SA Corporate Dec 2019 Results Presentation March 2020 AGENDA - PowerPoint PPT Presentation

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 03 Convenience retail is defensive Convenience retail is less sensitive to e-commerce 04 competition 05 Improving income returns of smaller format centres 06 SA Corporate portfolio is well positioned 23

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 24

WHY – Convenience Retail? 1. Non-Discretionary Nature of Food Offering Resilient trading densities in respect of food offering despite current economic  climate 25

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 26

WHY – Convenience Retail? 2. Non-discretionary nature of pharmaceutical spending Pharmaceutical and healthcare consumer spending is generally non-discretionary  in nature Consistent growth in the sale of pharmaceutical, health and beauty products  Supported by improving living standards, urbanisation and longer life expectancy  Above inflationary price increases (below)  Pharmaceutical retailers, Clicks and  Dischem, have shown above average growth in bottom line profits Historically, the ROE for this sector has  been above 30% SAC pharmaceutical December 2019 y-o-y  trading density growth 12.73% 27

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 03 Convenience retail is defensive 28

WHY – Convenience Retail? 3. Convenience retail is defensive Convenience retail has been defensive with higher trading density growth, driven by  food (grocer) and food service offerings The lower cost of occupancy, reduced vacancy levels and current gross rent to sales  ratios of small format centres makes the tenants more resilient 29

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 03 Convenience retail is defensive 04 Convenience retail is less sensitive to e-commerce competition 30

WHY – Convenience Retail? 4. Convenience retail is less sensitive to e-commerce competition Expected revenue in the e-commerce market amounts to R55 119m in 2020  Revenue is expected to increase by almost 40% over the next 5 years  The market's largest segment is electronics & media  31

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 03 Convenience retail is defensive 04 Convenience retail is less sensitive to e-commerce competition 05 Improving income returns of smaller format centres 32

WHY – Convenience Retail? 5. Improving income returns of smaller format centres Since June 2015, smaller format centres have provided a higher total return  than larger format centres Source: MSCI data not shown, interpolated for 2018 super regional 33

WHY – Convenience Retail? 01 Convenience offerings non-discretionary 02 Pharmaceutical spending non-discretionary 03 Convenience retail is defensive 04 Convenience retail is less sensitive to e-commerce competition 05 Improving income returns of smaller format centres 06 SA Corporate portfolio is well positioned 34

WHY – Convenience Retail? 6. SA Corporate portfolio is well positioned Grocer GLA 29% of total portfolio  Over half of shopping centres cater to convenience shopping  Community & neighbourhood shopping centres that dominate their catchment  areas IPD Sectorial Spread by GLA: 35

HOW – Convenience Retail? 01 Enhance Grocer Offering 02 Promote Health & Beauty 03 Improve Services 04 Expand Fast Food 05 Ease Accessibility 36

HOW – Convenience Retail? 01 Enhance Grocer Offering 37

1. Enhance Grocer Offering LAST 12 MONTHS NEXT 12 MONTHS Food Lover’s Market – Morning Glen Food Lover’s Market – Musgrave Centre Woolworths Upgrade – Cambridge Shoprite – 51 Pritchard, Jhb Inner-City Crossing Pick n Pay Upgrades – Comaro Shoprite – De Villers Street, Jhb Inner- Crossing, Stellenbosch Square & City Morning Glen Grocer – Northpark Mall Shoprite Liquor – Bluff Towers Pick n Pay Liquor – Stellenbosch Square Food Trading Density: PY 2018 – R3 123/M² CY 2019 – R3 469/M² 38

HOW – Convenience Retail? 01 Enhance Grocer Offering 02 Promote Health & Beauty 39

2. Promote Health & Beauty Pharmaceutical  Clicks extensions undertaken at 6 centres – Spas & Salons  Introduced in 5 centres – Medical  New medical centre & dental clinic at 2 centres – Gyms & Fitness Centres  Niche fitness centres introduced at 5 centres – Strategic relationship being explored with wellness  market leader 40

