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TOWER PROPERTY FUND LIMITED - Provisional annual results for the year ended 31 May 2014

Release Date: 24/07/2014 08:00
Code(s): TWR     PDF:  
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Provisional annual results for the year ended 31 May 2014

Tower Property Fund Limited
(formerly Reftin 1004 Proprietary Limited)
(Incorporated in the Republic of South Africa)
(Registration number 2012/066457/06)
JSE share code: TWR
ISIN: ZAE000179040
(Approved as a REIT by the JSE)
("Tower" or "the fund" or "the group")

PROVISIONAL ANNUAL RESULTS
for the year ended
31 May 2014

- Maiden annual distribution of 74.6
  cents exceeds pre-listing forecast
- Distributable earnings of R96.8 million
- Portfolio value increased by 25% to
  R2.06 billion*
- Portfolio vacancies reduced by 19%**
- Net asset value increased from R8.75
  to R9.07*
- Loan to value reduced to 37%
- Fixed debt increased to 72%
- Succesful greening programme
  at Cape Quarter

PROFILE
Tower Property Fund became South
Africa's first new real estate investment
trust ("REIT") to list when the group made
its debut on the JSE Limited in July 2013.
The fund owns a diversified portfolio of 31
commercial and retail properties valued at
R2.06 billion, located mainly in the Western
Cape (51% by value) and Gauteng (42% by
value). Tower is committed to a ‘greening'
strategy to increase the competitiveness
and values of buildings in its portfolio.

* As compared to the PLS
** As compared to Interum Period 30 Nov 2013

- Basis of preparation
The reviewed financial results are prepared in
accordance with the framework concepts, the
measurement and recognition requirements of
IFRS and the SAICA Financial Reporting Guides as
issued by the Accounting Practices Committee or its
successor and the requirements of the Companies Act
of South Africa and the JSE Listings Requirements.
The reviewed financial results contain, as a minimum,
the information required by IAS 34: Interim Financial
Reporting, and the accounting policies adopted
and methods of computation are in accordance
with International Financial Reporting Standards
("IFRS") and are consistent with those adopted in the
Pre Listing Statement ("PLS") and applied where
applicable in the financial statements for the year
ended 31 May 2013.

The following standard has been applied for the first
time as it became effective during the current period:
- IFRS13 - Fair value measurement

The adoption of the above standard has not had a
significant impact on the reviewed financial results.
These financial results were prepared under the
supervision of Mr F Jenkings CA (SA), in his capacity as
group Chief Financial Officer.

These financial results have been reviewed by the
group's auditors, Mazars. The review was conducted in
accordance with ISRE2410 "Review of Interim Financial
Information Performed by the Independent Auditor of
the Entity". Their unqualified review opinion is available
for inspection at the company's registered office.

Fair value of financial instruments recognised in the
statement of financial position.

The group measures fair values using the fair value
hierarchy that reflects the significance of the inputs
used in making the measurements.
- Level 1: Quoted prices (unadjusted) in an active
  market for an identical instrument.
- Level 2: Valuation techniques based on observable
  inputs, either directly (i.e. as prices) or indirectly
  (i.e. derived from prices). This category includes
  instruments valued using: quoted market prices in
  active markets for similar instruments; quoted prices
  for identical or similar instruments in markets that
  are considered less than active; or other valuation
  techniques where all significant inputs are directly or
  indirectly observable from market data.
- Level 3: Valuation techniques using significant
  unobservable inputs. This category includes all
  instruments where the valuation technique includes
  inputs not based on observable data and the
  unobservable inputs have a significant effect on the
  instrument's valuation. This category also includes
  instruments that are valued based on quoted
  prices for similar instruments where significant
  unobservable adjustments or assumptions are required 
  to reflect differences between the instruments.

The valuation of interest rate swaps uses only
observable market data and requires little management
judgement and estimation. The availability of
observable market prices and model inputs reduces
the need for management judgement and estimation
and also reduces the uncertainty associated with the
determination of fair values. The interest rate swaps
are valued using the mark-to-market valuations,
excluding transactions costs,. Interest rate swaps are
classified as level 2 financial instruments and the fair
value of interest rate swap assets at 31 May 2014 is
equal to R1 441 787.22

Current swaps entered into:

End                               Effective rate              Notional
Amount
20 July 2015                      6.04%                       R344 million
2 April 2017                      7.41%                       R126 million
6 April 2017                      7.20%                       R130 million

Dividend distribution
Notice is hereby given that dividend number 2 of 41.6 cents per share has been declared in
respect of the 6 months ended 31 May 2014. In accordance with Tower's status as a REIT,
shareholders are advised that the distribution meets the requirements of a "qualifying
distribution" for the purposes of section 25BB of the Income Tax Act No. 58 of 1962 ("Income
Tax Act").

