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SGA/SGB - Synergy Income Fund Limited - Revised forecast and financial

Release Date: 22/05/2012 15:57
Code(s): SGA SGB
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SGA/SGB - Synergy Income Fund Limited - Revised forecast and financial effects, posting of circular and Notice of General Meeting SYNERGY INCOME FUND LIMITED (formerly Capital Land Retail Fund Limited) (Incorporated in the Republic of South Africa on 13 November 2007) (Registration number 2007/032604/06) JSE share code for A linked units: SGA ISIN Code: ZAE000161550 JSE share code for B linked units: SGB ISIN Code: ZAE000162293 ("Synergy" or "the company") REVISED FORECAST AND FINANCIAL EFFECTS IN RESPECT OF THE SETSING CRESCENT AND GUGULETHU SQUARE ACQUISITIONS, UP-TO-DATE FORECAST OF SYNERGY`S COMBINED PROPERTY PORTFOLIO, POSTING OF CIRCULAR AND NOTICE OF GENERAL MEETING INTRODUCTION Unitholders are referred to the announcements released on SENS on 28 February 2012, 15 March 2012 and 30 April 2012 in respect of the acquisition of the Setsing Crescent Shopping Centre ("Setsing Crescent") and the Gugulethu Square Shopping Centre ("Gugulethu Square")(each an "acquisition" and together "the acquisitions") and are advised that a circular ("the circular") relating to the acquisitions, together with revised listings particulars, was posted to Synergy unitholders today, Tuesday, 22 May 2012. The purpose of this announcement is to present the revised forecasts for and financial effects of the acquisitions, including the effects of the placement and debt funding, present an up-to-date forecast for Synergy`s combined property portfolio, including the acquisitions and furnish the salient dates in regard to implementation of the acquisitions. FORECAST FINANCIAL INFORMATION Set out below are: - the updated summarised forecast statements of comprehensive income (the "acquisition forecasts") of the Setsing Crescent and Gugulethu Square acquisitions, on a stand-alone basis, for the ten months ending 30 June 2013 and the year ending 30 June 2014; and - together with the existing Synergy property portfolio, a full forecast statement of comprehensive income (the "combined property portfolio forecast") for the year ending 30 June 2013 and the year ending 30 June 2014, collectively the "forecasts". The financial effects announcement released on SENS on 15 March 2012 included acquisition forecasts which were prepared on the assumption that the acquisitions would be implemented on 1 July 2012. The acquisition forecasts set out below have been prepared on the revised assumption that the acquisitions will be implemented on 1 September 2012. The forecasts, including the assumptions on which they are based and the financial information from which they are prepared, are the responsibility of the directors of Synergy. The forecasts have been reported on by the independent reporting accountants and their report is set out in the circular. The forecasts presented in the tables below have been prepared in accordance with the company`s accounting policies and in compliance with IFRS. Summarised forecast in respect of the Setsing Crescent acquisition: Forecast Forecast for the for the ten months year ending ending 30 June
30 June 2014 2013 R`000 R`000
Recoveries and contractual rental revenue 27 579 36 584 Straight-line rental income accrual (net of 5 662 1 681 deferred tax) Total revenue 33 241 38 265 Net property income 26 800 26 638 Net operating profit* 25 479 25 029 Total profit and comprehensive income for 16 742 1 634 the year after debenture interest*
Distributable earnings attributable to 9 720 13 184 linked unitholders Summarised forecast in respect of the Gugulethu Square acquisition: Forecast Forecast
for the for the ten months year ending ending 30 June 30 June 2014
2013 R`000 R`000 Recoveries and contractual rental revenue 38 387 51 003 Straight-line rental income accrual (net of 5 063 3 707 deferred tax) Total revenue 43 450 54 710
Net property income 30 324 34 714 Net operating profit* 28 621 32 633
Total profit and comprehensive income for 15 609 3 650 the year after debenture interest* Distributable earnings attributable to 12 128 16 088 linked unitholders * Includes the effects of straight-lining rental income and the related deferred taxation charge and asset management fees. The combined property portfolio forecast: Forecast Forecast for the for the year year ending ending 30 June