HOW – Convenience Retail? 01 Enhance Grocer Offering 02 Promote Health & Beauty 03 Improve Services 41

3. Improve Services Improve Services: Laundromat  Postal Agency  Tailor  Self Storage  Fitment Service  Centre Pet Products &  Services 42

HOW – Convenience Retail? 01 Enhance Grocer Offering 02 Promote Health & Beauty 03 Improve Services 04 Expand Fast Food 43

4. Expand Fast Food Midway Mews Chicken Licken  is top site in South Africa (R5 508/m²) Convenience centre fast food:  R3 467/m² (11% PY ) Exploring future opportunities of  “Dark Kitchens” in East Point & Musgrave Centre unlettable space 44

HOW – Convenience Retail? 01 Enhance Grocer Offering 02 Promote Health & Beauty 03 Improve Services 04 Expand Fast Food 05 Ease Accessibility 45

5. Ease Accessibility Improved vehicle access &  free parking – Decathlon at East Point, Celtis Ridge & Morning Glen Parking reconfiguration  planned for Coachmans Crossing to provide short- term parking for convenience shopping Improved vertical circulation –  51 Pritchard, Morning Glen, Cambridge Crossing & Northpark Mall 46

WHY – Quality Industrial? 01 Positive investor sentiment i.r.o. Logistics 02 Tailwinds from e-commerce 03 SAC favourably positioned for the future 47

WHY – Quality Industrial? 01 Positive investor sentiment i.r.o. Logistics 48

WHY – Quality Industrial? 1. Positive investor sentiment i.r.o Logistics Predictable NPI growth  Premium rating for logistics consistent since beginning 2018  Uncomplicated and straight forward for investors to understand  Reduced management & oversight requirement  Tenants liable for local authority charges, insurance and maintenance  Source:MSCI 49

WHY – Quality Industrial? 01 Positive investor sentiment i.r.o. Logistics 02 Tailwinds from e-commerce 50

WHY – Quality Industrial? 2. Tailwinds from e-commerce  E-commerce currently growing faster than traditional retail  Increased demand in respect for the final tier of logistics supply chain closer to end users  E-commerce vendors and logistics providers require 3x more warehouse and logistics space than traditional retail warehousing & increased height  E-commerce is growing substantially and demand for these big box industrial properties will continue to increase as they have in developed markets 51

WHY – Quality Industrial? 01 Positive investor sentiment i.r.o. Logistics 02 Tailwinds from e-commerce 03 SAC favourably positioned for the future 52

WHY – Quality Industrial? 3. SAC favorably positioned for the future Improving portfolio quality  67.8% logistics – 61% of the SA Corporate’s industrial portfolio have triple net leases – Securing longer term tenancy with covenant strength – Divestment from poorer quality industrial properties  Substantial investment in SA’s premium pharmaceutical DC (Current Valuation R576m)  Robust relationships with dominant logistics companies  RTT, Grinrod, large listed FMCG group – Redevelopment capability to meet generic tenant operational needs  53

HOW – Quality Industrial? 01 Secure tenancy with covenant strength Divest from properties not meeting 02 investment criteria 03 Redevelop properties to meet tenant operational requirements 54

HOW – Quality Industrial? 01 Secure tenancy with covenant strength 55

1. Secure tenancy with covenant strength 115 769 m 2 Rental Reversion 12 year lease - 46% 7% escalation 5% reversion Year 6 27 681m 2 5 year lease - 33% 5% escalation 70 037m 2 5 year lease - 23% 7% escalation 18 051m 2 VALUE = DCF (Future Cash Flows) Capitalisation of 1 Year Income 56

HOW – Quality Industrial? 01 Secure tenancy with covenant strength Divest from properties not meeting investment 02 criteria 57

