Good afternoon, welcome to the Q&A call with the Growthpoint management team, following the release of the investor update for the 9 months ended 31st March 2023. Representing Growthpoint, we have Group CEO, Norbert Sasse. We have SA CEO, Estienne de Klerk; Head of Investor Relations, Lauren Turner; Group Treasurer and Financial Director, Aasha Patel and Gerald Völkel; Head of Corporate Social Responsibility and Transformation, Shawn Theunissen ; Head of Corporate Finance, Werner van Antwerpen. Details of the call: to ask a question, simply press star one. With that, I can ask the operator to please queue the questions and remind participants on how to ask a question.
Thank you very much, sir. Ladies and gentlemen, if you'd like to ask a question, please press star and then one on your telephone keypad or the keypad on your screen. A confirmation tone will indicate that your line is in the question queue. You may press star two to exit the question queue. Just a reminder, if you'd like to ask a question, you're welcome to press star and then one. Ridwaan, can I hand over back to you for the first question?
Yes, perfect. Thanks. Let's kick off from my side. You know, I'd like to start with discussing the successful refinancing of the Eurobond. Pleasantly surprised by the new rate, given the current environment. Well done there to the team. Just, can you unpack maybe and how you decided on the repayment, given the initial three options communicated to the market? Following on from that, maybe discuss the rate quarter on terming out the bond as well as the hedge maturity profile.
Good afternoon, everybody. It's Norbert here. I'll give this a go, if I get stuck, I'm gonna defer to Asha, who is on the call. Ridwaan, I can't recall specifically the three options that you referred to in your question as to what we communicated before. It's fair to say, you know, we've been monitoring this thing for the best part of, sure, I'd say close to 2 years. You know, given that, you know, the liability became current, 12 months before, it was payable in May 2023. May 2022, it already became current.
We were really concerned about it, so we've been heavily engaged with our advisors and investment banks on refinancing this bond in the bond market in the Eurobond market for best part of two years. It's fair to say that at the outset, we were being given quotes which sounded very acceptable to us and, you know, very supportive of using the bond market to refinance that. But as we got closer and closer to the maturity date of this bond, clearly, global debt markets and bond markets started playing up, and we saw, for a period of time, liquidity dry up completely in the Eurobond markets.
Whilst I believe there is liquidity there today, certainly in the last 6-9 months, you know, the pricing that we were given and that was indicated to us, which was sort of north of 7% and some even 8% in dollars, was, you know, was clearly not going to be acceptable to us. We started implementing alternative strategies, initially, just to put facilities in place, short-term facilities in place, which would allow us to draw down on those facilities to repay the bond in May 2023. You go back to see at June 2022, sorry, December 2022.
June 22, we had an excess of ZAR 10 billion worth of liquidity put in place specifically to deal with this refinance, but those were relatively short-term facilities, principally sort of 2-year facilities. We have, where we are today, we have essentially termed out the bulk of those short-term facilities. I think there's possibly still one which we need to do either just before 30 June or possibly just after 30 June. But we have refinanced with four local and one international bank, where they have lent us denominations of between EUR 50 and 100 odd million each, aggregating the EUR 326 million that needed to be refinanced. So we no longer have the situation where we have a dollar bond swapped into euros.
We've now just got bilateral euro loans with five financiers. In terming out these facilities, we've achieved average duration or term of loan of about 4.78 odd years, is the number we quote.
No, sorry, 4.86.
4.86 is the actual duration of the underlying loans. That can still change a little bit, I guess, depending on the final terming out of the one facility. Furthermore, I think, you know, we have negotiated obviously margins. We currently obviously have a particular, you know, base rate that we're dealing with in EUR. We have entered into swaps, to swap some of these sort of floating rate loans into fixed. We have achieved an all-in rate of 4 point.
18.
4.18%. That compares to the 3.6% odd that we were paying all in on the previous, let's call it Eurobonds, the dollar bond that we had swapped into euros. Call it 50, round numbers, 50- 60-odd basis points higher. What important to note, though, that the average duration of the hedges is slightly shorter than the average duration of the underlying loan facility. The average, weighted average term of the hedges is 3.79 years. You might say that the 4.18% looks low, given, you know, where current rates are.
The reason for that is when we originally issued the 5-year bond in 2018, we entered into 10-year interest rate hedges up to EUR 186 million equivalent. There's still about four, just 4 -4.5 years left on some of those hedges. Those were put in at a base rate, I mean, when the base rate was in the low ones, low 1%. I mean, immediately after entering into those rates, obviously rates continued to go much, much lower, so we didn't look too clever. Given where, what rates have done since then, you know, obviously, at the moment, we would be getting the benefit of that. I think, you know, we certainly, you know, very pleased with the overall outcome.
