The fourth quarter of 2017 brought about some positive economic and political

Transcription

1 WATCH THIS SPACE Quarterly Newsletter CONTENTS Introduction From the Asset Management Desk WORKING OUR PORTFOLIO HIGH FINANCE FUND SNAPSHOT (as of 31 December 2017) SHARE CODE: TEX (JSE) I TEX:SJ SHARE PRICE: R6.40 MARKET CAP: R2.407 BILLION NO. OF PROPERTIES: 46 SHARES IN ISSUE: January 2018 EDITION Block C, Investment Place 10th Road, Hyde Park Johannesburg, Gauteng, 2196 Tel: +27 (0) The fourth quarter of 2017 brought about some positive economic and political developments in the two regions in which Texton operates South Africa and the United Kingdom. During December, Cyril Ramaphosa was elected president of the ANC, which prompted positive sentiment and a strengthening of South African capital markets, resulting in stronger returns from SA-centric stocks in the final month of The property sector remains under pressure as various developments across all sectors come to fruition, adding to the oversupply of stock and giving tenants more variety to choose from. With a more competitive marketplace and rentals, Texton will continue with its proactive and flexible approach to business. Brexit continues to dominate discussions across the United Kingdom. Towards the end of 2017, the United Kingdom was granted sufficient progress by the EU s European Council and, as a result, post-brexit transition and trade can now be discussed. This brought slight relief and hope that focus on the mutually beneficial relationship that is in place now will continue. Operationally, the past six months have been about bringing change to the way we do things and being aligned with the right people in respect of our service providers. We believe the results of this change will start to show in the way we operate and the unlocking of efficiencies. NOSIPHIWO BALFOUR, CEO TEXTON QUARTERLY NEWSLETTER JANUARY

2 From the Asset Management Desk Taking the economic developments noted in page 1 into account, Texton will continue to maintain a defensive property portfolio in A key focus for the year ahead is cost rationalisation and portfolio-enhancing acquisitions. In particular, we will further diversify our portfolio and look to acquire industrial warehousing, logistics and retail properties with medium- to long-term leases in place that are underpinned by strong covenants. Another priority will be generating additional revenue from nongross lettable areas. Initiatives include using advertising platforms at properties with good exposure to busy roads and highways. We have already selected outdoor advertising and media companies that will implement and manage this process across our portfolio. Texton will continue to focus on sustainable business and greening initiatives. Cape Town s water crisis means that landlords need to prioritise water-saving measures and fast-track projects that reduce water consumption. 14 Loop Street is a good example of how to save water and money through various measures, such as installing grey-water tanks, waterless urinals and dual-flush toilets. At this property, water consumption is negligible, and the tenant only pays the statutory minimum for the water supply. Working our portfolio South Africa While the rationalisation of our portfolio has yielded pleasing results, this property in the medium to long term to potentially allow for a mixeduse development given the prime location of the site. The Foretrust we continue to operate in a challenging economy with weak local property fundamentals. The South African Property Owners lease renewal has also had an immensely positive impact on Texton s Association (SAPOA) national office vacancy at December 2017 was lease expiry profile, which has reduced significantly since June %, slightly less than the all-time high of 11.8% in early We are delighted to report that through our hands-on engagement Rental growth remains suppressed due to the current low growth with tenants, this figure has reduced to 14.3% when it was reported environment and oversupply of property stock. that 42% of leases (by revenue) expire in the 2018 financial year (see figure 1). This will continue to be a core focus of the business. Tenants remain cognisant of operating costs and clever use of space has become a priority. We have noticed consolidation of business operations Texton s gross lettable area in South Africa is m² with a vacancy into smaller or fewer premises in an attempt to reduce costs and realise of m². This vacancy amounts to 8.3% of the total vacancy in further savings. South Africa, which is still below market norms. The reduction in total gross lettable area between the third and fourth quarter is attributed to Between October and December 2017, Texton successfully concluded the disposal of five non-core industrial properties. six new leases amounting to 1 406m². In the same period, a further 22 existing leases were renewed, amounting to m². This is pleasing given our focus and proactive approach to tenant retention in a challenging market. A definitive highlight was the renewal of the Department of Public Work s lease at the Foretrust building in Cape Town, Texton s largest South African asset by value and gross lettable area. The renewal m 2 was a significant win given the challenge of general market conditions and the department s backlog of attending to expired leases. SA Lease expiry profile: December % % 38.7% 35% 31.8% % 25% 2 15% 13.1% 14.3% 15.4% 15.2% 1 8.3% 5% Vacant June 2018 June 2019 June 2020 > June 2020 Texton is also reassessing its options for Figure 1 GLA % Revenue % TEXTON QUARTERLY NEWSLETTER JANUARY