2. Divest from properties not meeting investment criteria Industrial disposals Carrying value Transfer Gross Selling Property at date of sale date Price (Rm) (Rm) 14/24 Mahoganyfield Way, Springfield Park Jan-19 36.0 27.0 40 Electron Avenue, Isando Jan-19 59.7 59.7 89 Flanders Drive, Mount Edgecombe Aug-19 53.5 51.0 Cnr Bridge and Molecule Roads, Bellville Dec-19 56.2 56.2 96 15th Road, Randjespark Jan-20 77.5 78.8 530 Nicholson Road, Denver # Mar-20 40.0 37.5 Stondell Investments, 684 Pretoria Main Road, Wynberg # Mar-20 4.0 7.4 59 Intersite Avenue, Springfield # Jun-20 87.2 92.0 11 Enterprise Close, Linbro Park # Jun-20 12.0 9.4 The Eveready Building, Port Elizabeth # Oct-20 125.0 122.0 551.1 541.0 # - Still to transfer. Divestment of R551m Non-Core Industrial Properties @ a weighted average exit yield of 9.0% 58

HOW – Quality Industrial? 01 Secure tenancy with covenant strength 02 Divest from properties not meeting investment criteria 03 Redevelop properties to meet tenant operational requirements 59

3. Redevelop properties to meet tenant operational requirements Sarel Baard Solar PV Initial Yield of 17% on R11.3m development cost  990kWAC  60

WHY – Divesting from Commercial Properties ? 01 Increasing vacancies 02 Poor rental growth prospects 03 Increasing tenant installation capex effect 04 Changing work behaviours 61

WHY – Divesting from Commercial Properties ? 01 Increasing vacancies 62

WHY – Divesting from Commercial Properties ? Increasing Vacancies: Current market vacancy Office vacancy levels have increased from 0.65 million m² in 2008 to 2.07 million m²  currently The vacancy has increased significantly since 2013 – despite vacancy rate trending  sideways as new supply continued to come onto market December 2019 SAC commercial vacancy was 15.96%, higher than the rest of portfolio  63

WHY – Divesting from Commercial Properties ? Future vacancy Gauteng (Waterfall, Rosebank and Sandton) have substantial developments over  previous 5 years as well as future development coming online 64

WHY – Divesting from Commercial Properties ? 01 Increasing vacancies 02 Poor rental growth prospects 65

WHY – Divesting from Commercial Properties ? 2. Poor rental growth prospects 2.1 Poor rental growth: Inflation adjusted asking rental growth has declined more than 10% since 2010  2.2 Increasing expense ratio: Office sector expense ratio increased from 31.6% in 2017 to 32.9% in 2019  (MSCI) Increasing cost base not recoverable from tenants  66

WHY – Divesting from Commercial Properties ? 01 Increasing vacancies 02 Poor rental growth prospects 03 Increasing tenant installation capex effect 67

WHY – Divesting from Commercial Properties ? 3. Increasing tenant installation capex effect Competition driving increasing requirement for substantial TI’s to secure new  tenancies Amortised TI expense increased by shortening lease terms  Exacerbated by tenant failures  68

WHY – Divesting from Commercial Properties ? 01 Increasing vacancies 02 Poor rental growth prospects 03 Increasing tenant installation capex effect 04 Changing work behaviours 69

WHY – Divesting from Commercial Properties ? 4. Changing work behaviours Trends will continue to suppress the demand for traditional office space:  Buffer (social media management company) study: Most desirable – employment benefits: Working from any location – A flexible work schedule – New technologies allow workers to “telecommute” instead of working in an office – Proliferation of co-working spaces and Wi-Fi enabled coffee shops, restaurants – and public spaces Millennials seek greater work flexibility whilst Gen Z have a greater aspiration – for “cottage industries” (own businesses) 70

HOW – Divest from Commercial Portfolio? 01 Divest from properties 02 Tenanting-up & Sale of GreenPark Corner 71

