Safari's niche portfolio in underserved locatons growing focus on operational performance

Posted On Tuesday, 25 June 2019 17:32 Published by
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JSE-listed REIT Safari Investments RSA Limited today posted annual results for the period ending 31 March 2019. 

 -DIRK-ENGELBRECHT-

The Company differentiates itself from other listed REITS by investing in quality income-generating retail properties located in regional underdeveloped peri-urban locations close to transport hubs that attract consumers and retailers to their centres. 

Thornhill Shopping Centre, effectively acquired from 1 October 2018, is a well established convenient neighbourhood retail centre in Polokwane.  Nkomo Village Shopping Centre Phase 1 was completed and opened for trading in November 2018.  

CEO, Dirk Engelbrecht, commented: 

“Many national retailers were introduced to the Atteridgeville community for the first time at Nkomo. Our focus on regional, underdeveloped locations has proven defensive, underpinned by strong demand for our centres as reflected in the low vacancy rate of 2.6%, and comparatively high trading densities across the portfolio.    

“During the period under review, we added to the portfolio with the acquisition of Thornhill and the opening of Nkomo.  Both of these assets are trading well and we expect that to continue”. 

During 2019 Safari implemented a Security SPV effectively pooling the security provided to lenders. The Board adopted an internal hedging policy and at year end 48% of the interest-bearing debt had been hedged. An additional R500 million debt facility was secured with ABSA.  Engelbrecht advised that “I am confident that this strengthens the Safari balance sheet and ensures appropriate management of risk.”

At the Denlyn centre in Mamelodi, McDonalds was secured and opened for trade and is trading well. In addition, Woolworths will open its first Mamelodi store at Denlyn and commence trading 1 July 2019 and all indications are that it will be well received by the community. 

Engelbrecht reiterated that the weaker than expected performance of the Platz Am Meer shopping centre in Namibia, as well as the delay in the sale of the residential units due to statutory requirements at the same development in Swakopmund impacted distributions negatively.  “We have implemented remedial action for Platz Am Meer and expect to see a turnaround in the future,” he said.  

The decrease in distributions was also attributable to the challenging retail environment with the property sector experiencing increasing occupancy costs in terms of municipal costs and electricity and retail space consolidation as a result of a number of new developments coming on line across all sectors. Other factors that are also playing a role is online shopping in especially fashion and electronic retailers and a strong focus on space optimisation in the banking sphere. The market is also seeing a negative gap between CPI and turnover figures according to recent reports. All these factors give rise to increased vacancies and tough rental negotiations affecting rental escalations. Safari is certainly also experiencing this to some extent but as a result of its dominating retail centres in the township areas and diligently managing the quality of our properties we were able to ensure low vacancies and retained strong national tenancy while continuing to achieve competitive rental escalations and ensuring sustainable earnings for our assets.      

As previously disclosed, Southern Palace defaulted on the R50 million equity loan from Sanlam during the current period which resulted in a cross-default on the R455 million senior loan. Guarantee fees and additional interest expense resulting from funding the interest shortfall from December 2018 amounting to R2,69 million paid on behalf of Southern Palace are deemed to not be recoverable and have been expensed in this financial year. Engelbrecht advises that “there is a reversionary pledge and cession agreement together with a Southern Palace Holdco guarantee in place which will result in Safari holding a pledge over the 53 million Safari shares of Southern Palace should Sanlam make a further call on the Safari guarantee for full settlement of Southern Palace’s outstanding obligations. This will result in a legal claim against Southern Palace for the full amount paid by Safari on account of Southern Palace’s obligations under the guarantees issued. ”.

The group recorded an operating profit, before investment revenue, fair value adjustments and finance costs for the year ended 31 March 2019, of R197.3 million (2018: R183.5 million).

The group’s property revenue increased by 14.5% to R275.9 million compared with the previous year’s R241 million. A weighted average escalation on lease agreements of 5,2% was achieved for the 2019 financial year. Property expenses as a percentage of property revenue was 26% (2018: 25%). 

The Safari group’s gearing (loan to value) ratio increased from 12% to 24%, mainly resulting from the completion of Nkomo Village together with the acquisition of Thornhill Shopping Centre.

On 28 March 2019, Safari and Fairvest Property Holdings Limited  published a joint SENS announcement regarding a potential friendly merger being investigated on an exclusive basis.  Engelbrecht asserts, “the process is continuing in the professional spirit in which it was started and we are positive that further announcements will be made soon.  Safari has built a reputation for managing a niche portfolio extremely successfully and this has made Safari a potential target for M&A discussion.  Whilst our strategy is to continue to build the business we cannot ignore these overtures and if they are value-accretive to shareholders and the company, management and the board have the obligation to review and present them to shareholders for consideration.” 

There have been further changes to the board with Mr Marais stepping down as Chairman of the Board and Safari would again like to take the opportunity of thanking him for his dedicated commitment to the company and wish him well for the future.  Dr Philip Snyman, a current independent non-executive director and former chairman of Safari, has been reappointed as chairman of the Company. The new management team are working closely together and this augurs well for the further success of Safari. The internalisation of the property management and leasing team was successfully completed, effective 1 March 2019, adding renewed focus on the management of the portfolio and the group. The relocation to new corporate offices enhanced the attraction of competent and motivated employees with a professional hands-on approach.  

“The management team and Board are committed to maximising the rental income streams with a proactive letting strategy focussed on national tenants.  We intend to minimise operating expenditure through the deployment of quality management within the portfolio,” Engelbrecht concluded.

Last modified on Tuesday, 25 June 2019 17:55
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