30 June 2014 2013 R`000 R`000 Rental income 172 209 195 730 Recoveries 60 413 74 850 Straight line rental income accrual 27 278 11 990 Revenue 259 900 282 570 Property expenses (81 048) (98 278) Administration costs and corporate costs (10 571) (11 747) Asset management fee (8 411) (9 414) Annual listing costs (2 160) (2 333) Tenant installation and letting commissions (3 322) (3 698) Profit from operations 164 959 168 847 Finance costs (56 404) (59 979) Interest (56 018) (59 569) Amortisation of debt raising fee (386) (410) Interest received on linked units issued cum 4 707 - distribution Interest received on call 1 917 2 575 Profit before debenture interest 115 179 111 443 Debenture interest (88 287) (99 863) Profit after debenture interest 26 892 11 580 Capital and other items not distributed 26 635 - Change in fair value of investment 26 635 - properties Profit before taxation 53 527 11 580 Taxation (12 452) (3 242) Net profit after taxation for the year 41 075 8 338 attributable to Synergy shareholders Reconciliation between earnings, headline earnings and distributable earnings Net profit after taxation for the year 41 075 8 338 attributable to Synergy shareholders Adjusted for: Debenture interest 88 287 99 863 Earnings attributable to linked unitholders 129 362 108 201 Adjusted for: Change in fair value of investment (21 713) - properties (net of deferred tax) Headline earnings attributable to linked 107 649 108 201 unitholders Adjusted for: Amortisation of debt raising fee 278 295 Straight-line rental income accrual (net of (19 640) (8 633) deferred tax) Distributable earnings attributable to 88 287 99 863 linked unitholders Estimated number of A linked units in issue 37 543 718 37 543 718 Estimated number of B linked units in issue 109 378 109 378 074 074
Weighted average number of A linked units in 35 434 624 37 543 718 issue Weighted average number of B linked units in 103 333 109 378 issue 907 074 Basic and diluted earnings per A linked unit 121.35 94.67 (cents) Basic and diluted earnings per B linked unit 95.63 69.39 (cents) Headline earnings per A linked unit (cents) 102.15 94.67 Headline earnings per B linked unit (cents) 76.43 69.39 Distributable earnings per A linked unit 82.66 86.79 (cents) Distributable earnings per B linked unit 56.65 61.51 (cents) The forecasts incorporate the following material assumptions in respect of revenue and expenses that can be influenced by the directors: 1. Synergy management`s forecasts are based on information derived from the property manager, historical information and work performed by the independent property valuer. 2. Contracted revenue is based on existing lease agreements. Uncontracted revenue amounts to 1.3% and 4.7% for Setsing Crescent and Gugulethu Square respectively for the ten months ending 30 June 2013 and 21.1% for the combined property portfolio for the year ending 30 June 2013. Uncontracted revenue amounts to 58.2% and 10.7% for Setsing Crescent and Gugulethu Square respectively for the year ending 30 June 2014 and 42.0% for the combined property portfolio for the year ending 30 June 2014. 3. All existing lease agreements are valid and enforceable. 4. Turnover rental (rental income based on the actual turnover of the tenant) has only been forecast for those tenants who have previously paid turnover rental. 5. Current vacant space has been forecast on a property-by-property basis and has been assumed to remain vacant unless it is deemed probable that such space will be let. Vacant space has been assumed to be let during the forecast periods only if management are at an advanced stage of discussions with prospective tenants and where offers to tenants have been made. 6. Leases expiring during the forecast periods have been forecast on a lease-by-lease basis, and in circumstances where discussion with the lessee has proven positive, are forecast to be let at current market rates. 7. Synergy management`s forecast property operating expenditure has been determined based on management`s review of historical expenditure, where available, and discussion with the property manager. 8. Properties will be paid for as and when they are transferred. The dates of the transfers are assumed to be 1 September 2012 in respect of both acquisitions. 