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SYNERGY INCOME FUND LIMITED - Condensed interim financial results for the six months ended 31 December 2013

Release Date: 20/02/2014 16:47
Code(s): SGA SGB     PDF:  
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Condensed interim financial results for the six months ended 31 December 2013

SYNERGY INCOME FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2007/032604/06)
www.synergyincomefund.com
JSE share code for A linked units SGA     ISIN ZAE000161550
JSE share code for B linked units SGB     ISIN ZAE000162293
(Approved as a REIT by the JSE)
("Synergy" or "the Company")
Managed by
Capital Land Asset Management Proprietary Limited

CONDENSED INTERIM FINANCIAL STATEMENTS for the six months ended 31 December 2013

Highlights

- Distributions to A linked unitholders of 42.34 cents per unit increased by 5%
- Distributions to B linked unitholders of 27.54 cents per unit increased by 11%
- Investment property valued at R2.233 billion increased by 19%
- Reduction in retail vacancies from 3.3% to 3.2%, 0.1% improvement
- Increase in national tenant ratio from 86% to 88%, 2% improvement

COMMENTARY

Profile
Synergy Income Fund Limited ("Synergy" or "the Company") is a
specialised retail property fund with a specific focus on medium
sized community and small regional shopping centres located
in high-growth nodes. Synergy has an investment bias towards
commuter-orientated centres located in township areas and
rural towns. The investment objective of Synergy is to generate
sustainable total returns for unitholders, in excess of inflation,
through value enhancing investments in retail property assets
located in high growth nodes.

Financial results
The board of directors of Synergy ("the Board") is pleased to
announce a distribution of 42.34 cents per A linked unit and
27.54 cents per B linked unit for the six months ended
31 December 2013. The distribution to B linked unitholders
represents an increase of 11.27% compared to the
corresponding interim period ended 31 December 2012.

The trading period to 31 December 2013 takes into account
15 properties, 14 of which were on the statement of
financial position for the full period. The acquisition of
Atlantis City Shopping Centre ("Atlantis") was effective
from 1 September 2013 and is therefore included for 4
months of the interim trading period.

Operational performance
Vacancy ratios of retail gross lettable area ("GLA") amounted to
3.2% at 31 December 2013, representing a marginal improvement
from the 3.3% vacancy at 30 June 2013. Atlantis is considered
fully let due to the existence of a rental guarantee for all vacancies
which existed at the effective date of transfer. Rental reversions
across the portfolio have trended upwards by 6.2%.

Synergy has succeeded in further improving the overall quality of
the tenant mix during the interim period with an increase in the
national tenant ratio from 86% at 30 June 2013 to 88% at
31 December 2013. This national tenant ratio is in line with
Synergy's target of 85% or higher. A tenant retention ratio of
76% was achieved during the period under review, partially due
to optimisation of the tenant mix across the portfolio.

The weighted average lease expiry period for the Synergy retail
portfolio is 3.9 years. In the June 2015 financial year, 22.5% of
leases (by lettable area) are due to expire. A large proportion of
these expiring leases are the result of 2015 being the fifth
anniversary of the opening of Gugulethu Square Shopping
Centre ("Gugulethu Square") (100% occupied), and are
predominantly national tenancies. These expiries are not viewed
as high risk due to a high demand for space at Gugulethu Square.

