Convenience shopping and essentials highlight Fairvest's resilience

Fairvest Property Holdings Limited has announced its results for the six months to December 2020, portraying strong improvements in property fundamentals and a pleasing 7.2% increase in distribution against the most recent six months to the 30^th of June 2020 during the height of Covid-19. When compared against the pre-Covid-19 corresponding period (31^st of December 2019), the distribution decreased by 5.1%.

The company maintains a unique focus on retail assets weighted towards non-metropolitan and rural shopping centres as well as convenience and community shopping centres servicing the lower income market in high growth nodes that are close to commuter networks. Its property portfolio consists of forty-three properties with 250 911m² of lettable area valued at R3.425 billion.

Chief Executive Officer, Darren Wilder says that Fairvest's specialist, niche positioning of smaller neighbourhood centres with grocery anchored assets, and an emphasis on essential shopping with a focused, hands-on management team, has been more resilient during the pandemic with the recovery turnaround time quicker than anticipated and, without significant increases in vacancies. Countrywide, food retailers demonstrated the most resilient trading densities of all merchandise categories and smaller format retail outlets performed as consumers redirected their spending power towards convenience shopping closer to home.

The defensive portfolio and consistent distribution track record have been well-recognised and rewarded by investors with the company featuring in the top three among JSE's universe of twenty-eight South African based REITs in terms of total return performance in each of the key investment period horizons of one, three, five and ten years.

Resilient distributions

Total property revenue increased by 2.3% to R274.2 million due to income growth in the historic portfolio and acquisitions in the later half of the previous financial year, offset by the disposal of Tokai Junction in Cape Town. Net profit from the property operations increased by 4.6% to R176.5 million.

Expenses were well contained, assisted by significant solar savings at the properties but countered by the effect of rental concessions provided to tenants as well as the substantial increase in the provision for expected credit losses on rentals billed during the national lockdown period.

Valuations

On a like-for-like basis, the historic portfolio increased by 3.4% compared to the previous year. Capital expenditure of R12.5 million was incurred and a further R14.9 million was invested in solar installations, with sixteen sites now completed and generating savings to the value of R5.0 million. Installations at eight further sites will start during the fourth quarter of the financial year with a further R14.2 million of capital expenditure committed.

Given the uncertainty in the current market, a conservative approach was maintained with the valuation of investment property. The weighted average exit capitalisation rate used remained unchanged at 10.3% compared to 30 June 2020, while the weighted average discount rate also remained unchanged at 14.8%. These conservative metrics continue to show prudent but fair valuations. During the period under review, Tokai Junction was sold for R180.0 million.  The disposal price represents a 10.5% premium to the 30 June 2019 valuation of the property, underscoring Fairvest's conservative valuation of its portfolio. The sale resulted in a 1.9% decrease in the value of the property portfolio at 30 June 2020 to R3.43 billion.

A low-risk portfolio with robust property fundamentals

The portfolio remains strongly diversified with a broad, geographically dispersed representation and A- and B-grade tenants who occupy 80% of the gross lettable area (GLA). The high national tenant component of 72.2% of the portfolio provides shareholders with a low-risk investment profile with national food retailers occupying 32.4% of the portfolio in terms of GLA. Tenants unable to trade during lockdowns represented less than 3.5% of monthly billings.

The weighted average contractual escalation for the portfolio decreased from 7.2% to 7.1%. Gross rentals across the portfolio trended upwards, with a 2.7% increase in the weighted average rental to R132.15/m² at 31 December 2020. This was because of contractual escalations, increases in rental achieved on new leases, and a 1.6% weighted average rental increase achieved on renewals.

Wilder said that Fairvest is fortunate to have a team of hands-on property professionals who have deep experience in both bull and bear markets. In tough times, this experience is brought to bear to continue to achieve healthy results and sustained value creation. The stable performance and notable improvements from the height of COVID are evident.

While vacancy rates within shopping centres across the industry reflected deteriorating tenant viability, Fairvest vacancies decreased from 4.5% to 3.8% during the period. Positive letting of vacancies after period-end resulted in the vacancy percentage further decreasing to 3.0%.  During the period under review, 101 new leases were concluded with a total GLA of 19 081m². Fairvest also successfully renewed 16 038m² of leases, with a positive reversion of 1.6% being achieved on these renewals. Tenant retention for the period remained high at 67.5%. The weighted average lease term decreased slightly from 39 to 37 months.

Covid-19 impact contained

Most rent relief negotiations with tenants have been concluded during the reporting period. Additional rental remissions of R9.7 million were conceded for the six months to 31 December 2020. During the period net arrears decreased by 26.7% to R16.7 million. Collection of deferrals have been better than anticipated and we expect arrears to decrease further by the end of the financial year.

Asset quality improving further

Fairvest's asset management initiatives resulted in improved nets cost to income ratios and further improved asset quality, with the average value per property increasing by 0.4% to R79.6 million, and the average value per square meter increasing by 2.7% to R13 650/m².

Disciplined, conservative financial management

Wilder said that Fairvest's balance sheet remains strong, with a conservative loan to value ("LTV") ratio and a comfortable interest cover ratio. The LTV ratio decreased to 32.2% (June 2020: 36.3%) mainly due to the disposal of Tokai Junction during the period, offset by further investments in solar projects. Of the debt, 72.3% was fixed through interest rate swaps as at 31 December 2020, with a weighted average expiry for the fixed debt of 34 months. The weighted average all-in cost of funding increased to 8.05% (June 2020: 7.57%). The increase is due to the reduction of floating rate debt with the proceeds of the Tokai Junction disposal. The weighted average maturity of debt decreased marginally from 23 months to 21 months.

The company has no debt facilities expiring for the remainder of the 2021 financial year.

Fairvest said that the lasting impact of the Covid-19 pandemic on the local economy remains uncertain, given the pace of the vaccine rollout and potential further infection waves which may impact tenants.

The company remains well-positioned with a defensive portfolio of grocery-anchored assets in smaller, more convenient centres., a conservative balance sheet with modest gearing levels, and more than R220 million of undrawn debt facilities. The focus areas remain to maintain viable tenancies and letting of vacancies, with a strong focus to reduce arrears even further.

After taking into consideration the uncertain environment described above, as well the performance of the past six months, the Fairvest board expects the distribution per share for the full 2021 financial year to be between 0% and 2% higher than the previous year. The board has also again resolved to maintain the current dividend pay-out ratio of 100% of distributable earnings. Any changes to this policy will be communicated to shareholders at least twelve months before any changes are implemented.

"We are determined to continue to keep an uncomplicated traditional property business with a conservative balance sheet and income statement, devoid of complex financial structures. We continue to maintain and grow a portfolio of quality assets with strong property fundamentals and to provide hands-on property management, as we strive to continue to add value for our shareholders" he concluded.