3 Texton has embarked on an active drive to fill its vacancies and continues to engage with its broker network, principals and prospective users. Our vacancy has increased from 6.1% in September 2017 to 8.3% at December 2017 (see figure 2) mainly due to the relocation and consolidation of a single tenant that occupied both the Scott Street and St George s Mall properties. On a like-for-like basis to 30 June 2018, we are confident that our vacancies will remain below the SAPOA statistics. VACANCY ANALYSIS 12% 10.6% % 7.9% 8% 7.1% 8.3% 6% 5.4% % 5.5% 4% 3.5% 3.4% 3.2% 2% 2.1% 0. June 2015 June 2016 June 2017 September 2017 December 2017 Total vacancy SA vacancy UK vacancy Figure 2 Acquisitions Over the last quarter, we had 52 potential acquisitions come across our desk, measuring a total area of m² in the United Kingdom and South Africa, but we remain discerning buyers. Yield accretive acquisitions remain important to us and we will continue to look for opportunities that improve the quality of our portfolio and steadily grow our assets. Greening initiatives Texton has agreed terms with a supplier to install its first solar plant at Kempstar Mall in Kempton Park. Following the installation of smart meters across the portfolio in 2016 and careful analysis, we identified this site as a good opportunity based on the electricity consumption and load profile. The installation will be complete by May 2018 and savings generated will be put towards further initiatives at the property. United Kingdom Although all sectors across the United Kingdom have remained generally stable, the retail sector has come under increased pressure. We are seeing a widely flat trend across all sectors in property tenant demand. The retail sector continues to struggle in terms of both rental growth expectations and capital value. The office sector is broadly unchanged, with supply and demand remaining the same; however, the value of landlord incentives has risen. Industrial has remained an outperformer in both investment and occupier markets. In the short term, rental growth expectations are looking positive in the industrial sector and relatively flat in the office sector. They are expected to come under pressure in the retail sector. In the longer term, both prime and secondary industrial rents are expected to rise, prime office rentals expect minimal increases and the secondary office market will remain flat. Prime retail space is expected to remain flat where previously projections were positive. The secondary retail locations expect further downward results. A shift towards online spending is putting the profit margins of nonfood retailers under pressure. High-street retail experienced mixed results during the Christmas period. Retail sales increased in December but decreased like-for-like from previous years. In the last quarter of 2017, the sales of non-food retailers fell by 4.4%. This is the most dramatic fall since data collection started in 2012 by the British Retail Consortium. In the final quarter of 2017, short-term capital values strengthened in the office sector. The industrial sector continued to provide the most significant gains, and this is expected to continue in the long term. The industrial and office sectors saw an increase in investment demand, whereas retail remained the same. Brexit negotiations with the European Council are progressing, and the post-brexit transition and trade will be discussed in This brought hope to businesses that the current mutually beneficial relationship will continue. To ensure we continue to operate with flexible plans that reduce future instability, senior management visited the United Kingdom in the final quarter of During the trip, the management team engaged with all relative parties and discussed Texton s future and further involvement in the United Kingdom. TEXTON QUARTERLY NEWSLETTER JANUARY

