Listed property remains the best performing asset class
The South African property sector featured strongly overall in the list of the Top 100 Companies on the Johannesburg Stock Exchange for performance.
The four directors of the Nova Property Group paid themselves R16.7 million for the company’s financial year ending February 2015, despite an operating loss of nearly R50 million.
This is evident from the company’s annual financial statement that was distributed to share- and debenture holders prior to the annual general meeting (AGM), scheduled for Thursday, November 5.
Although the statements show that the directors’ salaries and bonuses are slightly less than what they earned during the previous financial year, their pay exceeds the packages of many of the top executives of the largest listed property companies on the JSE.
The remuneration amount of R16.7 million should also be seen in context of Nova’s financial performance during the financial year. The company shows an operating loss of R49.3 million (2014: R628.9 million), with R147.5 million worth of operating expenses. The total revenue, mostly rental income, amounted to R79.2 million, down from R107.4 million reported in the previous financial year.
The directors’ salaries and bonuses therefore represent 21% of the total revenue of the company for the financial period.
It is not clear from the financial statements how much was paid out to Nova debenture holders. An entry in the cash flow statement suggests that R35.7 million was repaid to debenture holders.
Executive remuneration compared with industry benchmarks
For the financial year, Nova Chairman Connie Myburgh and CEO Dominique Haese earned nearly R4.5 million each, which included bonuses of R1.3 million.
Dirk Koekemoer, operations director, and Rudi Badenhorst, financial director, received R3.8 million and R3.9 million respectively, which also included bonuses of R1.25 million.
Myburgh and Haese’s salaries exceeded the salaries of the leading directors of many property companies, including Arrowhead Properties, Capital Property, Delta Property Fund, Emira Property Fund, Fortress, Octodec and SA Corporate Real Estate.
Badenhorst earned more than the financial directors of Hyprop, Vukile, and Growthpoint, to mention a few.
During Thursday’s AGM shareholders will be able to vote for a special resolution to ratify the directors’ salaries and bonuses. They will also have to vote on a proposal put forward by the board to increase salaries in the new financial year by up to 10%.
Unfortunately, it is unclear who will be able to vote on these and other resolutions at the AGM. Current debenture holders, as well as debenture holders who previously converted their debentures to shares, will not be able to vote. The shares that were issued to convert the debentures do not have any voting rights.
The annual financial statements show that the only shares with voting rights are Ordinary A shares, of which only 70 have been issued. It is not clear who owns these shares, but it may be fair to assume that the current board members own at least a fair number of these shares. It may therefore be a case where the board members could approve all the resolutions, including their own remuneration packages.
Moneyweb has requested access to the Nova shareholder register as provided for in the Companies Act, but Nova has vehemently refused this request. The case is currently before the courts.
Fair value adjustments
Returning to the financial results, the fair value adjustment of the group’s underlying properties amounted to R228.4 million (2014: R1.2 billion), which turned the R49.3 million operating loss into a net profit of R154.2 million.
The fair value adjustment is critical for any property company. This change in value is accounted for as income in the income statement, even as it is only an accounting entry and does not suggest any cash flowing into the company.
For the financial year, the valuation of the property portfolio rose marginally from R3.75 billion to R3.77 million, despite the sale of four properties to cover operational costs. These properties were Oxford Gate in Cape Town, Die Meent in Potchefstroom, the Nelspruit Hyper in Nelspruit and The Fern in Dainfern. Limited information about these sale transactions is revealed in the statements. (More properties may be sold in the new financial year, as Nova had less than R6 million in cash at February 28.)
The valuation of R3.77 billion also means that the total portfolio value of Nova has increased by nearly R2 billion since 2013.
The increase in the fair value occurred while the total revenue earned through these properties declined from R107.4 million to R79.2 million. In the 2013 financial year the revenue amounted to R103 million. The revenue generated by properties is normally a key indicator to calculate fair value.
A third of the properties were valued by the independent valuer; a certain Mrs A de Wet. She valued eight properties with a collective value of R481.7 million. The directors took the responsibility to value the remaining 16 properties, with a collective value of R3.27 billion.
One of the key properties in the Nova portfolio is the Villa Retail Park in Moraletta Park in Pretoria, a property that has stood abandoned for several years. The board valued this property at R1.6 billion, unchanged from the previous year. This property represents 43% of the total portfolio value of the group.
The fair value of the Zambezi Mall was also retained at R580 million.
It is also interesting to note that the Flora Centre, in Roodepoort, was valued in 2012 at R110.5 million and in 2013 at R116.5 million. The valuation has however jumped to R215.6 million in 2014 and to R227 million at February, 28, 2015.
A recent visit to the property clearly shows that there is a very high vacancy rate. In a recent communiqué to debenture and shareholders, the Nova board stated that several large tenants were expected to move in early next year.
Moneyweb requested permission to attend the AGM on Thursday, but it was declined.
A copy of this article and several questions were emailed to Haese on Monday morning. At the time of publishing she had not responded.