You know, we've repaid all of those bonds. We've got new debt for a pretty decent weighted average term, and equally, we've got, you know, fixed rate equivalent hedges in place now for 3.8 years. Now, clearly, as some of these hedges start rolling off, that's a weighted average number, so some of it will roll off next year, and some of it will roll off in the year thereafter. If interest rates remain where they are at the moment, where five-year base rates, Euribor is probably 3.50, there or there about, you know, that weighted average rate, you know, could, you know, could increase, depending at what we ultimately do. Either we leave it floating or we put new hedges on. That's the status quo where we are today.
I don't know if that answers your question there, Ridwaan.
No, perfect. It does. Well done on 4.18%. It's a very good rate in the current environment. Operator, can we take the next question, please?
Thank you very much, sir. Ladies and gentlemen, just a reminder, if you'd like to ask a question, you're welcome to press star and then one. Question from the line comes from Tertius Pelser of Cuthman Capital.
Hi, gentlemen. Hi, guys. Any attractive distressed opportunities overseas? Zakiono Enterprises, the controlling shareholder of Globalworth, looking to sell part of their stake due to their shareholders being under pressure, especially Aroundtown. Does Growthpoint have any capacity to do deals?
All right, Norbert, again, I'll go for that. I think, yeah, I mean, if one just looks at the broad market coldly, there appears to be, you know, many really good, cheap, opportunistic buying opportunities. If you've got access to new and let's say, fresh and relatively cheap capital, I think, you know, in terms of our broad statement around optimizing the international investments and, you know, continuing to look for offshore expansion, we have to be mindful of the fact that, you know, we have, I guess, limited access to capital ourselves, given the LTVs at the moment, and given the, where the share price is trading relative to NAV.
I guess whatever capital we've got available to pursue this optimization, one has to appreciate that it's relatively limited and it's gonna be incremental. We don't have access to. I don't know what Aroundtown stake is worth at NAV. Aroundtown stake is worth probably somewhere between EUR 550 million-EUR 600 million. The same for CPI. Their stake is probably worth the same at NAV. I think the short answer to that is we don't have access to that kind of capital. What I will say is that we continue to look to engage with, you know, those shareholders, with the view to try and optimize the position where, you know, at the moment, the company, I guess, would be relatively stuck.
I think each party would be more keen to maybe have some direct control over certain elements of the, of the business or certain portfolios within the business. Various discussions in that regard remain ongoing. Capital is expensive. Capital is relatively scarce, and, you know, we're gonna have to very prudently, you know, work with our available capital in terms of where we allocate that. Yeah, we certainly would be looking to find a better solution to what we currently have, where we're just sitting as a minority shareholder.
Hi, Tertius, does that answer your question?
It does. Thank you very much.
Thank you. The next question comes from Mweishö Nene of SBG Securities.
Hi, guys. Can you hear me?
We can.
We can.
Great. Just two questions from me, right? With GOZ's 60% interest rate hedge, right, on the facilities, and the Australian rate tax being quite extreme, is there a big risk on some downside on that GOZ dividend? Do you have that maybe going backwards? Just a second question, you have given us some kind of soft guidance for FY 2024. You said that it should be lower than 2023, but I'm just wondering, do you expect that to be negative? Thanks.
If I can try and answer that, I think the first one I'm probably gonna bat because I don't want to be making any statement. I mean, GOZ itself has not come out with any forward-looking statement yet. I think traditionally, GOZ has always put their forward-looking statement out at the time of putting out their final results. Obviously, just yesterday or two days ago, GOZ put out a market update on valuations and also reconfirmed its dividend for this year and the FFO for this year. It did not make a forward-looking statement, so I don't want to be making that statement here. You're gonna have to wait for GOZ to make that statement.
you know, I guess, you know, I'll just make a broad statement to say that no matter which company you're running, where in the world, if you've got circa 40% LTV and you've got, I don't know, floating anywhere between 15% and 30%, floating debt, you're gonna pick up significantly higher interest costs. you know, that's gonna filter through to the bottom line. Whether that is in Australia, Eastern Europe, South Africa, U.S., it doesn't matter where you are, it's just, it's just medical sort of calc. I'll leave the GOZ answer at that. I'm sorry for being a bit vague.