1. Divest from properties 2. Tenanting-up & Sale of GreenPark Corner Commercial disposals Carrying value Exit yield on Transfer Gross Selling Property at date of sale sale price date Price (Rm) (Rm) (%) Lebombo Road, Garsfontein (Remaining portion) Jul-19 27.1 27.1 9.3 Cnr Handel and Crownwood Roads, Ormonde Aug-19 60.0 52.5 9.3 1 Holwood Park, Umhlanga Ridge Dec-19 113.5 113.0 9.0 31 Allen Drive, Bellville # Mar-20 29.4 26.7 8.4 Cnr Old Pretoria and Alexandra Roads, Midrand # Mar-20 8.9 8.9 - 34 Mangold Street, Port Elizabeth # Mar-20 5.5 5.5 9.0 Non Core Commercial Properties Divested 244.4 233.7 8.7 # - Still to transfer. GreenPark Corner Initiatives Sale of sections, conditional on pre-sale  threshold Shared workspace joint initiative being  explored Building initiatives (reception  improvement, staff orientated to hospitality, enhanced service offerings) 72

WHY – Quality Residential? Residential property sector is under- 01 represented in South African Listed Sector 02 Robust growth prospects 03 Defensive characteristics 04 AFHCO competitive advantage 73

WHY – Quality Residential? 01 Residential property sector is under- represented in South African Listed Sector 74

WHY – Quality Residential? 1. Residential property sector under-represented in South Africa Listed Sector Despite higher than average global returns, residential exposure  in SA REITs versus global REIT exposure is substantially under- represented Source:MSCI Source:MSCI 75

WHY – Quality Residential? 01 Residential property sector is under-represented in South African Listed Sector 02 Robust growth prospects 76

WHY – Quality Residential? 2. Robust growth prospects Increasing urbanisation in SA and inner-city densification will continue to stimulate  demand for affordable residential rental property SA housing need = 2.2 million households (36% in main urban areas)  Behavioural trends  Millennials are choosing to rent over owning property – 28 million Millennials in SA – 77

WHY – Quality Residential? 01 Residential property sector is under-represented in South African Listed Sector 02 Robust growth prospects 03 Defensive characteristics 78

WHY – Quality Residential? 3. Defensive characteristics Disposal liquidity with opportunity to exploit pricing premium for ownership without a  regulatory restriction Reduced tenant dependency risk due to tenant diversification over large tenant base  PORTFOLIO SECTOR NO OF VALUATION TENANTS PER TENANTS (Rbn) Rbn RETAIL 691 7.2 96 INDUSTRIAL 95 4.5 21 OFFICE 48 0.5 88 RESIDENTIAL 9600 4.8 2000 Rental accommodation is relatively  non-discretionary - resilient through economic cycles AFHCO tenants generally pay in  advance • Inner-city rentals - R3000 - R7000 • Suburban rentals – up to R12,000 Source:TPN 79

WHY – Quality Residential? 01 Residential property sector is under-represented in South African Listed Sector 02 Robust growth prospects 03 Defensive characteristics 04 AFHCO competitive advantage 80

WHY – Quality Residential? 4. AFHCO competitive advantage Current residential focused listed funds are illiquid & do not have critical mass  Well established vertically integrated business:  Team of 170 people – Competencies: Identifying investment and development nodes, development – planning and project execution, stakeholder relationships, in-house marketing, construction management, property management platform & systems including 54 leasing agents, collections, facilities management, customer services platform, social network & IT platforms and sales Established tenant base – 23 years’ worth of brand equity in the market  Established relationships with developers  Ability to sell apartments at a premium to NAV  Continuous improvement in IT and systems  Focus on mixed-use precincts:  Close proximity to transport hubs – Safe & secure – Clean and well maintained – Access to amenities & retail offerings – 81

WHY – Quality Residential? 4. AFHCO competitive advantage (cont.) Diversification between inner-city and suburban tenants  Portfolio No. of Units/SQM Inner-city (units) 6 429 Suburban (units) 3 213 Inner-city Retail (SQM) 80 697 Quality refinement through  recycling of portfolio from old to new developments Quality upgrading  82

HOW – Establishing a Quality Residential Rental Portfolio 01 Portfolio optimisation 02 Johannesburg inner-city lifestyle developments Divestment of poorer quality, low growth 03 properties 04 Reduced pipeline to promote focus 83

HOW – Establishing a Quality Residential Rental Portfolio 01 Portfolio optimisation 84