9. It has been assumed that with regard to the vendor consideration placement, new A and B linked units will be issued in the same ratio as the capital raised in terms of the private placement at the time of listing and that new A and B linked units will be issued at market prices (estimated using the 30 day VWAP prior to the date that the financial effects announcement was released on SENS, being 15 March 2012). Accordingly, it has been assumed that 12 654 562 A linked units will be issued at R8.79 per A linked unit and 36 265 004 B linked units will be issued at R5.46 per B linked unit, raising gross proceeds of R309.2 million. 10. Transaction costs are assumed to be approximately R13.7 million. Of the R13.7 million in transaction costs, R6.4 million are assumed to arise and be expensed in the financial year ending 30 June 2012. 11. In terms of the acquisition agreements, if the transfer date for Setsing Crescent is after 31 August 2012, then the purchase price will increase by an amount equivalent to 0.02739726% in respect of each day by which the transfer date is delayed beyond that date. If the transfer date for Gugulethu Square is after 31 August 2012, then 75% of the purchase price will increase by 0.02739726% in respect of each day by which the transfer date is delayed beyond that date. The balance of the purchase price of Gugulethu Square (being 25% thereof) shall increase by 0.02739726% in respect of each day by which the transfer date is delayed beyond 13 July 2012. The escalation of the purchase price in respect of Setsing Crescent is as per the Setsing acquisition agreement. The escalation of the purchase price in respect of Gugulethu Square is as agreed in correspondence between the parties and will in due course be recorded in an appropriate addendum to the Gugulethu Square acquisition agreement. 12. Setsing Crescent is assumed to be acquired with effect from 1 September 2012 for a purchase consideration of R243.4 million (including capitalised transaction costs of R3.3 million). Gugulethu Square is assumed to be acquired with effect from 1 September 2012 for a purchase consideration of R295.0 million (including capitalised transaction costs of R4.0 million). The total purchase consideration amounts to R538.4 million and is inclusive of capitalised transaction costs of R7.3 million and exclusive of costs to be expensed of R6.4 million. 13. R304.5 million of the proceeds of the vendor consideration placement are assumed to be utilised to partially fund the Setsing Crescent acquisition and the Gugulethu Square acquisition, the balance of R4.7 million will be recognised as interest received on linked units issued cum distribution. 14. The balance of the purchase consideration of R240.3 million is assumed to be funded through new debt facilities from Rand Merchant Bank ("RMB"), a division of FirstRand Bank Limited, and Nedbank Limited ("Nedbank"). 15. Interest is assumed to be payable on the debt funding at a melded fixed and variable rate of 8.7% per annum, in accordance with the relevant loan agreements with RMB and Nedbank. 16. Synergy is assumed to have a loan-to-value ratio of approximately 40% (R685 million) once all properties that have been contracted for, have been transferred, including Setsing Crescent and Gugulethu Square and the properties being acquired from SA Corporate Real Estate Fund (as disclosed in the pre-listing statement issued by Synergy on 30 November 2011). 17. Setsing Crescent and Gugulethu Square have been valued at R257 million and R308 million respectively, by Mills Fitchet Magnus Penny (Proprietary) Limited ("Mills Fitchet"), as set out in the summary valuation report which is presented in the circular. The properties have been revalued to their fair values in terms of IFRS for the ten months ending 30 June 2013. No fair value adjustments have been provided for either Setsing Crescent or Gugulethu Square in the year ending 30 June 2014. 18. The SA Corporate Real Estate Fund portfolio one acquisition and the SA Corporate Real Estate Fund portfolio two acquisition (further details of which are set out in the pre-listing statement issued by Synergy on 30 November 2011) are assumed to transfer on 1 June 2012 for purposes of the combined property portfolio forecast. The forecasts incorporate the following material assumptions in respect of revenue and expenses that cannot be influenced by the directors: 19. There will be no unforeseen economic factors that will affect either the lessees` ability to meet their commitments in terms of the existing lease agreements or the forecast future profitability of these properties. 