while.

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [55]

--------------------------------------------------------------------------------

My view, I mean, it depends on if you're buying or selling.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [56]

--------------------------------------------------------------------------------

With lower interest rates. There's no doubt that lower interest rates, to my mind, somebody mentioned, lower interest rates. I think, in a different context on how that might impact valuations. I don't think lower interest rates really have an impact on valuations too much. It's -- valuations are more driven by longer term interest rates and the bond yields. But lower interest rates can definitely be a bit of a stimulus for liquidity in as much as, if users are starting to rise and interest rates are dropping, the -- let's say, the yield spread is widening albeit that you're talking more short-term funding rather than long-term funding, that does and historically had led to some improved liquidity. But it all depends really on the bank's appetite to continue to take more exposure to commercial real estate, I guess.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [57]

--------------------------------------------------------------------------------

Thanks, Norbert. Perhaps the next question is more for Estienne. And Kirstin Govindasamy from Catalyst would like to know if expenses like water, electricity rates and taxes have been mostly recovered from tenant and historically, whether the recoveries included in the rental income line item reverse with the rental or grow at another rate?

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [58]

--------------------------------------------------------------------------------

So it just depends on the structure of the leases. And obviously, the various tenants have kind of different leases in the retail sort of context. But just on average, what landlords typically try and do is they try and recover on a pro rata basis, all their outgoing. So that would be a rise on electricity and water and sewer. So -- and also in sewer. So that in this environment, clearly, to the extent that clients have been paying, we have been recovering those to the extent that clients haven't been paying and that number will be part of the billings, and we typically would have to fund that in terms of the deferral process. So as an industry, we've kind of agreed to do that interest free at the moment in terms of those principles and guidelines that we put out as a property industry group. Hopefully, that answers the question.

I think the one other part of the inversion, whether that is good. So no, because of the recovery of an actual expense, we wished that rents and water, et cetera, would revert at some point, but it hasn't, unfortunately.

--------------------------------------------------------------------------------

Mahir Humdulay, [59]

--------------------------------------------------------------------------------

I have 2 more questions, if you don't mind, that have come through. So the first one is just on your investments. Globalworth, the Africa Fund as well as GOZ, your expectations in terms of dividends. And the second question relates to the capital structure as well as the use of offshore and cross-currency funding, whether you still believe that, that is the optimal capital structure that you have in place?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [60]

--------------------------------------------------------------------------------

So just on the international investments, I think the 2 investments that we probably are the least concerned about in terms of the impact of COVID to date on their businesses would be GOZ and Globalworth. Neither of those have got retail exposure, they're pure office and industrial plays. I mean, Globalworth probably has a little bit more retail exposure than GOZ. But certainly, operationally, these 2 companies are performing well. They've got significant liquidity and 0 -- not 0, very, very little concerned about solvency and liquidity in those 2 entities. And operationally, their businesses remain largely unaffected. Clearly, they're not immune to what's happening in their own economies. But in terms of the specific lockdown periods, the rental deferment and reduction requests that those 2 entities have received have been very, very miniscule, actually.

So the only question with those 2 companies would be, to what extent would the boards of those companies decide that notwithstanding that operational performance is good? They would hold back a bit on the dividend just for the sake of longer term liquidity, let's say, management and balance sheet management. So those 2 are least of our concern.

I think Capital & Regional is a bit more challenged, I guess, it's a 100% retail. And I think we all know that the U.K. retail environment was weak pre-COVID and it's quite a bit weaker post-COVID. So there aren't the, let's call it, the headroom on covenants and the access to liquidity of Capital & Regional is not as good as it is for Globalworth and GOZ. And I guess the management team, they are doing their best to negotiate with the funders to ensure that we find an amicable solution in relation to, let's say, potential future covenant breaches, whether that be LTV or ICR. So I think Capital & Regional probably going to take a bit more attention in the short term. But it's fair to say that the order of Capital & Regional debt, the 4 facilities that they've got is nonrecourse finance. There's no cross collateralization and there's no guarantees from South Africa in that regard.

The Africa Fund, interestingly enough, actually performed pretty well. And some of those markets didn't actually go into lockdown. I think Zambia didn't actually go into lockdown, Ghana and Nigeria did go into lockdown and -- but they -- I think one of them, I forget which one was only lockdown for 2 to 3 weeks, and they opened up again. So again, relatively speaking, the trade has been pretty good. So retail has -- and the kind of centers that we have there are very focused on the daily needs of shoppers as opposed to being high-end fashion and jewelry type store offerings. And they've actually traded pretty well throughout the period. We are expecting our first dividends out of Africa Fund. And we certainly also, I think, we've turned the corner with a management company, with the Fund now having reached the level of maturity, if I can call it that, we have about $550 million of assets, fully invested. We've got about $300-odd million of NAV. The management company would also now be profitable and cash positive. So we would also be expecting to receive dividends or net income coming through from the management company.