Condensed statement of comprehensive income
                                                                                Unaudited        Audited       Unaudited
                                                                               Six months           Year      Six months
                                                                                    ended          ended           ended
                                                                              31 December        30 June     31 December
                                                                                     2013           2013            2012
                                                                                        R              R               R
REVENUE
Property portfolio                                                            154 378 525    253 366 497     114 069 485
 Recoveries and contractual rental revenue                                    147 659 651    240 010 489     111 941 552
 Straight–line rental income accrual                                            6 718 874     13 356 008       2 127 933
Rental revenue                                                                154 378 525    253 366 497     114 069 485
Property operating costs                                                     (57 714 441)   (90 732 526)    (41 376 428)
Administration costs                                                          (6 739 045)   (12 875 626)     (6 210 353)
Net operating profit                                                           89 925 039    149 758 345      66 482 704
Fair value adjustments                                                          7 640 897    149 862 250      21 206 159
Changes in fair value of investment properties                                 14 398 101    160 657 440      26 230 076
Adjustment resulting from straight–lining of rental revenue                   (6 718 874)   (13 356 008)     (2 127 933)
Changes in fair value of swaps                                                   (38 330)      2 560 818     (2 895 984)
Profit from operations                                                         97 565 936    299 620 595      87 688 863
Non–recurring capital raising expenses                                                  –     (2 500 954)    (2 500 954)
Net finance (expense)/income                                                 (34 146 459)    (43 110 632)   (19 188 713)
 Finance income                                                                   468 312       1 597 227      1 101 328
 Finance costs                                                               (34 342 318)    (48 096 897)   (23 924 600)
 Interest received on linked units issues cum distribution                              –       3 884 150      3 884 150
 Amortisation of loan raising costs                                             (272 453)       (495 112)      (249 591)
Profit before debenture interest and taxation                                  63 419 477     254 009 009     65 999 196
Debenture interest                                                           (49 332 159)    (93 786 818)   (45 415 650)
Profit before taxation                                                         14 087 318     160 222 191     20 583 546
Taxation                                                                            7 192      28 520 195    (4 351 340)
Profit for the period attributable to Synergy shareholders                     14 094 510     188 742 386     16 232 206
Total comprehensive income for the period                                      14 094 510     188 742 386     16 232 206
Reconciliation of earnings, headline earnings and distributable earnings
Profit for the period attributable to Synergy shareholders                     14 094 510     188 742 386     16 232 206
Debenture interest                                                             49 332 159      93 786 818     45 415 650
Basic earnings attributable to linked unitholders                              63 426 669     282 529 204     61 647 856
Changes in fair values of investment properties (net of deferred taxation)    (7 679 227)   (176 299 168)   (19 210 759)
Changes in fair value of investment properties                                (7 679 227)   (147 301 432)   (24 102 143)
Deferred taxation                                                                       –    (28 997 736)      4 891 384
Headline profit to linked unitholders                                          55 747 442     106 230 036     42 437 097
Non–recurring capital raising expenses                                                  –       2 500 954      2 500 954
Amortisation of loan raising costs                                                272 453         495 112        249 591
Straight–line rental income accrual                                           (6 718 874)    (13 356 008)    (2 127 933)
Changes in fair value of swaps (net of deferred taxation)                          31 138     (2 083 276)      2 355 941
Changes in fair value of swaps                                                     38 330     (2 560 818)      2 895 984
Deferred taxation                                                                 (7 192)         477 542      (540 043)
Distributable earnings                                                         49 332 159      93 786 818     45 415 650
Distribution for the period                                                    49 332 159      93 786 818     45 415 650
Distributed to A linked units                                                           –      19 092 408              –
Distributed to B linked units                                                           –      26 322 286              –
To be distributed to A linked units*                                           20 046 792      20 048 923     19 092 171
To be distributed to B linked units*                                           29 285 367      28 323 201     26 323 479
Total distributions                                                            49 332 159      93 786 818     45 415 650
Actual number of A linked units in issue                                       47 352 203      47 352 203     47 352 203
Actual number of B linked units in issue                                      106 352 670     106 352 670    106 352 670
Weighted number of A linked units in issue                                     47 352 203      44 705 871     42 102 687
Weighted number of B linked units in issue                                    106 352 670     102 436 772     98 584 720
Earnings per A share (cents)                                                         9.17          128.27          11.54
Earnings per A linked unit (cents)                                                  51.51          215.82          56.88
Earnings per B share (cents)                                                         9.17          128.27          11.54
Earnings per B linked unit (cents)                                                  36.71          181.62          38.24
Headline earnings/ loss per A share (cents)                                          4.17            8.46         (2.12)
Headline earnings per A linked unit (cents)                                         46.51           96.01          43.23
Headline earnings/ loss per B share (cents)                                          4.17            8.46         (2.12)
Headline earnings per B linked unit (cents)                                         31.71           61.80          24.58
Distribution per A linked unit paid (cents)                                             –           40.32              –
Distribution per A linked unit payable (cents)                                      42.34           42.34          40.32
Distribution per B linked unit paid (cents)                                             –           24.75              –
Distribution per B linked unit payable (cents)                                      27.54           26.63          24.75

*This amount will be distributed on 17 March 2014
The Company has no dilutionary instruments in issue