On the South African comment, I guess, you know, the, the comment that we put into the press release speaks to the dynamic that I just elaborated on. There is obviously a chunk of variable debt, which is attracting significantly higher interest rates than what we would have paid on that during this year. This year has also been characterized by the fact that interest rates kept stepping up periodically throughout the year. I read some press yesterday that suggests that interest rates in South Africa could have peaked.
I don't know what the U.K. announcement earlier today means for that, but yesterday, the sort of commentary was that maybe there's another 25 bip rise in South Africa, but for the rest, this consensus view is pretty much that interest rates have peaked. Nobody's really suggesting they're gonna be rushing down next year. There's broadly a view held, certainly I hold it as well, that interest rates are now gonna be sort of higher for longer, having been lower for longer for many years. The consequence of that is that the higher interest rate on the floating component of our debt will effectively be in for a full 12 months, whereas this year it was obviously, you know, stepped pretty much every month as you went through the financial year.
Interest costs are gonna definitely be higher, and as a result, we, you know, are just messaging to the market that we think, next year's, Distributable Income Per Share will be lower than what we produced this year.
Okay, thanks. That's negative then, negative growth. Okay.
Correct. Correct.
Cool. Thanks. Bye.
Thank you. The next question comes from Jonathan du Toit of Oyster Catcher Investments.
Hi, guys. Can you hear me?
Yes.
Good. I guess two questions from my side. Just on the retail side, you're still getting, I mean, I know there's been an improvement in the rent reversions, but it is still quite negative. I guess some of your peers, I mean, not entirely comparable portfolios, but the reversions are certainly getting, you know, quite a lot closer to flat. I don't know if you can comment a bit about that. I mean, why is it still so negative? Then the second question is, on the 2024 DIPS guidance, without high interest rates, would it have been closer to flat?
Is it purely interest rates or is there something else in the portfolio that is also causing 2024 DIPS to be expected to be slightly lower?
What I'm suggesting I do here is maybe I'll answer that second part of your question.
Then, Estienne, and I don't know if I can put you on the spot, perhaps on the retail reversions, and your comments on that. This relates to the second part of your question. I think, you know, the dynamic, as I, as I explained it, in relation to, you know, South African interest rates, would apply, I guess, equally to, you know, all the other investments, you know, that we have, to a greater or a, or a lesser extent, depending on levels of hedging, et cetera, et cetera. I would suggest that, there are a number of moving parts-
In terms of our outlook for next year. The biggest contributor to the, let's call it, negative reversion on DIPS, by far, is interest. There are a few other bits and pieces that, you know, that equally are probably likely to have a negative outcome or a negative impact. It's not purely interest rates. There are a few other, let me say, more operational type issues that would have an impact. I guess from, you know, as I said, on the portfolio of investment side, we are equally, you know, expecting that there are a few pieces to the puzzle that would be negative. It's not 100% interest only.
There are a few other areas that we have taken a view on that, you know, would be negative next year.
All right, thanks.
Estienne, if I could refer to you on the.
Yeah, sure.
if you don't mind?
Sure, sure. I think the message is that we are seeing improved sort of rental reversions as we speak. Clearly, mathematically, even if you were doing no reversions at the moment, given what's happened in the first nine months of the year or the first half, specifically, you know, mathematically, the average still will reflect negative as it is reflecting here. I think the message is that, you know, that we are seeing a marked improvement, and those reversions are what I would deem to be in the single digit now.
These are very much a property-by-property thing, and we have had one or two large transactions in the year, in the first half of the year, that definitely had a material impact on that number. What I've been led to believe for this or the numbers we've seen for the second half, is that this is continually improving. Clearly, the better the asset, or the stronger the trade in the asset, the better the answer is. We have recently been on a roadshow around the country to and seen the very large retailers.
We have indicated to them that, you know, we are, the trade and the trading density within the shopping centers now supports rental levels and potentially even growth in rentals. Whilst it wasn't a message that they eagerly wanted to receive, they couldn't deny the fact that their cost of occupation had plummeted in the past year, given the dynamic of the reducing rentals and increasing trading in those shopping centers. The difficulty that we do have, and unfortunately, you know, nothing is a perfect world when you're dealing in the environment that we are dealing in. You know, the difficulty we have into work through is the complaints around their increased operating costs, given load shedding, and, you know, inflation in their costs.
That is quite a difficult debate because, you know, the reality is the landlord shouldn't bear the full responsibility for their operating costs. I think it is an ongoing debate, but I think the messaging is, and certainly the trend that we have seen, is that should be a significant improvement. Just mathematically, obviously, given the scale of the quantum of transactions that are concluded, I mean, you're dealing with big volumes of leases that are being concluded. If you did quite a lot in the first half, mathematically, it can't show you the same picture you're hearing for maybe a quarter from some of our competitors.