20. In terms of the asset management agreement with Capital Land Asset Management, Synergy shall pay the asset manager: a. an asset acquisition fee of 1% of the aggregate purchase price; b. a monthly fee equivalent to 1/12th of 0.5% of the aggregate of the market capitalisation and the borrowings of Synergy; and c. for all property management services a monthly fee equivalent to 4% of gross monthly income collected. 21. No future properties will be acquired and no properties will be disposed of during the forecast periods other than those being acquired in terms of the acquisitions. 22. Debenture interest will be paid to A and B linked unitholders in accordance with the provisions of the debenture trust deed. 23. Consumptions based recoveries are consistent with the independent property valuer`s property income statements. Material items of expenditure within the property expenses line items include: 1. In respect of the forecast for Setsing Crescent, R1.1 million in property management expenses, R5.1 million in electricity costs and R0.7 million in rates for the ten months ending 30 June 2013 and R1.5 million in property management expenses, R7.6 million in electricity costs and R0.9 million in rates for the year ending 30 June 2014. 2. In respect of the forecast for Gugulethu Square, R1.5 million in property management expenses, R8.4 million in electricity expenses and R1.9 million in rates for the ten months ending 30 June 2013 and R2.0 million in property management expenses, R12.6 million in electricity expenses and R2.4 million in rates for the year ending 30 June 2014. 3. In respect of the forecast for the combined property portfolio, R9.3 million in property management expenses, R34.4 million in electricity expenses and R16.5 million in rates for the year ending 30 June 2013 and R10.8 million in property management expenses, R45.3 million in electricity expenses and R18.5 million in rates for the year ending 30 June 2014. Property expenses, straight-line line adjustments, the asset management fee and the administrative expenses for the forecast for Setsing Crescent and for the forecast for Gugulethu Square are not expected to change by more than 15% between the historical and forecast expenditure. Electricity expenses have been assumed to increase in line with guidance issued by Eskom and taking into account guidance from the relevant municipalities. Property expenses, straight-line line adjustments, the asset management fee and the administrative expenses for the forecast for the combined property portfolio are expected to increase by more than 15% from historical costs due to the increase in the size of the company as a result of the acquisitions. In addition, electricity expenses have been assumed to increase in line with guidance issued by Eskom and taking into account guidance from the relevant municipalities. UNAUDITED PRO FORMA FINANCIAL EFFECTS OF THE ACQUISITIONS The table below sets out the unaudited pro forma financial effects of the acquisitions based on Synergy`s reviewed interim results for the six months ended 31 December 2011. These financial effects are the responsibility of the directors of Synergy and have been prepared for illustrative purposes only, in order to provide information about the financial position of Synergy only, assuming that the acquisitions had been implemented on 31 December 2011 for purposes of the statement of financial position. The unaudited pro forma statement of financial position of Synergy at 31 December 2011 and the explanatory notes thereto will be provided in the circular to Synergy linked unitholders. The unaudited pro forma financial effects have been reported on by the independent reporting accountants and their report is set out in the circular. Due to their nature, the unaudited pro forma financial effects may not fairly present Synergy`s financial position subsequent to the acquisitions. The unaudited pro forma financial effects have been prepared in accordance with the accounting policies of Synergy that were used in the preparation of the reviewed interim results for the six months ended 31 December 2011. As forecast financial information for the acquisitions has been prepared and presented above, financial effects in respect of an unaudited pro forma statement of comprehensive income have not been presented. The table below reflects the unaudited pro forma financial effects of the acquisitions on a Synergy linked unitholder: Before the Acquisitio Acquisitio After the Change acquisitio n of n of acquisition after ns Setsing Gugulethu s the Note 1 Crescent Square Note 3 acquisi
