Safari Investments, the owner of malls in towns and semi-urban areas, has released its weakest results since listing five years ago as the default on a loan by BEE partner Southern Palace and tenant struggles caused it to slash its dividend by a quarter.

But CEO Dirk Engelbrecht said the company’s underlying portfolio of eight shopping centres would see a turnaround in the next financial year. This “highly disappointing” set of results need not spook the market as Safari was preparing to merge with Cape-based Fairvest, which also invested in shopping centres geared at the lower LSM market and commuters in SA’s secondary towns. 

Safari’s seven SA shopping centres lie largely in semi-urban areas, which tend to be rural areas that have a developed urbanised town centre. It also owns Namibia’s Platz Am Meer, a mall that serves tourists who visit Swakopmund’s beachfront as well as people living in high-end apartments nearby.

While full-year revenue increased 20% to R299.4m, distributable earnings declined 10.1% to R155.8m. Safari’s dividend shrunk 26% from 68c for the year to March 2018 to 50c for the reporting period.

“We own some of the best malls in their class but there were forces which just let us down, primarily problems with Southern Palace’s ability to pay for shares in Safari and also tough operating conditions, which placed pressure on our tenants’ ability to pay their rent,” said Engelbrecht.   

Southern Palace was set to buy 66-million shares in Safari using funding from Sanlam and elsewhere. But the company defaulted on its R50m equity loan from Sanlam during the reporting period, which resulted in a default on a connected R455m senior loan. Guarantee fees and extra interest expenses of R269m, which were supposed to be received by Safari, were then written off as bad debt expenses that shaved off value from the company’s distributable profits and in turn its dividend. 

Safari also chose to terminate its leases with struggling retailer Edcon at Atlyn Shopping Centre and its Denlyn Mamelodi mall.  

SA’s landlords have been struggling in recent reporting periods amid the country’s economic slowdown, which has dented demand for office space and taken its toll on retail tenants.

Last week, Accelerate Property Fund, which owns Gauteng’s Cedar Square shopping centre, said earnings fell in the year to end-March as it accepted lower rentals to fill space.

Safari is in talks to merge with Fairvest, a group owning shopping centres that serve customers with similar spending power.

Fund managers have welcomed the marriage of Safari and Western Cape-based Fairvest, saying it would create a larger, more liquid group.

“We desperately need some kind of merger activity now. A few years ago property companies were listing as real estate investment trusts (Reits) to get access to capital and tax benefits. As Reits they pay out the majority of their income as dividends, which means the income is taxed in the hands of the shareholders,” said Evan Robins, the head of listed property at the Old Mutual Investment Group.

Engelbrecht said Safari and Fairvest would update the market about their merger talks within the next week.