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Homes Memorial Parks REIT

Calgro M3 is the developer of choice in selected markets through the consistent delivery of homes, rental units and memorial parks of the highest quality.

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Effective strategy and variable operating model ensure Calgro M3 successfully navigates taxing economic climate

Highlights

  • Core headline earnings increased by 6.97% to 143.47 cents per share (“cps”)
  • Combined revenue increased by 16.71% to R2.3 billion
  • First international funding of R387 million (€25 million) raised
  • Level 1 B-BBEE contributor
  • Memorial Parks contributed 5.14% of Group profit after tax
  • Property Development and Memorial Parks Project pipeline of R27.5 billion

Johannesburg, 14 May 2018 – Today Calgro M3, the JSE-listed property and property-related investment company, released its results for the year ended 28 February 2018, with combined revenue increasing to R2.3 billion, up 16.71% from last year. The Group is a market leader in the development of Integrated Residential Developments, Residential Rental Investments, as well as the development and management of Memorial Parks.

“Our performance was lower than internal expectations due to challenging political and associated economic conditions as well as delays in raising working capital. Our increased focus on the private sector within our Residential Property Development business, gave rise to higher working capital requirements that took longer to secure than initially expected. The first funding was secured towards the end of November 2017 but could unfortunately not be invested and capitalised on immediately due to the December construction shut down period. Future working capital, required in the 2019 financial year, is on track and we are securing longer-term working capital for utilisation to 2020.” says Wikus Lategan, CEO of Calgro M3.

The Group’s financial performance was impacted by the construction of units for the REIT JV, in which Calgro M3 has a 49% shareholding. This shareholding resulted in 49% of the development profit (construction and other services) being eliminated on consolidation as an unrealised profit.
The impact of this unrealised profit on the financial performance necessitated the institution of new metrics to measure operational performance between reporting periods, namely: Core Headline Earnings Per Share (“Core HEPS”) and Core Earnings Per Share (“Core EPS”) – earnings per share before elimination of unrealised profits from the development of units for the REIT JV.

Lategan said that the current core headline earnings and revenue growth are testament to the effectiveness and resilience of the Group’s strategy. Core headline earnings increased by 6.97% to 143.47 cents per share. “Our performance proves that the variable operating model in place is efficient in uncertain times, as experienced during this financial year.”

Ensuring sufficient working capital
When comparing the full year results with the interim results for the period ended August 2017, a slowdown in revenue and combined revenue in the second six months is evident. “This was due to a conscious decision by management to ensure the Group was not placed under undue working capital pressure while additional working, risk and opportunity capital funding was being secured. The capital raising process took longer than initially anticipated and operations had to be slowed down to protect working capital. Revenue and combined revenue therefore grew at a slower pace in the second half of the year,” comments Lategan.

In November 2017 the first tranche of international funding was raised to the value of R278 million, from Societe De Promotion Et De Participation Pour La Cooperation Economique (“Proparco”) S.A, a subsidiary of Agence Française De Développement (“AFD”). The balance of R109 million is due to be released in June/July 2018, once compliance with certain international health, safety and environmental requirements are met.

Integrated Residential Developments
During the year, 8 564 units and houses were under construction, of which 3 426 were completed and handed over to customers. Within the balance of 5 138, just over half are expected to be handed over before the end of July 2018. The Group has approximately 3 500 units already sold on which construction is imminent. The total Residential Property Development pipeline consists of 54 376 opportunities with an unescalated revenue of R25.3 billion. According to Lategan, the current share price levels are estimated to be at a discount to management’s valuation.

Lategan adds that the Group is pleased with a diversified contribution to combined revenue, with South Hills surpassing Fleurhof as the main contributor in the year under review. South Hills was responsible for 41.94% (2017: 19.00%) and Fleurhof for a contribution of 22.86% (2017: 36.10%). “We view this as extremely positive and evidences our ability to consistently and sustainably deliver on these large-scale integrated projects.”

The Belhar and Scottsdene projects in Cape Town contributed 19.38% of revenue, despite a slowdown due to the water crisis. “Construction at our first project in KwaZulu-Natal will start during the first quarter of the new financial year, while the long-awaited Kwa Nobuhle project in the Eastern Cape will commence later in the year.”

The Group decided to discontinue the Leratong and Nelmapius projects due to a change in their risk profiles. In line with this risk mitigation strategy, the Group also disposed of its 35% shareholding in the Otjomuise project in Namibia.

Post the financial year-end, Calgro M3 experienced attempted land grabs at both the Fleurhof and Scottsdene projects, and although the situation remains delicate, it is under control.

Lategan adds that the Group continues to engage and consult with local and provincial government to offer assistance for a sustainable and legal way to eradicate the housing shortage in an endeavour to ensure that all people can live in safe and dignified homes.

Memorial Parks
Memorial Parks contributed 5.14% (2017: 0%) to Group profit after tax. Lategan says that a substantial amount of emphasis will be placed on growing this business in the next financial year to achieve an internal contribution goal of more than 10% of Group profit. With a target of equal profit contribution from all three businesses in the medium term, the Group views Memorial Parks as a high growth area.

“Our national roll-out plan is in progress and developing, supported through the acquisition of the Durbanville Memorial Park in Cape Town on 1 March 2018 and the Avalon Memorial Park in Bloemfontein, which will be effective 1 June 2018. The Eastern Cape and KwaZulu-Natal are targeted provinces for expansion, planned for later in the 2019 or early in the 2020 financial year.”

Residential Rental Investments
Of the 3 852 units in the first tranche, 648 were completed and handed over to the Afhco Calgro M3 Consortium (the “Consortium”) during November 2017. The remaining units will be handed over in a staggered manner over the coming months, with Belhar delayed due to the slowdown associated with the water challenges in Cape Town.

“Indications, at this stage, are that we are on track to achieve the net property income yields in excess of 10,5% and a targeted rental escalation of 6% per annum which equates to approximately 20% Return on Equity in total, after gearing,” Lategan explained.

“In line with our medium to long-term strategy, we entered into this sector to secure annuity revenue for use as operating cash. In addition to this, we benefit from bulk infrastructure created previously, rather than having to create infrastructure each time a development commences. This strategy further assists Government in eradicating the housing backlog without exposing the Group to diminishing public sector spend,” Lategan clarifies, adding that in line with the diversification strategy, Calgro M3 had entered into its first non-Calgro M3 acquisition in Ruimsig, Gauteng to the value of R402.4 million.

Outlook
The primary areas of focus for the Residential Property Development business in the coming year will be to roll out the existing pipeline, capitalising on the private sector sales drive, enhancing the product offering, while at the same time remaining focused on efficiencies.

A targeted contribution of more than 10% from Memorial Parks is set for the coming financial year. This rather ambitious target is supported by grave sales that are increasing month on month, coupled with ongoing improvements and advancements within the business.