Thank you.
Jonathan, does that complete your questions?
Yeah, it does. Thank you.
Thank you. The next question comes from Mauro Longano of Coronation.
Hi, team. Thanks very much. Two questions from my side. The first is with regard to the NSFAS cap at ZAR 45,000. You've noted it only sort of impacts the Pretoria portfolio, excluding Brooklyn. You've also noted some initiatives. I'm sorry, also the guarantee that comes into effect for FY 2023. I'm trying to understand what the difference is between that cap and sort of the market rental for that query, just to understand the earnings impact. Question two is on Lango. You made a comment that due to Mauritian regulations, specifically related to the calculation of retained earnings, that it's preventing Lango from declaring distributions. I'm just trying to understand that a little bit better, if you could add a bit more color there. Thank you.
Thanks, Mauro. Es, are you happy to take the NSFAS-?
Yeah.
Do you want me to do that?
Sure. No, I'm happy to cover that. Mauro.
I'll do the Lango.
Perfect. Yeah. I mean, it's pretty clear, the messaging was that, you know, the 45 did come a little bit left field, to be honest. Nobody in the market expected this cap to come through. Yes, it has had a negative impact on certain of our properties. The properties in Pretoria, and I'm talking about certain of those properties, have been negatively impacted, and they are the properties that had, you know, a big exposure to the NSFAS students that were in occupation. Clearly, that will erode value in the year going forward. There are strategies that are being implemented, which will improve, you know, make improvement to that erosion.
As you pointed out, we did have a rental guarantee till the financial year end this year, so, you know, that won't impact this year at all. In terms of the properties, let's say in Johannesburg, many of those properties actually, you know, were very close to those rental levels anyway. You know, if you know that you are targeting a market at a certain rate, then you can develop properties accordingly. You can structure the product to suit the rental that you can earn. You know, some of the stuff that we are busy with at the moment, developing, we've obviously had to redesign some of those to accommodate the right levels.
In the properties where we have a high level of NSFAS students, we are looking to potentially densify, you know, some of those properties further. That will obviously improve the situation. There is also active work being done through the universities, as well as ultimately discussing the matter with NSFAS at looking at grading properties, et cetera, which potentially in the future, you know, will alleviate this sort of one-rate-fits-all. To give you an idea, you know, I think the bigger problem is actually in universities, like Pretoria, like Cape Town University, where the rates will really have a material impact on the ability of NSFAS students to actually obtain accommodation in those markets. We do have a broad spread.
I think we've got about, just under or just around 60% of the portfolio is exposed to NSFAS. The balance is private students. Those obviously have a different product, quite often, and pay totally different rates.
I can just add to that a little bit. Mauro, your specific question is the strategies, and I think Estienne elaborated there on. It's mainly linked to reconfiguration of the existing space. You know, can you densify by putting two beds in a room or, I don't know, two, you know, bunk beds, or it's more operational efficiencies and reconfiguration at the asset level to try and improve, you know, the overall revenue generation of that asset. I'm gonna put a number out there.
I might be, I might be shot by some of my colleagues later on, but in terms of NSFAS students and the 45,000 versus what they were paying, and bearing in mind, not every Pretoria property is 100% NSFAS, each one has got various varying percentages of NSFAS. What was being paid by those NSFAS students versus the 45, I think the 45 represents a drop of, I'm gonna put a number there, about 25 odd %. Again, it's not, as I said, each asset has got differing percentages of NSFAS occupancy relative to total occupancy, but the reconfiguration is more operational. Moving on then, I think, Mauro, to the second question that you had, which talks to Lango.
In essence, the Mauritius, let's say, whatever these are, what regulations or whatever you want to call them, determine that you can't pay a dividend unless you have retained earnings. There are two elements that are impacting, I guess, the retained earnings of Lango. The definition, there retained earnings clearly captures asset revaluations up or down. Whilst asset values have been relatively stable, there, you know, there is that one element of what's impacting the, let's call it distributable earnings at the Mauritian level. The second one is very much a Ghana-specific issue, where the tax laws in Ghana actually require you to amortize your buildings at a rate of 10% per annum.