Condensed statement of financial position
                                                                 Unaudited         Audited       Unaudited
                                                                     As at           As at           As at
                                                               31 December         30 June     31 December
                                                                      2013            2013            2012
                                                                         R               R               R
ASSETS
Non-current assets                                           2 233 143 504   1 877 453 361   1 738 146 021
Investment property                                          2 232 756 951   1 877 074 000   1 738 146 021
  Fair value of property portfolio for accounting purposes   2 207 964 952   1 859 000 875   1 731 300 971
  Straight-line rental income accrual                           24 791 999      18 073 125       6 845 050
Deferred taxation                                                  386 553         379 361               –
Current assets                                                  33 070 751      29 293 927      18 298 604
Trade and other receivables                                     24 158 185      23 989 593      10 403 635
Cash and cash equivalents                                        8 912 566       5 304 334       7 894 969
Total assets                                                 2 266 214 255   1 906 747 288   1 756 444 625
EQUITY AND LIABILITIES
Stated capital and reserves                                    313 876 110     299 781 600     127 271 420
Stated capital                                                   1 537 049       1 537 049       1 537 049
Reserves                                                       312 339 061     298 244 551     125 734 371
Non-current liabilities                                      1 865 138 845   1 525 892 224   1 562 307 999
Debenture capital                                              952 971 381     952 971 381     952 971 381
Interest-bearing liabilities                                   910 094 811     570 886 520     569 353 318
Derivative financial instruments                                 2 072 653       2 034 323       7 491 125
Deferred taxation                                                        –               –      32 492 175
Current liabilities                                             87 199 300      81 073 464      66 865 206
Trade and other payables                                        37 867 142      32 701 340      21 449 556
Debenture interest payable                                      49 332 158      48 372 124      45 415 650
Total equity and liabilities                                 2 266 214 255   1 906 747 288   1 756 444 625
Net asset value per linked unit *                                     8.24            8.15            7.03
Net asset value per A linked unit * ^                                 9.41           11.58           10.38
Net asset value per B linked unit *                                   7.72            6.62            5.54

* Net asset value includes total equity attributable to equity holders and linked debentures.
^ 60-day volume weighted average trading price at 31 December 2013, limited to combined net asset value, in accordance with the provisions of the
  Company's Debenture Trust Deed.

Condensed statement of changes in equity
                                                            Unaudited         Audited       Unaudited
                                                           Six months            Year      Six months
                                                                ended           ended           ended
                                                          31 December         30 June     31 December
                                                                 2013            2013            2012
                                                                    R               R               R
Balance at the beginning of the period                    299 781 600     110 482 187     110 482 187
Issue of linked units                                               –         557 027         557 027
Total comprehensive income for the period                  14 094 510     188 742 386      16 232 206
Total stated capital and reserves                         313 876 110     299 781 600     127 271 420

Condensed statement of cash flows
                                                            Unaudited         Audited       Unaudited
                                                           Six months            Year      Six months
                                                                ended           ended           ended
                                                          31 December         30 June     31 December
                                                                 2013            2013            2012
                                                                    R               R               R
Cash flows from operating activities
Cash generated from operations                             88 203 375     141 146 202      71 432 811
Interest income                                               468 312       5 481 377       4 985 478
Interest paid                                            (82 714 443)   (118 799 535)    (49 212 543)
Net cash inflow from operating activities                   5 957 244      27 828 044      27 205 746
Net cash outflow from investing activities              (341 284 850)   (545 116 560)   (540 615 945)
Net cash inflow from financing activities                 338 935 838     518 435 137     517 147 455
Net movement in cash and cash equivalents                   3 608 232       1 146 621       3 737 256
Cash and cash equivalents at the beginning of the year      5 304 334       4 157 713       4 157 713
Cash and cash equivalents at the end of the year            8 912 566       5 304 334       7 894 969

Property portfolio
Synergy's property portfolio currently comprises 15 properties
in South Africa with a total GLA of 198 767m(2) and a market
value of R2.233 billion as at 31 December 2013.

Atlantis was acquired during the interim period ended 31
December 2013. The salient details relating to this acquisition
are as follows:
                                        Effective date of   Latest valuation
Property       Location        GLA m(2)          transfer                  R
Atlantis City   Atlantis,
Shopping Centre Western Cape   22 077    1 September 2013        353 800 000

Atlantis was externally valued at R353.8 million by an
independent valuer, Mills Fitchet Magnus Penny Proprietary
Limited, on the effective date of transfer being 1 September
2013. The balance of the portfolio is carried at the 30 June 2013
valuation plus capital expenditure incurred, the aggregate of
which is considered to be a reasonable approximation of their
value at 31 December 2013.