So -- and then in the Healthcare Fund, Healthcare Fund continues to also achieve, let's say, more greater levels of maturity in inverted commerce. We had the new investment, I think, it's mentioned in the report by the ZAR 280-odd million in the beginning of the year. We are in advanced discussions with the IFC on an investment by them into the equity as well as providing some debt finance for the growth of that fund. And so that fund is doing well.

Having said that, it's also important to note that with the extreme provisions of lockdown, some of the tenants within that portfolio had been negatively affected, where the, call it, the industry body required all elective and semi-elective surgery procedures to be put on hold or deferred. The doctors within those hospital groupings, obviously, weren't able to perform the kind of procedures in the theaters and ICUs that generate the bulk of their revenue. So we've had to provide rent concessions to some of the tenants in the Healthcare Fund.

Capital structure, what was the question on the capital structure again?

--------------------------------------------------------------------------------

Mahir Humdulay, [61]

--------------------------------------------------------------------------------

I would just -- the question was...

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [62]

--------------------------------------------------------------------------------

CCIRS, right?

--------------------------------------------------------------------------------

Mahir Humdulay, [63]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [64]

--------------------------------------------------------------------------------

Yes. So, yes, look, I think we have systematically, I think, over the last 12, 18 months already started, let's call it, reducing effectively some of the exposure on the CCIRS. You recall the Capital & Regional transaction, we took a deliberate decision to fund partly in rands and partly through the use of CCIRS. So that was only 50-50 funding deal. So historically, all the offshore stuff got -- let's say, was funded 100% with CCIRS and let's call it synthetic foreign currency debt, we have already pulled back on that. Cap rates starting point was only 50%. We recently also repaid a -- I think it was a EUR 59 million, it was an FMC, which we converted to CCIRS, and then we actually subsequently settled it in rands. So we've also sort of taking a view on, let's say, the value of the underlying assets, equity value of the assets that we have relative to the value of funding in cross-currency interest rate swaps that we have. And I think it's fair to say that we would be taking a slightly more conservative view on the use of CCIRS as certainly as long as some of the equity values are potentially at the same level as the debt or possibly even higher. So that's been an ongoing -- it's not as if it's just emerged now off the back of COVID. It was a deliberate decision by management and the risk committee, et cetera, to start pulling on that even before COVID.

--------------------------------------------------------------------------------

Mahir Humdulay, [65]

--------------------------------------------------------------------------------

Thank you, Norbert. Operator, are there any questions in the queue?

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Yes, there are. The first question comes from Charles Boles from Titanium Capital.

--------------------------------------------------------------------------------

Charles Boles, [67]

--------------------------------------------------------------------------------

Two questions, if I may. The first one is Capital & Regional. Norbert, you did talk about it a bit. And I think you picked your words carefully in terms of potential covenant breaches and renegotiations with debt funders to maybe term out some of those or relax some of those. And that there's no debt guarantees. In the event that a capital funding was required or capital support was required given where Growthpoint itself is at. How would you think about that? That's question 1. And question 2, on these municipal costs, they seem to -- despite complaints and concerns and issues being raised seemed to keep increasing at levels that are just detached from inflation. Can they realistically be dealt with? Because, I mean, the all-in cost of occupation can't absorb their costs plus -- I mean the giver is going to be the rental at some point to get the all-in cost of occupation to a viable level. Is there a viable solution to that?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [68]

--------------------------------------------------------------------------------

So Charles, let's start with your second question first, and Estienne can come in. But I think it is fair to say, and Estienne made the point on one of the earlier questions that was asked that there is the allegations, if you want, that rentals have just kept increasing and rentals have kept increasing and the escalations in rentals are not sustainable. But the reality is rentals have actually already been the buffer for a couple of years where the escalations in these administered costs have come through a double digit and have prevented the landlords actually from getting there effective, let's say, 7% and 8-odd percent increases. So that's already been at play for a couple of years.

As to what the industry is doing, I think maybe I'll hand over to Estienne to comment. It is fair to say though that it is a serious struggle. If you look at the Municipal Rates Act and the way these acts are drafted effectively on a cost recovery basis. So the municipality would determine its budget and it would then determine its revenues and whatever the shortfall is between the expenses and the revenues they need to recover via sort of rates and taxes. The kicks and balances on the cost budgets leave a lot to be desired. And the process, to my mind, is actually floored. And I think that is where -- as an industry through SAPOA and otherwise, we're having to step up the efforts in trying to sort of address that and rest that.