On that amortization number, you have to provide there's a deferred tax implication, taxed at 25%. And you are then raising effectively a deferred tax liability, which again, is impacting the determination of retained earnings. On the basis that you don't have retained earnings, you cannot pay a dividend. This is, this deferred taxing is not a cash flow item, it's a accounting entry. Those would be the two major things that and are having the effect that, you know, we can't, we're unable to, at this time, pay a dividend out of Lango, out of Mauritius. I hope that answered the question, Mauro.
No. Perfect. Thank you very much. Appreciate that, [Norbert].
Thank you. Ladies and gentlemen, at this stage, I'm handing back over to Ridwaan Loonat for further questions before coming back to the telephone lines. Thank you.
Perfect. Thanks. Maybe just a question on yesterday's circular, seeking shareholder approval for the ZAR 250 million in B-BBEE ownership scheme. Can you guys just maybe talk to that, the price and with regards to the amount? I see it's not new shares that are being issued, but rather coming out of treasury shares. Can you just give us more information on that, please?
I'm gonna ask Estienne and Shawn and Werner in the Johannesburg office to deal with that, if that's okay, Es?
No problem, Norbert. I think maybe I'll talk to the pricing and then Shawn can just talk around the objective of the trust, et cetera, and give you guys a bit of insight into that. We obviously we assess our position ongoing as to, you know, our CSI requirements, and we budget for that annually. We've definitely decided that, you know, if we can structure something that over the long term will fund these initiatives more efficiently, you know, that would be beneficial to the beneficiaries as well as to the company. Over time, our ownership points have reduced as some of our previous empowerment transactions, the beneficiaries have sold down.
You know, obviously as we've issued more shares, that has also had an impact on those empowerment points. This structure sort of meets nearly two objectives. In terms of the actual shares that we've that we've used, as you pointed out, they are treasury shares. Once we knew what we wanted to do, the idea was to rather buy in shares, rather than issue new shares, 'cause existing shareholders will obviously dilute if we had to issue new shares. We acquired these shares on the market, mostly cum dividend, actually. The net price that the trust is going to pay, the ZAR 12.50, is then the effective clean price. It...
In fact, on the announcement date, it was pretty much the market pricing of the share on the day. The trust will then be funded with a loan, and that is how the trust will afford it. Maybe if, Shawn, you can just cover the sort of purpose of, you know, of the trust and objective.
Yes. Thanks, Estienne. I think, in terms of the scheme, as you would have seen, we're looking at a broad-based scheme, and very much to be able to benefit, beneficiaries that we have supported, through initiatives like Property Point. It would be a see-through scheme where the beneficiaries are small businesses, as well as educational beneficiaries through our Growsmart program. I think there was a couple of objectives that we had. One was to ensure that we are able to focus on ensuring that there's an impact in society. Secondly, that it becomes a long-term scheme to be able to really focus on uplifting society and not necessarily, more narrow-based schemes like we've done in the past.
It, it's also programs that Growthpoint has been supporting in the past. They have been able to derive good impact, both from small business support and integrating these small businesses back into the supply chains of society, of the industry, as well as some of the educational programs through our Growsmart initiatives in the Western Cape and the Eastern Cape.
Thank you. I hope that answers your question. Thanks.
It does. Can we go to the next question, please? I think I see it coming from Francois du Toit.
Thank you. The next question is Francois du Toit of Anchor.
Hi, guys. Just a quick one on arrears. Arrears released ZAR 30 million yesterday. Can you give a sense of the distributable impact of that? In other words, how does that compare with your provisions for bad debt and changes there, too? Related to that as well, if you can give a bit of color around the level of provisions for bad debts and how that compared with before, with pre-Covid levels, and whether you expect there's thought to be a bit of contribution from that source to distributable earnings going forward. That's the first question. Second question, if you can give a bit of a sense of the yield on disposals, a fairly meaningful disposal program that you're working through at the moment.
I see your solar power capacity is doubling this year. If you can just remind us of the cost of that and, the earnings impact or I think the yield on that and where we can expect that yield to reflect in future years. Yeah, those are my three questions.
Yeah. Francois, I'll try and give it a bit of track. Yeah. I don't know. Norbert, do you wanna go?
I mean, I don't mind going, and Gerald's in the room, so Gerald can, he can't kick me under the table, but he can shut me up if I get this completely wrong. Francois, we've seen obviously a steady decline in arrears over the last couple of years since COVID. The arrears levels back then was over ZAR 500 million, and it's come all the way down. I'm thinking pre-COVID, I think our arrears were at about ZAR 100 million the last time we reported pre-COVID there or thereabout. I would think that we've reaching levels, given the environment that we're in, that unlikely we're coming down materially from here.
