Current Share Price: 962 Percent change: -0.52 Closing Price: 967



Redefine Properties, the second-largest listed South African property loan stock company by market capitalisation listed on the Johannesburg Stock Exchange, has declared a distribution of 37 cents per linked unit for the six months ended 31 August 2011. This, combined with the distribution of 31 cents for the half year ended 28 February 2011, results in a total distribution of 68 cents per linked unit for the year to 31 August 2011. Total distributable income for the year was R1,8 billion.

On a comparable recurring income basis, the total distribution is 3% ahead of last year, after excluding fee income from the current and prior year's distributions of 4.6 cents and 5.0 cents per linked unit respectively.

Redefine has a range of diverse property assets under management exceeding R37 billion. Geographically, South Africa generated 93% of distributable income. Contractual rental income comprised 79% of total revenue, income from listed securities 10%, hotel income 5% and trading and fee income 6%. Operating costs represent 26.5% (2010: 21.5%) of contractual rental income with roughly a quarter of this increase arising from higher local municipal and electricity charges that are not fully recoverable from tenants. It also includes non-recurring costs from internalising property management which Redefine believes will enhance its tenant offering and improve efficiencies and economies. The benefit of this initiative began to emerge in the second half of 2011.

Redefine CEO, Marc Wainer, says the group has made significant progress in implementing its strategy of restructuring and improving the quality of its core property portfolio. Wainer says Redefine will concentrate the bulk of its portfolio in the Western Cape, KwaZulu-Natal and Gauteng. Within these areas, most of the portfolio will be located in so-called 'hotspots' for offices and industrial premises. "We are still happy to have retail shopping centres of sufficient size countrywide. However, we believe it is in these hotspots that the greatest rental growth and capital appreciation will evolve over the next few years," says Wainer.

Wainer says Redefine has also decided not to invest further in areas where experience has shown that local authorities are dysfunctional. "While investing in these areas may well give us attractive initial yields, we have to ensure we obtain the required internal rate of return over a given period. The prognosis for property in many of these areas, in our view, is that values will in fact decline or growth will be very low."

Based on the property portfolio restructuring strategy, the number of South African properties will decline from 358 to around 260 and the average property value will increase from R50 million to R80 million. The total portfolio value will increase to some R20 billion. "We are convinced we are making the right decisions at the right time with the medium and long-term benefits of all of our stakeholders in mind. Hopefully this will be reflected in our distribution growth and the increase in net asset value over time," says Wainer.

Three properties were acquired and transferred during the past year for an aggregate purchase price of R733 million with a gross lettable area (GLA) of 42 243m² at an initial yield of 9.1%. Since year end, definitive agreements have been concluded to acquire seven quality office and industrial properties from the Zenprop Group for R979.4 million. In addition, the Discovery Life building in Sandton was acquired for R510 million and another acquisition of R430 million concluded for a portfolio of six high-quality industrial properties, which is subject to sub-divisions. Competition Commission approval is required for these acquisitions.

Disposals during the year included the sale of 39 properties with a GLA of 184 083m² for an aggregate consideration of R938 million at an average yield of 11.2%.

On 28 October 2011, Redefine linked unitholders approved the unbundling of a subsidiary, Arrowhead Properties Limited (Arrowhead), which will be listed on the JSE. In the process, Redefine disposed of 98 properties. Redefine also concluded an agreement with Arrow Creek Investments 227 (Proprietary) Limited (Arrow Creek), unrelated to Arrowhead, for the disposal of 12 properties. According to Wainer, Redefine believes management of these smaller properties is best served by specialist managers in a separate portfolio.

Wainer notes that the portfolio restructuring is only one leg of Redefine's strategic plan. Hand-in- hand with this acquisition and disposal strategy goes effective funding. Redefine recently made its debut on the bond market with a successful R250 million commercial paper issue at a rate under 6% and intends to continue accessing the bond market as part of the funding mix. "We ultimately envisage that 15% to 20% of our funding requirements will be sourced from the bond market. We also intend taking advantage of the lower interest rate environment and aim to have 75-80% of our debt fixed for longer periods," says Wainer.

On the international front, Redefine International has enlarged its platform, following the reverse acquisition of Wichford. This positions it strongly for growth. Salient features of Redefine International P.L.C. results for the year ended 31 August 2011 include:

Commenting on the group's international exposure, Wainer says this remains a core part of the strategy and that he was pleased with the performance of both Redefine International and Cromwell. "We will continue to support both these companies financially and strategically to ensure they take advantage of the exceptional opportunities they come across. Redefine International is now bedding down the Wichford takeover and will in due course strategically change the profile of its portfolio."

Commenting on prospects, Wainer says the domestic economy has not escaped the impacts of global financial market turmoil. Despite ongoing challenging market conditions, the core property portfolio is expected to achieve satisfactory growth which will, in line with the restructuring strategy, be offset by the immediate negative impact of the Arrowhead unbundling and lower yields from acquisitions. As a result, distributable income on a recurring income basis is expected to reduce moderately in 2012. Fee and trading income remain largely unpredictable.


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