Estienne, I don't know if you want to just comment on that?

--------------------------------------------------------------------------------

Estienne de Klerk, Growthpoint Properties Limited - CEO of South Africa & Director [69]

--------------------------------------------------------------------------------

Yes. Look, I mean, it's a difficult issue because there's -- a lot of it goes into what's happening at the municipalities. Now I'll give you an example. If you are Johannesburg municipality, you're offering all your employees 6.5% increases, on top of that, you're losing 38% of the water that you're buying from Rand Water, you don't know where that's going, and you can't predict. And then you're also not collecting a lot of your rates and your budgeting together 8.7% increase in your top line. So how they do that is they just pass that straight through in terms of a fixed formula where they pass through to the different taxpayers. Now that is a problem that we're having at. As Norbert pointed out, you've got the valuations on the one side, and you got your rate and the rand on the other. And what we have to do as an industry is we have to approach corporative governance, the ministry, and we're going to have to try and see whether we can put in some kind of a either ombudsman or a regulator, similar to NERSA that can start managing this because I can tell you what the statistics, it just take for Johannesburg, the '17/'18 year, they got a 15.1% increase. For '18/'19 year, they got a 35.8% increase in revenue. And then in the '19/'20 year, it's 21.7%. So this is additional rates that they've been basically getting from the taxpayers. And as Norbert's pointed out, yes, it ultimately eats into the margin say it's expropriation without compensation because on top of all these increases, the real estate industry is also picking up increasingly the, let's call it, downside of nondelivery. So we're providing at all our facilities uninterrupted power now. If you've got industrial facility, you have to build pumps and tanks because for the very first way of fire regulations that we have, we need water pressure, and that obviously isn't available anymore. So you've got to have pumps and tanks. So putting in an incredible layer of cost into the sector, I mean, in the new Woodmead offering, you'll be pleased to see is being developed. Guess who's doing that? Not the problems. It's Growthpoint, okay? So we're picking up the real estate industry to ensure that we can let our facilities, we're picking up the tax book, ultimately. And it's not infinitely possible. So we're going to have to approach, Minister of Finance and Minister of -- Corporate of Governance, and we'll be doing that through SAPOA most probably. So that train has left the station. Everybody should try and get a copy of that little leaflet that they've just put out some very interesting reading in there.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [70]

--------------------------------------------------------------------------------

Charles, if I'm going to see. Maybe final comment on that is for a couple of years, we've been referring to, let's say, the administered costs, in particular, in relation to rates and taxes, water and electricity as the, call it, a triple whammy. The first whammy is you're paying more. The second whammy is you getting less. And the third whammy is you actually have to replicate the service often at your own cost. So that is, I would argue one of the single biggest risks to the industry in the short to medium term.

On your cap rate question, yes, I think certainly, the management and Board are currently challenged with exploring all the relevant options that are available to it, including, as I said, active engagement with the funders. If there is to be a capital call, I don't believe to keep the wolves at bay for want of a better description that any -- it needs to be a significant capital call. I think a smallish capital call will go a long way to solving the short-term issues. And certainly, from our side, we would want to support as best as we can, and we're going to have to obviously take that into account in our overall capital allocation and liquidity modeling at this time.

--------------------------------------------------------------------------------

Charles Boles, [71]

--------------------------------------------------------------------------------

Thanks so much for the feedback. That's very useful.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [72]

--------------------------------------------------------------------------------

Sure.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

The final question in the queue comes from Alex Ayoub from Waha.

--------------------------------------------------------------------------------

Alexandre Ayoub, [74]

--------------------------------------------------------------------------------

Sorry, I think, I was on mute. Really thank you so much for this quarter's lot of the details. Just wanted to keep it very high level. You mentioned valuation would be potentially decreasing by 10% to 20% in the next like 12 months to 1 to 2 years, does it mean that maybe we can also model our rolling rate revenue from South Africa to decrease by like maybe 10%, 20%, 25% over the next year or 2 assuming that the COVID situation doesn't materially deteriorate or materially improve? That's first question. Second question on the expenses. Same question it's like the situation that doesn't materially change, should we expect like that the expenses will decrease by maybe 10%, 20% as well? And finally, I wanted to get a better clarification on the liquidity, short-term liquidity, how much debt do you have amortizing in the next 12 months? And how much cash roughly and available facilities you have to cover that for the next 12 months? And what are you doing to be less reliant? Or can you do something to be less reliant on short-term financing?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [75]