You know, maybe it moves in ZAR 10 million or ZAR 15 million or maybe ZAR 20 million kind of movement, but I don't think it's not gonna half from the current levels, you know, that kind of dynamic. If I recall correctly, between the provisions at the property level and the provisions at head office level, we're circa 75% provided. Gerald, you can maybe just help me there or thereabout.
Yeah. Yeah, that's correct. That's correct.
Okay. I don't think, you know, there's any reason for us to move from that materially. Clearly, every debt is analyzed and assessed at the year-end and audited. I wouldn't be looking for a major contribution to bottom-line distributable earnings from fiddling around with a provision. You know, the numbers are gonna be relatively modest. I'll leave that on the arrears. Maybe, Es, I'll go back to you guys on the yield, the disposal yields, and the solar.
Sure. Okay. It's quite a complicated answer to give you, Francois, the reason is that obviously the different sectors have quite different ranges of pricing. You know, it also depends on the level of occupation of within the asset that is being sold. Now, a lot of the disposals have been to owner-tenants, sort of owner-tenanted scenarios and investors. In certain cases, some of those assets were either partially vacant or fully vacant. As such, you know, to give you a you can kind of work on a sales yield, potentially, if it was full.
I mean, in a broad range, you know, on a, on a kind of fully let basis, we've been selling assets between 8% and as high as, I would say, on the extreme, 13.5%-14% odd percent. That, that would be the extreme and very few of those. I think what's probably more relevant is the, you know, how we've performed relative to book, and you can see there that effectively we've really managed to sell very, very close to our book values. In some cases, you know, we've made quite decent profits on book. In certain cases, we've had to take a bit of a loss on book. You know, net, it's sort of square.
I think what we'll try and give you a little bit more color on that in our year-end results if that's all right, because, I mean, it is marginally dilutive based on a sort of fully let basis. As I've pointed out, you know, not all these properties were fully let. If you sell an empty building, it's actually quite accretive even if you're selling it at a 15% yield, you know? That's the sort of... I think maybe just the answer on that. I just can't remember. What was the last question?
Solar.
The solar. The solar, yes. The solar projects. Yeah, to be honest, the return on solar at the moment is a little bit better than on real estate. Given the sort of environment that we're operating in, you know, there's multiple sort of rationale why we should be doing it. I mean, clearly, it's in line with our strategy to get to carbon neutral. The second thing is, it does help with a level of power security at these assets, and in certain cases, even brings down the cost. The returns are very dependent on what the retail rates are at the specific asset.
You know, at municipal properties within municipal areas, the returns are higher than at properties where they are on Eskom areas. They do range from 20% upwards, roughly, give or take. That's sort of the broad range that we're looking at. That's just a simple sort of yield. Total return, probably because these things they've got a sort of a limited lifespan, you're probably looking at roughly between 22%-50% as a broad range for total return on some of those. The quantum we spent, I'm just trying to remember. Geez! I think the whole lot to date has cost us about ZAR 500 million .
I think that's more or less, I think the incremental stuff is included in that. I'll have to go and check that number. Sorry, I don't have that offhand.
Can you provide-
We'll give you a bit of insight into that as well.
Estienne, that number is correct.
Sorry.
That's what the, that's the number we disclosed at half year, ZAR 2.10 plus ZAR 1.50, more or less.
Very good.
It's a bit more.
Thanks. That doesn't have to, or at a 20% return, it gives us ZAR 100 million of distributable earnings. Where will we start seeing that those earnings come through? Will it reflect in reduced costs or reduced recovery rates or sorry, improved recovery rates of costs increased?
Yeah. Yeah, basically, just to understand the sort of financials of how that works. We do sit with two scenarios in a way, maybe three scenarios. The original schemes that we put in were not connected in a way that should there be load shedding, that they continue to operate. They actually switch off. That was a specific safety measure that was a requirement. There is, obviously, technology has moved on. We can now. There is technology where we can connect it via the generating system, and those then can continue to operate. All the new installations clearly have that in place, and there you are getting a significantly increased return as a result of that.
What you will see is that effectively, your cost of electricity that you're paying, will reduce in the income statement over time, and your recovery should remain effectively the same or even go up in certain cases. Because if you look at the financials, we set off the recovery of electricity against the cost. We make a retail margin, so we're buying wholesale effectively from Eskom. Just to contextualize, I think our total capacity is still 94% from Eskom at the moment. Sorry?
Municipalities.