The acquisition of Atlantis, together with some minor capital
expenditure on the rest of the portfolio, has led to an increase
in Synergy's property portfolio from R1.877 billion at 30 June
2013 to R2.233 billion at 31 December 2013. The recognition of
Atlantis at fair value on acquisition resulted in a fair value gain of
R14.4 million over the purchase consideration.

New developments and upgrades
Synergy is currently in negotiations with a second anchor for the
Ermelo Game Shopping Centre in Ermelo, Mpumalanga which, if
successful, will result in the need to extend the centre. A minor
cosmetic upgrade, which could have a positive impact on vacancies,
is also under investigation at Richdens Village Shopping Centre in
Hillcrest, KwaZulu-Natal. A refurbishment at Ruimsig Shopping
Centre in Roodepoort, Gauteng is planned to begin in March 2014.

Borrowings
Synergy had loan facilities totalling R946 million in place as at
31 December 2013 following the approval of a new R201
million facility from Nedbank Limited to fund the acquisition of
Atlantis. The Company had total borrowings of R910 million
at 31 December 2013, leaving unutilised long-term facilities
of R36 million at this date. At the end of December 2013,
interest rates were hedged on 51% of total borrowings at a
weighted average rate of 9.11% for these facilities. Synergy's
total weighted average cost of borrowings at 31 December
2013 was 8.27%. The Company's loan to value ratio in relation
to its property portfolio at the end of December 2013 was
40.8%.

Following the announcement on 29 January 2014 of a 50
basis point increase in interest rates, Synergy's total weighted
average cost of borrowings has increased to 8.51%.

Prospects
Linked unitholders are referred to the announcement published
on SENS on 29 January 2014 which disclosed that discussions
have commenced in respect of a potential transaction between
Vukile Property Fund Limited and Synergy linked unitholders.
Accordingly, Synergy linked unitholders are advised to continue
to exercise caution when dealing in their linked units until a
further announcement is made.

The Board confirms the guidance previously provided in
Synergy's June 2013 results announcement published on
SENS on 26 August 2013. The forecast full year distributions
for 2014 for Synergy's A linked units are expected to be
86.79 cents per unit. The Board expects Synergy's B linked
unit distributions for 2014 to increase by between 12% and
16% compared to June 2013. This forecast assumes that the
current economic and interest rate environment will remain
stable, no major corporate failures will occur and tenants will
be able to absorb increases in municipal and utility costs.
This forecast information has not been reviewed or reported
on by the Company's independent external auditors, Moore
Stephens BKV Inc.

Payment of interim distributions
Notice is hereby given that the Board has declared an interim
distribution of 42.33550 cents per A linked unit and 27.53609 cents
per B linked unit for the period 1 July 2013 to 31 December
2013 (collectively, "the Interim Distributions"). The issued
linked unit capital at the declaration date comprises
47 352 203 A linked units and 106 352 670 B linked units.

As Synergy has Real Estate Investment Trust ("REIT")
status with the JSE Limited ("JSE"), linked unitholders are
advised that the distributions meet the requirements of a
"qualifying distribution" for the purposes of section 25BB of
the Income Tax Act, No. 58 of 1962 ("Income Tax Act").
The distributions on the linked units will be deemed to be
dividends, for South African tax purposes, in terms of
section 25BB of the Income Tax Act.

The distributions received by or accrued to South African tax
residents must be included in the gross income of such linked
unitholders and will not be exempt from income tax (in terms
of the exclusion to the general dividend exemption, contained
in paragraph (aa) of section 10(1)(k)(i) of the Income Tax Act)
because they are dividends distributed by a REIT. These
distributions are, however, exempt from dividend withholding
tax in the hands of South African tax resident linked unitholders,
provided that the South African resident linked unitholders
provided the following forms to the Central Securities Depository
Participant ("CSDP") or broker, as the case may be, in respect of
uncertificated linked units, or the Company, in respect of
certificated linked units:
   
a) a declaration that the distribution is exempt from
   dividends tax; and
    
b) a written undertaking to inform the CSDP, broker or the
   Company, as the case may be, should the circumstances
   affecting the exemption change or the beneficial owner
   cease to be the beneficial owner,

both in the form prescribed by the Commissioner for the
South African Revenue Service. Linked unitholders are advised
to contact the CSDP, broker or the Company, as the case
may be, to arrange for the abovementioned documents to
be submitted prior to payment of the distribution, if such
documents have not already been submitted.