--------------------------------------------------------------------------------

So yes, I think quite a few questions there. The first one, you heard it correctly, was the assumption on run rate revenue out of South Africa. And I think, as I said to you, I believe that of the valuation -- down to valuation trend, I would argue that 80% of that 10% to 20% downward valuation is driven by, let's call it, revenue -- let's say, income assumptions being more challenged or income being under pressure. So as a consequence here, I think you could be modeling somewhere between -- and if you look at the rent reversions, et cetera, that we are currently experiencing, you probably can continue modeling some of the current rent reversion dynamics that we are experiencing for another 1 year or 2.

On the expenses, I would -- look, I would argue that expense -- cost-to-income ratios, historically for Growthpoint for many, many years was 25% was the norm. It became 27%. It became 29%. And I think we're into the 30% range going forward. So expenses are not going to be declining by as much as 10%. I think, expenses, to my mind, will continue to grow at circa inflation. And clearly, as vacancies rise, then you are -- that also has quite a dynamic on the cost-to-income ratio.

In relation to the liquidity, we have -- I think we mentioned in the update, which was published that at the end of May, we had over ZAR 2 billion of liquidity in the form of cash and facilities. There's been quite a few moves over the last week, which, to my mind, will improve that dynamic once the activity in the bond market has settled in the next couple of days and one other debt facility that we're currently negotiating and obviously, if the investment from the IFC comes through, that will also be net positive for liquidity.

And yes, as to how any magical formulas to be less reliant on short-term funding, clearly, the debt markets and the bond market in South Africa have been changing shorter over the last sort of 3 to 5 years or maybe shorter period, let's say, 2 to 3 years. It's fair to say that today, getting a 3-year loan is probably almost as long-dated as you could possibly get at a stretch, maybe you get 4 years, and it would be an exception today to get 5-year debt funding in either the bank or bond market. And that then only really leaves, I guess, equity. I mean equity at the end of the day, I guess, is the longest dated form of liquidity, if you want to call it that.

And as I mentioned, we're not certainly in any process at the moment to consider tapping the equity markets depending on, let's say, the next couple of months and just what transpires as we head into the end of the, let's call it, calendar year. We need to -- as a Board and as a management, I think we need to obviously be open to any and all liquidity opportunities irrespective of what they are. But we fully appreciate the fact that equity is obviously the most expensive form of liquidity, especially when the share price is sitting where it's at and the big discount to NAV. So we're going to navigate through this as best as we can without necessarily defaulting to equity, but it has to be a consideration at any point in time.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

Mahir, we have no further questions in the queue. Do you perhaps have any other questions?

--------------------------------------------------------------------------------

Mahir Humdulay, [77]

--------------------------------------------------------------------------------

No. Thank you very much. I think we've gone over our time allocation. So thank you for being with us, Norbert, Estienne and Lauren. I'm not sure whether you have any closing remarks from your side. But from my side, I'd once again like to thank you for taking the time out. And to all participants, if you didn't get around to asking your question and if you would like, Lauren has indicated that you can e-mail your questions through to her.

So Norbert and Estienne, any closing comments from your side?

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [78]

--------------------------------------------------------------------------------

Nothing really from my side, Mahir. Thanks. I think obviously, we're now in a close period until the final results will be made available. Lauren, I forgot the exact time frame, that's mid-September, if I'm not mistaken.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [79]

--------------------------------------------------------------------------------

It's 9th of September, Norbert.

--------------------------------------------------------------------------------

Leon Norbert Sasse, Growthpoint Properties Limited - Group CEO & Director [80]

--------------------------------------------------------------------------------

9th of September. We're not foreseeing a need to delay announcing results unless something comes out, unless the auditors are unable to perform their function remotely. Certainly, our management team and the Growthpoint finance team and the Growthpoint team as a whole, I think, have worked seamlessly through this unprecedented times. I think the stresses that our people have been under over the last couple of months from managing shopping centers and dealing with regulators and changing regulations every 0.5 hour, it's just been absolutely very, very stressful on the team. And so we certainly are able to deliver on our side from a financial adhering perspective, but not everything is clearly in our control. And -- but for now, we are set on delivering the results on the -- you said the 9th, Lauren. And we'll go ahead with you after that again.

--------------------------------------------------------------------------------

Lauren Turner, Growthpoint Properties Limited - Head of IR [81]

--------------------------------------------------------------------------------

Yes. That's right, Norbert.

--------------------------------------------------------------------------------

Operator [82]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.