Municipalities, good point, yeah. From municipalities and Eskom, from the grid, let's call it. Only 6 odd % is from renewables and other sources. The reality is, the numbers are still reasonably small in the scheme of things, Francois.
Thanks. It's helpful.
Estienne, just [to be] . Just to be absolutely clear, in my mind, the interest costs associated with the capital spend will be in the interest line.
Sure.
The improved return, if you want, will be in the NPI of the retail, mainly retail assets, depending on which asset this particular installation actually impacts. Is that correct?
Correct. You'll, it'll reflect I think when we consolidate, we do provide in the year-end results, we provide detailed information on the income or the recoveries and the expense as it relates to electricity. You should see a bit of a margin opening up there, which is then your return effectively.
It's in the NPI line, right? It's gonna come through in the NPI line, effectively.
Correct. Correct.
Yeah. Yeah. All right, Francois, I hope that answers your question.
Perfect. Yes. Thank you.
Thank you. The next question comes from Tertius Pelser of Cuthman Capital.
Will Growthpoint need to devalue their SA properties, given that the SA 10-year government bond yields around 12% when looking at discount rates, or how do you think about this?
Well, there we go with that. Look, I think the, you know, clearly the ultimate valuation decisions or calculations and determination sits with the valuers. Whilst we obviously, you know, don't just accept everything they put on the table at face value, and we're able to have a discussion with them where we believe there's fundamental flaws or fundamental errors. Generally speaking, you know, this is, you know, it's the valuation's up to the independent third party valuers. The way they have looked at the movement in the long bond rate over time, I mean, I generally track the, what I call, I think what is called the ten-year constant maturity yield. That's been pretty volatile.
It's moved up over 12, but it's actually right back down to about 10, sorry, 11.50-odd today, if I'm not mistaken. What the valuers tend to do is not pick a number at a date. They generally look at the long-term sort of trend and let's call it more of an average movement in the long-term ten-year yield. I don't think every valuer doesn't usually think consistent, excuse me, consistently, but somewhere between a 3- and a 5-year average, if you want, on the risk-free rate. I think what, you know, what is and has been evident over the last couple of years is, you know, we have I think since pre-COVID, Growthpoint's written down our assets by in excess of 20-odd percent.
We recently had a presentation by MSCI, which confirmed to us, I guess, that, you know, relative to the market or rather the benchmark, we have been writing our assets down, or our assets have been written down, more aggressively than the market. I believe that, you know, the consideration of that is also sort of taken into account in the final analysis on, you know, what has the overall historic write-down been over the last sort of, four years or since pre-COVID.
On a more sectoral level, I think, you know, the recovery in retail and the recovery in industrial, I think, suggests, and, given what was, historically written off, you know, the view, the general view held is that, you know, there's, we're not likely to see any meaningful movement in those asset values. Whereas, you know, office generally being the weaker of the, of the three sectors, notwithstanding the fact that we've written those down, I think, for the last 5 years, that potentially there's a bit more to come. I hope that answers the question.
Yes, that does. Thank you.
Thank you. The next question comes from O'Neil Thiart of Optimum Investment Group.
Hi, guys. Can you hear me?
Yeah.
Thanks a lot. Just a quick question. You mentioned in your industrial segment, some tenants doing application for business rescue in May. What impact can that maybe have on vacancies? How large are those tenants currently renting? If you can provide some more color on that. Those are currently...
Yeah. Yeah.
Those current clients are currently in business rescue, and those two properties, I think that they won't have that material impact on the vacancy number. It'll be, at worst, maybe 1% higher, at worst. I think there are other transactions, okay, post these results, which will probably mitigate that impact. Some letting that we have done.
Thanks a lot.
Thank you. At this point, I'm handing back over to Ridwaan Loonat for further questions. Thank you.
Yeah, maybe one question from me regarding the V&A. You know, it's performed very well for the nine months. Can we expect zero rental relief going forward for the hospitality tenants?
I'll answer that. I think, Ridwaan, yeah, V&A, as you rightly point out, you know, has performed very strongly. I think it's fair to say that there's no further rental relief being provided, I think, to any tenant within the Waterfront. There is still a fair bit of recovery, so what rental relief was, you know, significant rental relief was given to the hotel operators and some of the restaurant operators and the operators of some of those in some of the markets during COVID. A number of the hotel operators were given an extended period of time to repay. Unlike, I think, what happened in COVID, we actually gave, you know, absolute rental discounts, the Waterfront tended not to give absolute discounts, but to rather give deferrals.
There will be a continuous recovery of some of those deferrals, but certainly no further rental relief. Those deferrals would be in the arrears number of the Waterfront as well.