Accordingly the dividend distribution received by South African tax residents must be included
in their gross income and will not be exempt in terms of the ordinary dividend exemption in
section 10(1)(k)(i) of the Income Tax Act No. 58 of 1962 ("the Act") as a result of paragraph (aa)
of the proviso thereto which provides that dividends distributed by a REIT are not exempt from
income tax.

The dividends received by South African tax residents will, however, be exempt from dividend
withholding tax provided that the shareholder has provided the following forms to their
Central Securities Depository Participant ("CSDP") or broker, as the case may be in respect of
uncertificated shares or the company, in respect of certificated shares:
 a) a declaration that the distribution is exempt from dividends tax; and
 b) a written undertaking to inform their CSDP or broker, 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.
 South African tax resident shareholders are advised to contact their CSDP or broker, 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.

The dividend distribution received by non-resident shareholders will be exempt from income
tax in terms of section 10(1)(k)(i) of the Act, but will be subject to dividend withholding tax.
Dividend withholding tax is levied at a rate of 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 non-resident shareholder.

Assuming that dividend withholding tax will be withheld at a rate of 15%, the net dividend
amount due to non-resident shareholders is 35.36 cents per share. A reduced dividend
withholding rate in terms of the applicable DTA may only be relied on if the non-resident
shareholder has provided the following forms to their CSDP or broker, as the case may be in
respect of uncertificated shares or the company, in respect of certificated shares:

  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 or broker, 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 shareholders are advised to contact their CSDP or broker, as the case may be,
  to arrange for the abovementioned documents to be submitted prior to the payment of the
  distribution if such documents have not already been submitted.

Both resident and non-resident shareholders are encouraged to consult their professional
advisors should they be in any doubt as to the appropriate action to take.

The dividend is payable to Tower shareholders in accordance with the timetable set out below:

2014
Last day to trade cum dividend distribution          Friday, 8 August
Shares trade ex dividend distribution               Monday, 11 August
Record date                                         Friday, 15 August
Payment date                                        Monday, 18 August

Share certificates may not be dematerialised or rematerialised between Monday,
11 August 2014 and Friday, 15 August 2014, both days inclusive.

Shares in issue at date of declaration: 137 214 674.
Tower income tax reference number: 9607/564/16/9

By order of the Board
Tower Property Fund Limited
24 July 2014

- Strategy
  Tower aims to generate competitive investment performance
  by adding value through property asset management and
  the cost-effective greening of properties in the portfolio. This
  results in lower operational expenditure and increased tenant
  retention. Tower aims to continue to expand its portfolio through
  management's network of contacts throughout South Africa.

  The investment strategy is to expand the portfolio by targeting
  mainly medium-sized (R30 million to R200 million) properties
  and to ensure a diversified sectoral and geographic portfolio.

- Financial and operating                      
  performance
  Tower performed strongly in its first
  year of operation, generating revenue of
  R191.3 million and operating profit of
  R161.3 million for the 12 months ended
  31 May 2014 ("the period").

  Distributable earnings totalled R96.8
  million. The directors declared a final
  distribution of 41.6 cents per share,
  bringing the total distribution for the
  period to 74.6 cents. This exceeds the
  fund's pre-listing forecast of 71.7 cents.   
  During the six month period following
  the initial interim period 23 760 993 new
  shares were issued by the company.
  6 150 930 shares were issued to vendors
  for the purchase of new properties and
  17 610 063 shares were issued for cash.

  The market capitalisation of the group
  has grown by 18% since listing to
  R1.164 million at 31 May 2014. The results
  represent an annualised historic income
  return to investors of 9.6%, outperforming
  the listed property sector.
  
  The fund's net asset value grew by 4% (as
  it appeared in the PLS) in the period to
  R9.07 per share.
                                                 
  A strategy of active asset management
  since the launch of the fund has resulted
  in expense reduction through contractor
  management and greening initiatives.
  
  Cape Quarter, the flagship property in
  the portfolio located in Green Point, Cape
  Town, is now effectively fully let following
  an innovative marketing campaign which
  has been successful in driving foot traffic
  and attracting national and international
  tenants. Parking revenue has shown             
  a significant increase. Tenants have
  generally reported increased turnovers
  and Tower has engaged architects to
  address concerns with the centre's
  navigability as well as seeking to create
  new lettable areas within the property.
  
