Nova cannot repay former Sharemax investors

The Nova Property Group is in a desperate financial position and is unable to repay its debenture holders – former Sharemax investors – anytime soon, if ever.

The group’s most recent annual financial statements (AFS) reveal a company suffering losses, facing desperate cash flow challenges, and with a property portfolio that has been slashed to such an extent that it is not able to generate the cash to keep the company afloat, let alone repay debentures.

However, the Nova board – under the leadership of chair Connie Myburgh and CEO Dominique Haese – believes the company is in a “sound financial position” and can continue as a going concern.

Myburgh and Haese pocketed salaries of R4.4 million each during the period.

Read:
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Loss of R50 million and only R4.4 million in the bank

The AFS for Nova’s financial year to the end of February 2023 shows a loss of R50 million (2022: loss of R15 million).

It also reveals that despite receiving R24 million in cash from the sale of the Athlone Mall, Nova burned through the cash at an alarming rate and only had R4.4 million in the bank at the end of February.

Cash consumption has been a theme since the scheme’s inception in 2012. Nova has never reported a positive cash flow from its operating activities.

Over the past five years, Nova realised R313 million in cash through property sales but only returned R50.4 million to debenture holders.

Since it only had cash of R4.4 million in the bank at the end of February this year, this implies that Nova has burned around R160 million of cash since 2019.

However, this source of cash has dried up, as the Companies and Intellectual Property Commission (CIPC) issued a compliance notice last year forbidding Nova from selling any more fixed assets. Nova is challenging this notice and states in the AFS that it is “certain that it will be successful” in setting it aside.

Until it is set aside, should that indeed happen, Nova cannot sell any more properties.

It seems the cash flow challenges have escalated since February to the extent that Nova cannot cover its operating expenses – it failed to repay a significant supplier, Quatro, and it failed to pay the municipal accounts of two properties in Nelspruit, leading to the cutting of their electricity supply.

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Sound financial position

Neither Myburgh nor Haese responded to Moneyweb questions. However, in the directors’ report in the AFS, the board has “satisfied themselves that the group is in a sound financial position and that it has access to sufficient resources to meet its foreseeable cash requirements”.

The board also states that there were several non-recurring expenses during the period, and if excluded, the group would have made a profit of R6.2 million. Nova did not respond to a question asking for a detailed segmentation of these non-recurring items.

The AFS does not make any provision for the repayment of debentures in the current financial year and hinted that it may take many years.

This follows Nova’s board in December 2021 unilaterally postponing the repayment of investors beyond the 10-year period specified in the Section 311 Schemes of Arrangement (SoA), claiming it had the authority to do so.

Nova states in the AFS: “Further fair value enhancement [of debentures] would take many more years post the projected 10-year period, and consequently, the board felt it prudent to start the process of exiting the remainder of the group’s debentures. This process is extensive. Even properly coordinated, it will take time.”

ARC Inc, Nova’s fifth auditor in seven years, also stated in its audit report that “material uncertainty” exists as to whether Nova can continue as a going concern if it is to repay debentures in the current financial year.

Read:

Response

Jean-Pierre Tromp, the trustee of the Nova Debenture Trust, said the AFS reveals a company not in a healthy financial position.

“The fact that the Group’s liabilities exceed its assets [by] R44.5 million is a huge concern.”

He highlighted that Nova owes the South African Revenue Service (Sars) R50.7 million and that the AFS does not disclose any payments made to Sars during the past two years.

“Cash and cash equivalents decreased to R4.4 million with only R900 000 allowable for use by the Group. The Group’s financial position does not paint a healthy financial position,” he said.

In response to a question about whether debenture holders will be repaid, Tromp said: “Even though it would be desirable, the CIPC placed a moratorium on the immediate sale of any assets. Unfortunately, I do not foresee this to happen in the short term.”

Decimated property portfolio

It is doubtful that Nova can recover financially to any extent to repay debenture holders as it has sold most of the properties in its portfolio.

Today, only 10 properties remain in Nova’s portfolio, of which only seven generate revenue.

This is a far cry from the 28 unencumbered (unbonded) properties it assumed from Sharemax investors in 2012.

Nova acquired one property (Cold Creek), which had links to Myburgh. (Read the story here.)

In 2013, the portfolio generated revenue of R104 million, more than double the R50 million of the 2023 financial year.

