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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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Despite current challenges, Calgro M3 remains committed to delivering shareholder value, with attractive prospects in place

Highlights

  • Memorial Park sales increased by 128.24%
  • Acquisition of Durbanville and Bloemfontein (Avalon) Memorial Parks
  • Level 1 B-BBEE contributor
  • Balance sheet remain strong with management estimate of nett tangible asset value in excess of R 3,5 billion

Johannesburg, 22 October 2018 - JSE-listed Calgro M3, the property and property-related investment company involved in Integrated Residential Developments, Residential Rental Investments and the development and management of Memorial Parks, today released interim results for the six months ended 31 August 2018, declaring revenue of R628.6 million.

According to Group CEO, Wikus Lategan, the period under review was one of the most difficult ever experienced by Calgro M3, which faced several major challenges, not the least of which has been the macro and micro economic uncertainty, coupled with policy indecision pertaining to land expropriation.

"Our Scottsdene and Fleurhof projects were shut down because of illegal occupation with additional security and repair costs amounting to approximately R65 million. Associated claims are in the assessment process but not yet finalised and so not accounted for. This will be an income with no associated expense when approved."

Lategan also cited major electrification challenges on Fleurhof, resulting in a standing time cost of roughly R14.5 million and the drought in the Western Cape as having had a further negative impact on the Group’s operational cash flow, which led to the deliberate slowdown in levels of activity on other sites.

He said that despite all the uncertainties and challenges, management had worked hard to ensure that the Group has a healthy balance sheet. "We have 10 projects in the ground at various phases, which is pleasing, and we expanded the Memorial Parks business quite considerably during the year."

Financial review
Lategan cautioned that a revenue comparison between the periods presented should not be performed as the Group has elected not to restate the comparative information as permitted by IFRS 15. "The impact of IFRS 15 has been applied using the modified retrospective restatement method allowed under the standard, resulting in an adjustment to the opening retained earnings on 1 March 2018."

Had revenue been accounted for under the previous accounting standards, he said revenue would have been R657.0 million, a 34.95% decrease from the R1.010 billion reported in the previous period. Combined revenue, under the previous accounting standards, decreased by 37.4% to R815.7 million due to the deliberate slowdown in operations by management.

In response to the negative impact of the adoption of IFRS 15 and IFRS 9 on the net debt/equity ratio, and the impact that this increased ratio has on the Group’s future gearing ability, the participants of the Executive Share Scheme unanimously agreed to forfeit the scheme in the 2019 financial year to enhance the equity of the Group through the reversal of the share-based payment reserve of R118 million to retained earnings. The cancellation of the scheme resulted in the remaining expense on the scheme being fast-tracked through profit and loss in the current year (R44.0 million), increasing administrative expenses.

Taking into account the land invasion charge of R65 million, the electrification standing cost of R14,5 million, and cancellation of the executive share scheme and corresponding fast-tracked expense of R44.0 million with no associated cashflow, the pre-tax effect of these combined, amount to R123,5 million. This does not take into consideration the opportunity cost of the capital tied up in Scottsdene and Fleurhof or the additional cost of working capital.

The additional increase in administrative expenses of 55.51% from the previous period is mainly due to increases in marketing and advertising, salaries and wages and professional fees. The finance cost expense escalated largely due to increased working capital requirements due to delays on the various projects.

During the period, the Group invested very little into new infrastructure to reduce pressure on working capital.

Basic earnings per share ("EPS") decreased by 50.16% to 23.78 cps (August 2017: 47.71 cps). Similarly, headline earnings per share ("HEPS") decreased by 93.48% to 3.11 cps (August 2017: 47.71 cps). The new metrics introduced in the prior financial year provide additional information on the Group’s performance. Core earnings per share ("Core EPS") decreased by 82.62% to 13.40 cps (August 2017: 77.10 cps).

The Group secured R109 million as a second tranche of international funding in June 2018 from Societe De Promotion Et De Participation Pour La Coopération Economique ("Proparco") S.A, a subsidiary of Agence Française De Développement.

Operational Overview

Residential Property Developments
The 10 projects in the ground contributed to revenue, which made the impact of delays more manageable. A total of 5 279 units were under construction during the period, of which 1 843 units, of which 934 were fully subsidised, were handed over. With over 9 500 serviced or near serviced opportunities, the Group remains well positioned to increase sale to private sector and to assist Government in the eradication of the housing backlog in times when Governmental budget is available.

Memorial Parks
The Memorial Parks business’ sales continued to grow monthly, with 649 grave and niche sales being achieved for the six months under review, compared to 947 for the whole of the previous financial year.

He said that the national roll-out plan is advancing rapidly through the acquisition of the Durbanville Memorial Park in Cape Town on 1 March 2018 and the Avalon Memorial Park in Bloemfontein on 1 June 2018. The Tshwane and KwaZulu-Natal are targeted for expansion, planned for early in the 2020 financial year.

Residential Rental Investments
A total of 696 units were handed over to the Afhco Calgro M3 Consortium (REIT JV) during the past six months. "Calgro M3 remains confident in the rental market and believes the affordable rental market has immense potential," said Lategan, going on to add that this rental market strategy further assists Government in eradicating the housing backlog without exposing the Group to diminishing public sector spending.

The first 40 of 480 units that were acquired from an external developer will be handed over to the REIT JV in November 2018. "In view of the slow rental uptake, the hand-over pace of these units was re-negotiated and extended by a further six months to ensure an effective tenanting process."

Outlook
Lategan indicated that, "We’ve strategically aligned the Group to ensure we remain committed and set to the targeted return on equity of 30% over the medium term, based on a Residential Property Development pipeline of R25.3 billion, Memorial Parks pipeline increasing to R2.2 billion and Real Estate Investment with a targeted ROE of 20.5%, amounting to the annual rental yield plus revaluation growth, on an estimated Group equity investment of R4 billion."

He added that this would enable the extraction of multiple sources of revenue and profits from business and opportunities along the turnkey property development value chain, which will lead to an improved operating margin blend and the creation of annuity income.

"We remain focused on our strategy of ensuring that the three segments contribute evenly to profitability in the future," he said.

Lategan mentioned that the Group is currently investigating memorial parks in Tshwane and KwaZulu-Natal, one new residential development project as well as some potential properties to be acquired and developed for the REIT. "We are, however, cognisant of rolling out the current projects that we have in our pipeline and are investigating alternative uses for some of the mid to high-end land parcels to improve the cash generation cycle."

The Group is cautious in the current uncertain environment and careful consideration will be given to what the best use of cash is on each project to ensure sustainable long-term return and value for shareholders. "We are expecting the effect of the challenges and delays to continue towards the end of the financial year."

He concluded that despite challenges, the Group remains strategically positioned to ensure risk is optimally mitigated and managed in these uncertain times, creating a solid foundation for future growth.