  Management has focused intensely on
  attracting long-term tenants to reduce
  vacancies across the portfolio and has
  been successful in letting over 24 000m²,
  including 11 000m² of new space and
  13 000m² of renewable space.
  
  The level of vacancies in the portfolio
  reduced to 9.3% at year end (from 11.5% as
  at 30 November 2013) and had reduced to
  8.2% by the date of this report.

- Property acquisitions
  In the past six months the fund acquired
  properties totaling R329 million,
  contributing to the increase in the
  value of the portfolio to R2.06 billion.
 
  These properties are the De Ville Shopping
  Centre (Durbanville) for R226 million,
  Clifton Place office building (Durban) for
  R81 million and 19 Section Street, an
  industrial property in Paarden Eiland,
  Cape Town for R22 million.
 
- Portfolio greening
  The lighting retrofit programme completed
  at the Cape Quarter has resulted in an
  estimated annual saving of R1 million
  in operating costs. This programme is
  expected to reduce kilowatt hours and
  carbon emissions by 69%.
 
  The focus of the fund's greening strategy
  is on improving energy efficiency which
  serves to reduce operating costs and lower
  carbon footprints to make properties more
  valuable and marketable to prospective
  tenants. The reduced demand for energy
  also mitigates against inevitable electricity
  tariff hikes. Management views the
  "greening" of its properties as a proactive
  rather than defensive strategy.

- Borrowings
  Tower has loan facilities with Investec
  Bank, Standard Bank and Nedbank
  totaling R843 million at year end. Interest
  rates are hedged on 72% of the total loan
  facility and the weighted average rate of
  interest is 8.3% for the portfolio. Based
  on investment properties valued at
  R2.06 billion, the loan to value ("LTV") ratio
  of the fund was 37.3% at year end. The
  fund has a targeted LTV of 40%.
 
- Prospects
  Management will continue to enhance
  the portfolio and investor returns through
  careful cost control of its existing portfolio
  and the continued roll out of greening
  initiatives. Well located, quality properties
  will be sourced to strengthen the portfolio
  and reduce risk to particular properties.
 
  Over R1 billion of new acquisitions are
  being negotiated and management is
  currently undertaking extensive due
  diligence on these properties.
 
  Refurbishment opportunities within the
  portfolio will be examined as will the
  pipeline of development opportunities
  which are becoming apparent.

Sectoral profile by value
Retail 35.1%
Office 63.7%
Other 1.2%

Geographic profile by value
Gauteng 42.1%
Western Cape 51.4%
KwaZulu-Natal 6.5%

Statement of comprehensive income 

                                               Reviewed year ended
                                                       31 May 2014   
                                                             R'000   
Revenue                                                              
Contractual rental income                                  174 168   
Straight line rental income accrual                         17 102   
                                                           191 270   
Net property operating expenses                           (19 785)   
Net property income                                        171 485   
Administration expenses                                   (10 223)   
Net operating profit                                       161 262   
Fair value adjustments on investment properties           (11 740)   
Fair value adjustments on interest rate swaps              (1 442)   
Profit from operations                                     148 080   
Finance costs                                             (53 456)   
Investment income                                            3 497   
Capital raising expenses                                  (11 487)   
Profit before taxation                                      86 634   
Taxation                                                         0   
Total comprehensive loss for the period                     86 634   
Basic and diluted earnings per share - weighted average
shares in issue (cents)                                         82   
 
Statement of financial position

Assets                                        
Non-current assets                                   2 060 847   
Investment properties                                2 043 745   
Straight line rental accrual                            17 102   
Current assets                                          75 052   
Trade and other receivables                             36 881   
Cash and cash equivalents                               38 171   
Total assets                                         2 135 899   
Equity and liabilities                                           
Equity                                               1 240 830   
Stated capital                                       1 251 034   
Retained income                                       (10 204)   
Liabilities                                                      
Non-current liabilities                                          
Secured financial liabilities                          769 518   
Current liabilities                                    125 551   
Trade and other payables                                68 634   
Shareholders for dividend                               56 917   
Total equity and liabilities                         2 135 899   
Shares in issue (000)                                  136 853   
NAV per share (cents)                                      907   