Distributions received by non-resident linked unitholders will
not be taxable as income and instead will be treated as ordinary
dividends which are exempt from income tax in terms of the
general dividend exemption in section 10(1)(k)(i) of the Income
Tax Act. It should be noted that up to 31 December 2013
distributions received by non-residents from a REIT were not
subject to dividend withholding tax. From 1 January 2014, any
distribution received by a non-resident from a REIT will be
subject to dividend withholding tax at 15%, unless the rate is
reduced in terms of any applicable agreement for the avoidance
of double taxation ("DTA") between South Africa and the
country of residence of the linked unitholder. Assuming
dividend withholding tax will be withheld at a rate of 15%, the
net dividend amount due to non-resident linked unitholders is
35.98518 cents per A linked unit and 23.40568 cents per B linked unit.
A reduced dividend withholding rate, in terms of the applicable
DTA, may only be relied on if the non-resident linked unitholder
has provided the following forms to the CSDP or broker, as the
case may be, in respect of uncertificated linked units, or the
Company, in respect of certificated linked units:
    
a) a declaration that the dividend is subject to a reduced
   rate as a result of the application of a DTA; and
    
b) a written undertaking to inform the CSDP, broker or the
   Company, as the case may be, should the circumstances
   affecting the reduced rate change or the beneficial
   owner cease to be the beneficial owner,

both in the form prescribed by the Commissioner for the South
African Revenue Service. Non-resident linked unitholders are
advised to contact the CSDP, broker or the Company, as the
case may be, to arrange for the abovementioned documents
to be submitted prior to payment of the distribution if such
documents have not already been submitted, if applicable.
The salient dates in relation to the Interim Distributions will
be as follows:
                                                         2014
 Last day to trade cum distribution           Friday, 7 March
 Linked units trade ex distribution          Monday, 10 March
 Record date                                 Friday, 14 March
 Payment date                                Monday, 17 March

Linked unitholders may not dematerialise or rematerialise
their linked units between Monday, 10 March 2014 and Friday,
14 March 2014, both days inclusive.

A linked units in issue at the date of declaration of interim
distribution: 47 352 203

B linked units in issue at the date of declaration of interim
distribution: 106 352 670

Synergy income tax reference number: 9068723171

Preparation and accounting policies
The condensed interim financial statements for the six months
ended 31 December 2013 have been prepared and presented
in accordance with International Financial Reporting Standards,
which include IAS 34 Interim Financial Reporting, the SAICA
Financial Reporting Guides as issued by the Accounting Practices
Board, the JSE Listings Requirements and the requirements of
the Companies Act 71 of 2008.The accounting policies adopted
are consistent with those applied in the prior period.

These interim results have not been audited or reviewed
by the Company's independent external auditors, Moore 
Stephens BKV Inc.

This report was compiled under the supervision of Anton
Raubenheimer CA (SA), the Company's Financial Director.

The Board is not aware of any matters or circumstances arising
subsequent to 31 December 2013 that require any additional
disclosure or adjustment to the interim financial statements
and which are not disclosed in this announcement.

By order of the Board

Synergy Income Fund Limited

Cape Town

20 February 2014


Directors:              M Kuscus* (Chairman), W Brooks (CEO), 
                        A Raubenheimer (FD), U Meyer^, S Segar*, 
                        M Mdlolo*, A Ramsden*, L Mtumtum*   
                        * Independent Non-executive ^ Non-executive                                                                            
                        U Meyer retired as an Executive Director
                        effective 1 August 2013.                                                      
                        A Raubenheimer was appointed as the new 
                        Financial Director effective 1 August 2013.                                    
Registered office:      3rd Floor, 200 on Main, 
                        Cnr Main and Bowwood Roads, 
                        Claremont, 7708                                                    
Transfer secretaries:   Computershare Investor Services Proprietary Limited                                                                    
Sponsor:                Java Capital                                                                                                           
Company secretary:      Probity Business Services Proprietary Limited                                                                          


SYNERGY INCOME FUND LIMITED
3rd Floor, 200 on Main, Cnr Main and Bowwood Roads, Claremont, 7708. Postnet Suite I, Private Bag X1005, Claremont, 7735

www.synergyincomefund.com

Date: 20/02/2014 04:47:00 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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