tions (%) Net asset value and net tangible asset value per linked unit (cents) - A linked units 875.64 933.88 6.7% - B linked units 522.13 587.16 12.5% - combined 611.91 679.55 11.1% linked unit Net asset value and net tangible asset value per linked unit (excluding deferred tax)(cents) - A linked units 881.82 952.80 8.0% - B linked units 528.30 606.09 14.7% - combined 618.09 698.48 13.0% linked unit Actual number of 24 889 156 5 719 867 6 934 695 37 543 718 50.8% linked units in 73 113 070 16 391 795 19 873 209 109 378 074 49.6% issue - A linked units - B linked units Notes and assumptions: 1. The figures set out in the "Before the acquisitions" column above have been extracted, without adjustment, from the published reviewed results of the company for the six months ended 31 December 2011. 2. The acquisitions are assumed to have been implemented on 31 December 2011 for net asset value and tangible net asset value per linked unit purposes. 3. The "After the acquisitions" column above includes the effect of the following: 3.1 The King Senzangkhona Shopping Centre ("KSSC") (full details of which are set out in the pre-listing statement issued by Synergy on 30 November 2011) in Ulundi transferred on 16 February 2012 and has been accounted for post 31 December 2011. R96 million of the purchase consideration of the KSSC was funded through the proceeds raised from the private placement which took place prior to the listing of Synergy and the balance of the purchase consideration of R90 million was funded through bank debt. 3.2 The SA Corporate portfolios (full details of which are set out in the pre-listing statement issued by Synergy on 30 November 2011) are assumed to transfer on 31 December 2011 for purposes of the unaudited pro forma financial effects. The purchase consideration of R494.2 million includes capitalised transaction costs of R2.2 million. R140 million of the purchase consideration of the SA Corporate portfolios will be funded through the proceeds raised from the private placement which took place prior to the listing of Synergy and the balance of the purchase consideration of R354 million will be funded through a combination of existing and new debt facilities from Standard Bank, RMB and Nedbank, details of which are set out in Annexure 11 of the revised listings particulars. 3.3 The SA Corporate portfolios and KSSC have been valued at R772.0 million by Mills Fitchet (full details of the valuations were set out in the pre- listing statement issued by Synergy on 30 November 2011). The properties have been revalued to their fair values in terms of IFRS. Accordingly, the difference of R91.1 million between the aggregate purchase consideration of R680.9 million and the fair value of R772.0 million has been recorded as a fair value adjustment and is included as part of accumulated profit. Deferred tax has been provided for on the fair value adjustment at a rate equivalent to 66.6% of the corporate tax rate of 28%.
4. Although for purposes of the unaudited pro forma financial effects, the Setsing Crescent acquisition and the Gugulethu Square acquisition are assumed to be implemented on 31 December 2011, the acquisitions will in fact be implemented after 1 September 2012. In terms of the acquisition agreements, the full purchase consideration of R240 million in respect of Setsing Crescent will increase at a rate of 0.02739726% per day from 31 August 2012 until the transfer date. With regard to Gugulethu Square, 75% of the purchase consideration of R290 million will increase at a rate of 0.02739726% per day from 31 August 2012 until the transfer date. The balance of the purchase consideration of Gugulethu Square (being 25% thereof) shall increase by 0.02739726% in respect of each day by which the transfer date is delayed beyond 13 July 2012. 5. Setsing Crescent is assumed to be acquired with effect from 31 December 2011 for a purchase consideration of R243.4 million (including capitalised transaction costs of R3.3 million). R134.7 million of the purchase consideration will be funded through the vendor consideration placement; refer to Note 10. The balance of the purchase consideration of R108.7 million for the Setsing Crescent acquisition is assumed to be funded through new debt facilities from Nedbank. 