1. Portfolio Optimisation 1. Marketing of trusted brand 2. Loyalty programme 3. Real-time market competitive rental analysis and yield management 4. Planned unit & common area refurbishment program 5. Wi-Fi & amenity roll-out 6. Solar PV generation, energy efficient lighting & equipment & standby functionality to address load shedding 7. Operational excellence in customer services, facility management and cleaning 8. Holistic security solution (CCTV & on-site presence interfacing with control room engaging tactical response) 85

HOW – Establishing a Quality Residential Rental Portfolio 01 Portfolio optimisation 02 Johannesburg inner-city lifestyle developments 86

2. Johannesburg inner-city lifestyle developments End Street Precinct Complete 1 832 residential units (including  student accommodation rooms) 9 242 sqm retail (anchored by  Shoprite) Lifestyle amenities including gym,  park, soccer fields, medical facilities Integrated Precinct security  87

2. Johannesburg inner-city lifestyle developments (cont.) End Street Precinct In Progress 90 residential units  3 496 sqm retail leasing  Pedestrianisation of Davies  Street and traffic calming measures on End Street Streetscaping  Improved access to and  from Doornfontein Station 88

2. Johannesburg inner-city lifestyle developments (cont.) Jeppe Street Post Office Complete 244 residential units  8 852 sqm retail  (anchored by Boxer) Lifestyle amenities  including Wi-Fi, kiddies play area, laundry facilities 89

2. Johannesburg inner-city lifestyle developments (cont.) Jeppe Street Post Office In Progress 242 residential units  410 sqm food court  Lifestyle amenities including  gym, cinema room, braai / chill areas Precinct security  Storage for Cross Border  shoppers and retail tenants Parking  90

HOW – Establishing a Quality Residential Rental Portfolio 01 Portfolio optimisation 02 Johannesburg inner-city lifestyle developments Divestment of poorer quality, low growth 03 properties 91

3. Divestment of poorer quality, low growth properties 1. Review of residential rental portfolio to establish poorer quality, low growth properties not meeting investment criteria 2. Sale of sections to owner occupiers 3. Aesthetic upgrade to enhance sales 4. Marketing and sales team target FLISP buyers 5. Historic cost competitive vs new build 92

HOW – Establishing a Quality Residential Rental Portfolio 01 Portfolio optimisation 02 Johannesburg inner-city lifestyle developments 03 Divestment of poorer quality, low growth properties 04 Reduced pipeline to promote focus 93

4. Reduced pipeline to promote focus 1. Cancelled Calgro M3 pipeline in Cape Town 2. Cancelled Founders Hill JV with M&T 3. Re-evaluation of Menlyn East End JV with M&T 94

OUTLOOK RORY MACKEY

Outlook Fragile South African economy Defensive income focus Retail: Increase exposure to grocer &  Afhco: convenience offering (Leasing vs Target) Leverage quality, security and  Leasing responsive to changing market  amenity offering concentrated in mixed use & catchment demand (Vacancy) precincts in close vicinity to transport nodes to be competitive (NPI) (Vacancy) (Quality, security & amenity activation vs Target) Industrial: Strong tenant covenant & longer lease  terms notwithstanding short-term Green Strategy: rental sacrifice (Leasing vs Target) Continued roll-out of rooftop PV solar  Position portfolio to be quality logistics  installations (MW rolled-out) by divesting properties not meeting investment criteria & having vacancy risk (Divestment vs Target) Commercial: Capital Structure: Divest methodically at best possible  Managed to be supportive of sustainable  pricing (Vacancy) distribution (LTV) (Distribution vs Cash) (Divestment vs Target) 96

2020 Forecast 2020 Detractors -R60m Guidance 116 000m 2 Industrial –ve reversions Sold buildings interest saving vs NPI Annual distribution per share decline of -3% to -6% 51 Pritchard cap interest vs NPI Organisational capacity 2019 H2 was 14% lower than 2019 H1 2020 H2 is anticipated to be higher than 2020 H1 YOY growth 2020 H1 & H2 : 12% to 18% 97

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