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Sustainabile growing income
The company’s primary objective is to provide sustainable
and growing income for its investors. Underscoring this
is Redefine’s pursuit of revenue enhancing opportunities
that translate into increasing distributions for unitholders.
Distributions are currently paid on a quarterly basis.
Growth in income and distributions is targeted through:
• Organic growth from the core property portfolio
2010: Gross revenue from the property portfolio accounted
for 84% of total gross revenue (up from 67% in 2009).
Recurring net income accounted for 95% of distributable
income.
• Increased distributions from strategic listed securities
2010: There was a significant increase in income
from Redefine International plc (RI plc) and Hyprop Investments
Limited (Hyprop) as a result of the increased investment
in these companies.
• Yield enhancing acquisitions and disposals
2010: Redefine acquired four properties at a yield
of 11,2%, and disposed of 11 properties at a 5,7% yield.
• Management of debt
2010: Interest costs increased significantly as a
result of the expansion of the company. Careful strategic
management of the debt exposure is a key priority.
• Development and redevelopment of properties to add
value to the portfolio
2010: Redefine has a number of development projects
in progress, valued at R185 million, which will enhance
the existing portfolio.
• Cost containment
2010: Despite increases in electricity and rates
tariffs, costs were contained at 21% of gross revenue.
Investment strategy
Redefine aims to enhance and improve the portfolio from
which its income is derived, and acquires or disposes
of properties or listed securities accordingly.
Acquisitions
It is Redefine’s strategy to acquire revenue enhancing
properties to grow the portfolio, grow income and minimise
risk. All decisions in respect of acquisitions are taken
by the investment committee or by the board in cases where
the acquisition value is above the investment committee
mandate set by the board.
Investment criteria for acquisitions
The emphasis is on acquiring revenue enhancing assets,
which is influenced by the method through which the purchase
consideration will be settled. More recently, the cost
of mortgage funding has reduced as a result of the lower
interest rate cycle and this method of funding is more
advantageous than issuing additional linked units. In
these circumstances, the yield on acquisition of an investment
must be higher than the rate at which Redefine can borrow
funds.
When selecting investments in direct properties, management
aims to carefully balance revenue enhancement and overall
quality, and this has been a major focus of Redefine during
the year.
”Quality” incorporates factors such as tenant covenants,
lease expiry profiles, rental levels, location and overall
condition of the properties. Redefine invests in properties
which have market related rental streams and where rental
escalations contribute to growth in revenue.
Redefine assesses the portfolio on a regular basis to
identify properties that no longer fit the profile of
the company.
Criteria for the disposal of properties
Disposals are determined by the ongoing assessment of
the medium- to long-term potential of portfolio properties,
their geographic location, management efficacy and whether
sales will be revenue diluting or not.
In circumstances where a disposal may be dilutionary,
the decision to sell may still be taken if management
believes the property is in a state of decline or will
be a drag on the portfolio in the future.
Investments in listed securities
In addition to investments in fixed properties, Redefine
holds strategic investments in listed property securities.
Investments in other listed property companies are actively
pursued if there is an opportunity for corporate action.
During the year to 31 August 2010, Redefine was active
in acquiring units in listed securities. Notably, the
company increased its stake in Hyprop from 33,3% to 45,7%
at 31 August 2010 and substantially increased its holdings
in Redefine International plc.
Offshore strategy
Redefine has invested in offshore property companies to
further diversify risk and to provide investors with a
hedge against rand weakness. The aim was to expand the
offshore portfolio and to acquire further interests in
Ciref Plc and to rebrand it as Redefine International
plc (RI plc).
Redefine was the first listed property company to receive
approval from the South African Reserve Bank for foreign
direct investment in offshore property. The company received
permission to hold its interest in RI plc directly through
a wholly-owned South African subsidiary, Redefine Properties
International Limited (RI Limited) – which listed on the
JSE subsequent to year-end on 7 September 2010.
All Redefine’s offshore investments are now housed in
this locally listed vehicle and as a consequence of the
listing, Redefine’s holding has reduced to 57,2%.
Merger integration
The integration of Redefine, ApexHi and Madison, following
the merger which took place in July 2009, took centre
stage during the 2010 financial year. Redefine has successfully
consolidated the expanded portfolio to ensure that economies
of scale and cost savings were realised, and the asset
management division was restructured to increase efficiencies.
Internalisation of management functions
The internalisation of asset management was successfully
implemented following the merger.
During the year to 31 August 2010, the property management
model was re-evaluated and alternative and more beneficial
ways of managing the portfolio were assessed. Redefine
consequently made the decision to move from an outsourced
to an in-house property management model because Redefine
was dissatisfied with the service levels being provided.
Furthermore, due to the increased size of Redefine, it
was deemed more appropriate to internalise property management,
and the company commenced with the establishment of its
own property management department. This is expected to
result in an increase in revenue as well as considerable
financial savings and efficiencies in the medium term.
Risk management
Redefine actively manages risk within the business by
identifying, assessing and monitoring the risks to which
the business is exposed.
Portfolio risk
The size of Redefine’s property portfolio significantly
reduces risk due to:
• the number of properties owned;
• the geographical spread throughout South Africa;
• the spread between office, retail and industrial sectors;
and
• the large number and quality of tenants within the
portfolio.
Acquisitions and disposals
The investment committee, a sub-committee of the board,
approves all material acquisitions and disposals based
on a defined mandate and stringent technical and financial
due diligence processes.
Debt
Redefine has a conservative debt profile, with a current
loan to value ratio of 34%. The company actively pursues
the lowest cost of finance and fixes interest rates as
low as possible for long periods. In the year to 31 August
2010, Redefine took advantage of the favourable interest
rate environment and increased its debt from R5,5 billion
to R8,4 billion to facilitate the expansion strategy and
has maintained the average all inclusive cost of borrowings
at 9,3%.
Lease expiries
The company’s lease expiry profile reflects that approximately
31% of the lettable area expires in the coming financial
year. In the review period, 33% of the lettable area in
the portfolio expired. Leases for 912 395m2 were renewed,
and new leases over 215 848 m2 were secured. The company
has an in-house leasing team, and also makes use of independent
brokers. The strategy is, where practical, to secure large
A-grade tenants where the likelihood of lease renewals
is high.
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