6. Gugulethu Square is assumed to be acquired with effect from 31 December 2011 for a purchase consideration of R295.0 million (including capitalised transaction costs of R4.0 million). R163.3 million of the purchase consideration will be funded through the vendor consideration placement; refer to Note 8. The balance of the purchase consideration of R131.7 million for the Gugulethu Square acquisition is assumed to be funded through new debt facilities from RMB. 7. Setsing Crescent and Gugulethu Square have been valued at R257 million and R308 million respectively, by Mills Fitchet, as set out in the summary valuation report which is presented in the circular. The properties have been revalued to their fair values in terms of IFRS. Accordingly, the difference of R26.6 million between the aggregate purchase consideration of R538.4 million (including capitalised transaction costs of R7.3 million) for Setsing Crescent and Gugulethu Square and the fair values of Setsing Crescent and Gugulethu Square of R565 million has been recorded as a fair value adjustment and is included as part of accumulated profit. Deferred tax has been provided for on the fair value adjustment at a rate equivalent to 66.6% of the corporate tax rate of 28%. 8. It has been assumed that with regard to the vendor consideration placement, new A and B linked units will be issued in the same ratio as the capital raised in terms of the private placement at the time of listing and that new A and B linked units will be issued at market prices (estimated using the 30 day VWAP prior to the date that the financial effects announcement was released on SENS, being 15 March 2012). Accordingly, it has been assumed that 12 654 562 A linked units will be issued at R8.79 per A linked unit and 36 265 004 B linked units will be issued at R5.46 per B linked unit, raising gross proceeds of R309.2 million. R304.5 million of the proceeds of the vendor consideration placement are assumed to be utilised to partially fund the acquisitions of Setsing Crescent and Gugulethu Square. Transaction costs are assumed to be approximately R13.7 million and include, inter alia, debt raising fees, capital raising fees and a once-off asset acquisition fee. R6.4 million of the transaction costs are to be expensed (deducted against reserves) with the balance of R7.3 million capitalised to the acquisitions. 9. Synergy is assumed to have a loan-to-value ratio of approximately 40% (R685 million) once all properties that have been contracted for, have been transferred, including Setsing Crescent and Gugulethu Square and the properties being acquired from SA Corporate Real Estate Fund (as disclosed in the pre-listing statement issued by Synergy on 30 November 2011). NOTICE OF GENERAL MEETING A general meeting is to be held at 10h00 on Thursday, 21 June 2012 at the registered office of Synergy (23rd Floor, Triangle House, 22 Riebeeck Street, Cape Town, 8000) to consider and, if deemed fit, pass with or without modification the resolutions set out in the notice of general meeting attached to the circular which resolutions are necessary to implement the acquisitions. Unitholders will also be asked to approve an amendment to clause 28 of the memorandum of incorporation and an amendment to clause 8.5 of the debenture trust deed further details of which are provided in the circular. SALIENT DATES AND TIMES The salient dates and times relating to the acquisitions are set out below. Words and expressions in the timetable shall have the same meanings as assigned to them in the circular. 2012 Circular posted on Tuesday, 22 May Last day to trade in order to be eligible to vote at Friday, 8 June the general meeting Record date in order to vote at the general meeting Friday, 15 June Receipt of forms of proxy by 10h00 on Tuesday,19 June General meeting of Synergy unitholders at 10h00 on Thursday, 21 June Results of general meeting released on SENS on Thursday, 21 June Results of general meeting published in the press on Friday, 22 June Anticipated date for listing of linked units issued Monday, 20 August in terms of placement Anticipated date for transfer of acquisition Friday, 31 August properties and implementation of acquisitions Note: All dates and times in this announcement and the circular are local times in South Africa. Any changes will be released on SENS and published in the press. 22 May 2012 Corporate advisor and sponsor Java Capital Independent Sponsor Deloitte & Touche Sponsor Services (Proprietary) Limited Independent reporting accountants and auditors Moore Stephens BKV Inc www.synergyincomefund.com Date: 22/05/2012 15:57:01 Supplied by www.sharenet.co.za Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.

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