<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting now with Leon Kok. Many of you will know him of course as the COO of Redefine Properties, but he\u2019s also chair of the SA Reit (Real Estate Investment Trust) Association\u2019s accounting and JSE committee.<\/p>\n
Leon, appreciate the early morning time. You\u2019re going through a process in terms of the third edition of the Best Practice Recommendations. I want to dig into some of that. Before I do, the SA Reit Association accounting and JSE committee \u2013 What is this committee? Where does it fit? What is it\u2019s purpose?<\/p>\n
LEON KOK: Morning, Simon. Yes, the SA Reit Association accounting and JSE committee is effectively a subcommittee of our SA Reit Association. It comprises a number of finance executives, and also some of our corporate advisors. The main focus of this committee is to strengthen disclosure practices and, very importantly, improve consistency in financial communication across the Reit spectrum within South Africa.<\/p>\n
And then, similarly, it also addresses regulatory concerns specifically related to some of the JSE listing issues that are applicable to most of our Reit members, and it just creates a forum for finance execs and advisors within this space to be able to collaborate on matters of common concern as far as financial matters are concerned.<\/p>\n
Read\/listen:
SA Reits: Still room for growth
Shaping energy strategy in commercial real estate
Why transparent financial reporting for Reits matter<\/p>\n
SIMON BROWN: That\u2019s a great description, because this update that came through around best practices is more around clarity. This is more about bringing \u2013 I don\u2019t want to say bringing credibility to the sector because there is credibility; maybe we should say sort of enhancing and tweaking more than wholesale changes.<\/p>\n
LEON KOK: Quite right. This third edition follows on that second edition. And our second edition, which was done six years ago, was quite a substantial shift from the first one. The first one was a kind of introductory member addition, and the second one introduces a substantial amount of work.<\/p>\n
That\u2019s why we\u2019ve also taken a fair amount of time to introduce the third one because in the last while the focus was on greater adoption rate, consistency and really understanding what the teething issues and such were.<\/p>\n
So you\u2019re quite right. This third one is more about streamlining, clarifying and, more importantly, [that] the good work that was done was actually to simplify the good work that was done in the second one, so that it can encourage greater adoption and greater consistency.<\/p>\n
SIMON BROWN: Is there also a part bringing us in line with global Reit reporting? I am old enough to remember the day of property loan stocks and the like, before we had the Reit structures \u2013 or have we pretty much been sort of in line with with global standards around the Reit structures?<\/p>\n
LEON KOK: Correct. So Simon, we must just distinguish between general or conventional financial reporting, which is in South Africa, as well as internationally, in terms of IFRS, the International Financial Reporting Standards.<\/p>\n
I think South Africa in general has a very good reputation from a corporate reporting point of view. So what this Best Practice Recommendations [BPR] document encourages and where it is very closely aligned already with particularly European practices is that, again, it just streamlines things.<\/p>\n
So the mere fact that we didn\u2019t have to make many changes suggests, in my view, that we were already quite aligned, and in some of the changes, just in terms of how we classify things like the fund of funds from operation terms is more closely aligned to the term use \u2013 in Europe in particular.<\/p>\n
SIMON BROWN: You mentioned that \u2013 Funds From Operations (FFO). That\u2019s going to be the big number going forward. This is replacing distributable earnings per share. Is there a significant difference between the two that shareholders should take notice of, because my sense is that FFO is going to be a key reporting component into the future.<\/p>\n
LEON KOK: Quite right. And frankly, there is not a big difference between the two terms. It\u2019s just again to align more with the reporting practice internationally. And then it\u2019s quite prescriptive in terms of if you want to, or you have to, disclose if the Reit FFO funds [are] from operations to clearly articulate and also make the comparison from an operating point of view across Reits more comparably.<\/p>\n
And then of course, as always, it is quite common for entities to make company-specific adjustments because each\u2019s circumstances are different. Then the requirement is just to be very specific on disclosure around us.<\/p>\n
SIMON BROWN: Another change is to net asset value [Nav]. This now takes out goodwill, intangibles, some deferred tax. It becomes more of a \u2018tangible net asset value\u2019. I have to be honest \u2013 I have a preference for tangible net asset value. I know people who prefer the sort of more traditional \u2018net asset value\u2019.<\/p>\n
Again, these are tweaks. I suppose, from an investor perspective, from a Reit-management perspective, it\u2019s just understanding what is behind the terminology that we are using which is important.<\/p>\n
LEON KOK: Quite right. But just maybe to correct you, our net asset value definition always excluded goodwill and intangibles and deferred [tax].<\/p>\n
So what we are trying to do with this change is to just make it easier to reconcile \u2013 if you look at a conventional balance sheet \u2013 how to calculate tangible net asset value. In the past, we\u2019ve also excluded certain other financial instruments [where] the view was previously that that was realised through the income statement. So we felt we could exclude it. But frankly that just led to additional reconciliation.<\/p>\n
So now it made it far simpler. And if you look at a balance sheet, you can kind of pick up three or four items that need to be excluded to bring it to a tangible net asset value, which is quite right. That is what reflects a property company.<\/p>\n
Listen\/read:
SA Reits a \u2018world-beater\u2019 \u2013 Australia\u2019s Peter Verwer
Over R3bn in Covid-19 rental relief from SA Reit landlords [April 2021]
\u2018Agility and compassion vital for good leadership\u2019 [May 2020]<\/p>\n
SIMON BROWN: Gotcha. And then some standardisation ratios: cost to income, loan to value, interest cover ratio. Again important numbers and again just sort of creating a standardisation so that once again the investor looks at it and knows across the different companies what we\u2019re actually looking at, and [has] the ability to compare across.<\/p>\n
LEON KOK: Quite right. We\u2019re starting that up. The new term or the new recommendation we included was the definition for \u2018interest cover ratio\u2019, which was previously not included, simply because interest coverage ratio is typically defined by each banking arrangement that individual entities have, and there is quite a bit of difference.<\/p>\n
So we just tried to introduce a common term that is able to indicate entities\u2019 ability to service their interest; it\u2019s quite closely aligned to the loan-to-value so that we can report both of those measures next to each other.<\/p>\n
SIMON BROWN: A last and a more sort of overarching question \u2013 for a JSE-listed company operating as a Reit \u2013 are these prescriptive or are they sort of \u2018a Reit has traits\u2019. Or is this a case of you are a Reit, these are the terms you need to use, and this isn\u2019t how they need to be understood by the market.<\/p>\n
LEON KOK: Quite right. So if you are a member of SA Reits, you must disclose the prescribed terms within the BPR. And if you don\u2019t, you need to give a reason why you are not. And if you\u2019re not following the definition for whatever specific reason, you need to be very clear in terms of why that differs, and give a detailed explanation to it.<\/p>\n
SIMON BROWN: Leon Kok, of course [finance] boss of Redefine Properties, but chair, SA Reit Association\u2019s accounting and JSE committee, appreciate early morning.<\/p>\n
Read\/listen:
Positive move: Moody\u2019s \u2018upgrades\u2019 South Africa\u2019s outlook
SA \u2018on the right path to investment-grade rerating\u2019 \u2013 Redefine\u2019s Ntobeko Nyawo<\/p>\n
#Transparency #consistency #Reit #reporting #boost #investor #confidence<\/p>\n","protected":false},"excerpt":{"rendered":"
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