4 Management also visited Texton s properties namely, Mowbray House, Bonmarche and Poundland, Broad Street Mall, DHL and Booker Warehouse and held successful meetings with financial institutions and property managers. HSBC and Santander indicated that they are keen for business and look forward to future possible endeavours with Texton. Although there is still uncertainty in the market, banks are looking for opportunities with existing customers. Broad Street Mall and Fountain House The quarter from October to December always marks an interesting term at Broad Street Mall as we prepare for and reflect on the busy Christmas period. For the full calendar year Broad Street Mall footfall was down 0.2% against the 2016 solid figure. This was a satisfying result considering our largest anchor, Argos, was included in the scheme s figure last year; this is also above the national, regional and United Kingdom average. For the month of December footfall fell by 3.5% across the United Kingdom (data obtained from the British Retail Consortium). Broad Street certainly had mixed results, with some non-food retailers experiencing growth and some experiencing a slight decrease. Centre refurbishment and development Tiling, new kiosks and other improvements to the mall s central atrium were completed in time for the busy Christmas season. They have improved sightlines tremendously. As a result of the successful new kiosk development in the central atrium, development activity has shifted to enhancing the Oxford Road entrance, where a new kiosk may be built. The project is likely to be completed towards the end of the first quarter in New Kiosks Letting Update Kiosk A Existing tenant has taken up the kiosk with a new 10-year lease. (Tenant has reported a 1 like-for-like growth since taking up the new kiosk.) Kiosk B Existing tenant has taken up the new kiosk with a five-year lease. Table 1 Asset management and income enhancement We work with both new and existing tenants to explore ways to enhance store presence, shopfronts and new signage. If tenants are interested in reconfiguration or additional space, all efforts are put into place to achieve the best options. It is important for us to work with tenants and develop strategies to retain their presence at the mall. The former Argos space continues to be the main priority. There have been numerous discussions and interest in the space. A discount department store who was initially shortlisted and offered the space has come back and is showing interest. They will want the majority of the Argos space. This discount department store will add a retail alternative to the mall as well as attract increased foot traffic to this less busy end of the building. We are glad to report that discussions of how to fit out the store are under way. The re-letting of the Argos space to a discount department store would be a great addition to both Broad Street Mall and Reading. Importantly, it would add additional support to the trading propositions of existing retailers as they approach expiry dates over the next 36 months. While terms were being discussed, an urban pop-up unboxed Christmas market was set up in the vacant Argos space during Christmas trade. This new offering of independent start-up local traders bolstered footfall over this key trading period, attracting about entries into the old Argos space in December. Numerous retailers also commented on the additional traffic during the run-up to Christmas. Two more Christmas pop-ups were placed in the vacant units of 47 Broad Street Mall and 37A Oxford Road during December. The most recent building that Texton acquired with its joint venture partners is next to Broad Street South Court and was a nightclub. It was recently shut down, and as a result, a lease surrender was taken. This has allowed the demolition plans to be fast-tracked. TEXTON QUARTERLY NEWSLETTER JANUARY

5 The space will be incorporated into the urban market concept on South Court the Box Park idea for which planning permission has been received. We look forward to seeing this project progress and welcoming our new tenants. The mall s food and beverage offering was further improved during the last quarter, with Fernando s on Oxford Road having completed its refit and rebranding. It has been reopened to the public and received well. High finance Texton continues to engage with its financiers about realigning its capital structure so that South African assets are financed with South African debt and UK assets are financed with UK debt. A new facility with HSBC is being finalised. As at 31 December 2017, the average cost of funding was 9.22% on Texton s South African debt and 3.24% on Texton s UK debt, which has declined from June In accordance with Texton s hedging strategy, Texton entered into a put option to hedge exposure to fluctuations in the British Pound exchange rate expiring in December The put option that expired in December 2017 was exercised and resulted in a positive cash flow of R4 million for Texton. During the quarter to December 2017, Texton repurchased shares, at an average price of R6.36, through one of its wholly owned subsidiaries. The total number of treasury shares at 31 December 2017 was (31 December 2016: ). Given the lack of yield-accretive property acquisitions that meet Texton s strategic criteria currently available in the market and the yield at which Texton shares are currently trading, we believe that the repurchase of shares will assist in unlocking shareholder value. Texton will continue to focus on hands-on management and opportunitsic investment that meets the target sector and geographic diversity with an optimal tenant profile. Managing a tight ship with arrears is important in this trading environment as that will be the key to income protection alongside strong tenant covenants. INGE pick, CHIEF FINANCIAL OFFICER MANAGEMENT PRIORITIES Increasing efficiencies Securing new leases and lease renewals Strengthening capital management TEXTON QUARTERLY NEWSLETTER JANUARY