Statement of cash flows                                          
Cash generated from operations                         124 505   
Interest received                                        3 497   
Finance costs                                         (53 456)   
Net cash from operating activities                      74 546   
Acquisition of investment property                 (1 229 751)   
Net cash from investing activities                 (1 229 751)   
Proceeds from issue of shares                          440 000   
Capital raising expenses                              (16 142)   
Proceeds from secured financial liabilities            769 518   
Net cash from financing activities                   1 193 376   
Net movement in cash and cash equivalents               38 171   
Cash and cash equivalents at beginning of period             0   
Cash and cash equivalents at end of period              38 171   

"Total distribution of 74.6 cents
exceeds pre-listing forecast"

Statement of changes in equity
                                                          Stated    Retained
                                                         Capital      Income        Total
                                                           R'000       R'000        R'000

Balance at 1 March 2012                                                                 0
Issue of 845 000 shares                                        8                        8
Loss for the period ended 31 May 2013                                    (1)          (1)
Balance at 31 May 2013                                         8         (1)            7
Issue of 42 031 330 shares effective 1 June 2013         420 313                  420 313
Issue of 36 348 892 shares effective 19 July 2013        318 661                  318 661
Issue of 15 613 052 shares effective 15 August 2013      156 131                  156 131
Issue of 14 770 615 shares effective 27 August 2013      147 706                  147 706
Issue of 2 333 589 shares effective 1 September 2013      23 336                   23 336
Issue of 1 149 425 shares effective 31 October 2013       10 000                   10 000
Issue of 1 303 960 shares effective 24 December 2013      10 771                   10 771
Issue of 17 610 063 shares effective 10 March 2014       140 000                  140 000
Issue of 4 846 970 shares effective 15 April 2014         40 250                   40 250
Capital raising expenses                                (16 142)                 (16 142)
Total comprehensive income for the period                             86 634       86 634
Dividend paid and proposed                                          (96 837)     (96 837)
Balance at 31 May 2013                                 1 251 034    (10 204)    1 240 830

Calculation of headline earnings and distributable earnings
reconciliation

Total comprehensive income for the period                          86 634
Adjusted for: 
Change in fair value of investment properties                      11 740
Change in fair value of interest rate swaps                         1 442
Headline earnings                                                  99 816
Adjusted for:
Straight line rental income accrual                              (17 102)
Distributable profit                                               82 714
Adjusted for:
Capital raising expenses                                           11 487
Amortisation of debt raising fees                                   2 640
Distributable earnings                                             96 841

Basic and diluted earnings per share - weighted average
shares in issue (cents)                                              82,0

Basic and diluted headline earnings per share - weighted
average shares in issue (cents)                                      94,4
Distributable earnings per share - weighted average shares
in issue (cents)                                                     91,6
Dividend per share (cents)                                           74,6

Weighted average number of shares in issue                    105 709 677
Number of shares in issue at period end                       136 852 996

Segmental analysis
                                                        Retail       Office   Industrial        Total
                                                         R'000        R'000        R'000        R'000
Property assets                                        557 355    1 478 492       25 000    2 060 847
Segment liabilities                                    245 705      512 023       11 790      769 518

Revenue (excluding straight line lease adjustments)     47 302      125 856        1 010      174 168
Net operating costs                                    (5 480)     (14 229)         (76)     (19 785)
Segment profit                                          41 822      111 627          934      154 383
Straight line lease adjustment                                                                 17 102
Non property related expenses                                                                (10 223)
Net operating profit                                                                          161 262

Notes:
1) No comparative figures are disclosed as this is the
   company's first period of operation. It was dormant in
   the prior year
2) Related party transactions included:
   Asset management fees paid to Tower Asset Managers
   Proprietary Limited (R'000)                                                     8 353
   Property management fees paid to Spire Property                       
   Management Proprietary Limited (R'000)                                          6 400
                    
Registered address                    2nd Floor, Spire House, Tannery Park, 23 Belmont Road,
                                      Rondebosch, 7700 (PO Box 155, Rondebosch, 7701)
Contact details                       +27 (0)21 685 4020 / info@towerpropertyfund.co.za
Company secretary                     Ovland Management Services Proprietary Limited
Auditors                              Mazars Inc
Sponsor                               Java Capital
Transfer secretaries                  Link Market Services South Africa Proprietary Limited

Directors                             A Dalling* (Chairman), M Edwards (Chief Executive Officer),
                                      J Bester*, K Craddock, M Evans*, F Jenkings
                                      (Chief Financial Officer), B Kerswill, A Magwentshu*,
                                      N Milne*, R Naidoo*
                                      * non-executive directors

www.towerpropertyfund.co.za
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