The final question from me, regarding your hedge profile. You know, with higher rates now, how are you guys looking at, your interest rate risk? You know, if this hedge is coming up for renewal, do you look to, lock in higher rates now, or willing to accept, let's say, going variable risk and take on, you know, more interest rate risk in the current environment? Just how are you guys thinking about it?
Ridwaan, I'll give that a go as well. I mean, clearly a lot of debate at the various committees, in particular our risk committee, you know, on this particular topic. I don't think we are particularly good at forecasting interest rates and where they go and where they don't go. We've historically clearly had a very, I think, a reasonably conservative policy around interest rate hedging, that minimum 75% needs to be hedged for circa 3 years in duration. We've had various debates on whether we relax that, on whether we maybe tend a little bit lower. Clearly, I think at the March print, we 80%.
At June, I think, we'll be lower, given, you know, some impact of the, of the overall, let's say, bond refinance, but also some other existing hedges rolling off. We are targeting to be above 75% at 30 June. I guess philosophically, over the years, you know, just anecdotally, you know, I think, again, looking at some numbers, had we not had a policy of hedging, interest rates at the level that we're at, if we, for example, had a policy of just having floating interest rates for 100% of our debt, the additional interest on our debt book would, on a 12-month basis, would amount to circa ZAR 1.2 billion worth of additional interest.
Thank goodness, I guess, for the policy. The policy, I guess, was designed to, I guess, ride with interest rate trends as they play out. As interest rates rise, our average interest rate cost sort of goes up, but you know, not in a volatile basis. You'll see from the... If you go back to our disclosures over the last two, three years, maybe a little bit shorter, you'll see that our average interest rate, excluding the international hedges or international debt, you know, has gone up from 8.1%, 8.5% to, I think we printed a number now, just around about the 9% number, just over 9%.
Equally, when interest rates come down, they don't go from 9% to 6%. They sort of move down. Over the years, they moved down incrementally from 9% down to maybe 7% over a period of time. When interest rates came tracking down, we didn't get the full benefit, but equally, when they're going up, we don't suffer 100% of the pain. We constantly talk about and debate that hedging policy. It was debated again just last week at various committee meetings in the last two weeks. But for now, we're gonna stick with that policy of hedging at least 75%.
Clearly, where we are in the cycle, we don't want to push it from 75%-90% or to 95%. We're probably gonna be at that lower end of that, of that range, given the general feel and the general comment, as I mentioned earlier, that interest rates in SA have topped out.
Thank you. Our final question comes from Shala Ramokolo of Nedbank Private Wealth.
Afternoon, everyone. Just a clarifying question on the yields on solar. Do those include batteries? In terms of the new solar PV that you're putting up, do they also need a backup power, backup storage? How does that work?
[Shala , it's Estienne]. Yeah, we've only got literally one project where we've put in battery capacity of 4.5 MW at Pall Mall. To give you an idea, the reason why we did that was more to manage load than it was really to ensure backup power. Most of these large properties are just for clarity, electricity is charged in sort of two ways. One is a demand charge, which is like a line rental, if you'd like, and then obviously the other is the utilization aspect. Utilization is in most of these large properties, is on a time of use basis.
There'll be times where in the middle of the night, electricity is cheaper than in peak times, at 8:00 in the morning and 7:00 at night, or whatever the case may be. What we had worked out at Pall Mall, given the rate, the specific rates of that municipality, if we put in a battery where we can move the loads to cheaper periods, then we could get a very good return on that. The solar today, you know, is at most of our facilities, there isn't battery with that. But increasingly we're looking at a combination of different solutions to really optimize the solution. Increasingly, we are becoming the municipality. That's not really ideally what we wanna be.
On very big facilities, you still need generators. To the extent we can, we are putting solar on, and as fast as we can, to try and bring down that utilization of generation, 'cause it's obviously very expensive. Battery is a whole different league of expensive and, you know, we are assessing the optimum sort of solution for every single property, given the cost that it runs at in the specific municipality and the specific profile it has, and also the specific electricity rate that it is on. It's quite a, you know, maybe a complex answer to what was really a simple question.
Thank you.
Perfect. Thanks, Shala. Yeah, just in the interest of time, I'd just like to, you know, conclude the session and thank Growthpoint for allowing Nedbank to host the pre-close call or investor update. I'd like to thank everyone that dialed in and enjoy your evening.
Thanks, everyone.
Thank you.
Thanks, everyone.
Thank you, everyone. Cheers, guys. Bye.