The number of income-generating companies may be reduced to only five, as two Nelspruit-based properties have already been seized by the Sheriff of the Court and are set to be auctioned off. The auction has been stayed and is pending legal action. (See below.)

Read:
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Unqualified audit opinion

ARC gave the 2023 AFS an unqualified audit opinion, which means it believes it fairly reflects the company’s financial position. It is Nova’s first unqualified audit opinion since 2017.

Despite the unqualified audit opinion, the 2023 AFS is controversial.

Nova published the AFS on its website on 17 October but withdrew it two days later because, according to Myburgh, it contained a “few errors.”

Nova republished a materially different set a week later. The most notable change was a R10 million positive swing in the company’s cash balance, from a negative R5.7 million to a positive R4.4 million.

It seems that ARC did not review this and other changes, as the new AFS contained the same audit report as the first set, signed on 10 October.

Neither Nova nor ARC responded to a question about whether the republished AFS was reviewed.

Read:
Nova withdraws ‘unqualified’ financial statements due to a “few errors”
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No provision for Beneficio risk

In May this year, the Pretoria High Court ruled that Nova had to pay the bridging finance provider Beneficio an amount of R32.2 million plus interest at 1% a week. The court also hit Nova with a punitive cost order and denied it leave to appeal against the judgment

The case dates back to 2017 and 2018, when Nova borrowed money from Beneficio at an interest rate of 1% a week as commercial banks refused to provide it with finance.

Beneficio sued Nova for R31.2 million after it fell behind in repayments. Nova countersued Beneficio for R19.3 million for alleged overpayments, arguing that the 1% interest rate was unlawful and usurious.

Nova was confident it would win the case and accounted for the R19.3 million as income in its 2021 AFS as it believed there was “virtual certainty” its counterclaim would be successful.

However, after losing the case with a punitive cost order and denied leave to appeal, Nova applied directly to the Supreme Court of Appeal (SCA) for leave to appeal.

The 2023 AFS does not write back the R19.3 million counterclaim already accounted as income in 2021 or make provision for the R31.2 million plus interest if the SCA application is unsuccessful.

Nova also does not disclose that as part of the judgment, the Nelspruit properties may be auctioned off to repay Beneficio.

Remuneration

Nova’s remuneration of its executive directors has been controversial for many years.

During the 2023 financial year, they collectively earned R12.2 million in salaries. Myburgh and Haese received R4.4 million each, while the third executive director, Matthew Osterloh, earned R3.3 million.

Since 2012, Haese has received R45.9 million and Myburgh R44.9 million in salaries and bonuses.

The pair’s collective remuneration amounts to R90.8 million, more than half the total of R177 million Nova repaid to debenture holders.

Moneyweb calculated that in addition to his salary and bonuses, Myburgh had received at least an additional R30 million.

Nova has always contended that its salaries were market-related.

Moneyweb did a brief comparison of several JSE-listed property companies and the salaries of their chief executives. Only guaranteed salaries are shown.

Name	Company	Value of assets	Guaranteed remuneration
Dominque Haese	Nova	R2.6 billion	R4.4 million
Connie Myburgh	Nova	R2.6 billion	R4.4 million
Matthew Osterloh	Nova	R2.6 billion	R3.3 million
Gavin Lucas	Stor-Age	R12 billion	R3.2 million
Jackie van Niekerk	Attacq	R22 billion	R4.4 million
Andrea Taverna-Turisan	Equites	R29 billion	R5.2 million
Morné Wilken	Hyprop	R40 billion	R5.4 million
Laurence Rapp	Vukile	R40 billion	R5.5 million

Information was sourced from the relevant companies’ latest annual reports. The amounts exclude bonuses and long-term incentives.

Harrison & White

Nova’s sell-off of properties without the repayment of debenture holders relates to an unrelated case involving Myburgh and other individuals linked to Nova.

The case involves a company, Harrison & White, which was liquidated in 2017.

The liquidators are suing Myburgh, Hans Klopper (BDO head of restructuring, H&W business rescue practitioner and one of the receivers of the Nova Debenture Trust), and Diaan Ellis (an attorney at Faber Goërtz Ellis Austin Inc who regularly acted on behalf of Nova) for R110 million for delaying H&W’s inevitable liquidation, allowing for the looting of assets to the detriment of creditors.

Moneyweb sent questions to Myburgh, Klopper and Ellis to enquire whether they have filed answering affidavits, but they did not respond.

Moneyweb understands they have not replied to the charges.

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