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Summarised audited financial statements for the year ended 30 June 2014 and renewal of cautionary announcement
SYNERGY INCOME FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2007/032604/06)
JSE share code: "SGA" ISIN ZAE000161550
JSE share code: "SGB" ISIN ZAE000162293
(Approved as a REIT by the JSE)
SUMMARISED AUDITED
FINANCIAL STATEMENTS
for the year ended 30 June 2014 and
renewal of cautionary announcement
www.synergyincomefund.com
Highlights Year on year
- Revenue of R303 million Increased 26%
- Distributable income of R102 million Increased 9%
- Distributions to A linked unitholders of 86.79 cents per unit Increased 5%
- Distributions to B linked unitholders of 57.57 cents per unit Increased 12%
- NAV per combined linked unit of R9.43 at 30 June 2014 Increased 16%
- Investment property valued at R2.422 billion Increased 29%
- Market capitalisation of R1.313 billion Increased R52 million
COMMENTARY
Profile
Synergy Income Fund Limited ("Synergy" or "the Fund") is a specialised
retail property fund with a specific focus on medium-sized community
and small regional shopping centres located in high-growth rural
and township nodes. Synergy was listed on the Johannesburg Stock
Exchange ("JSE") on 14 December 2011 with an initial portfolio of
three small shopping centres valued at approximately R280 million.
Since listing, Synergy has grown its property portfolio to 15 shopping
centres valued at approximately R2.4 billion. Key shopping centres in
the Synergy portfolio include Gugulethu Square Shopping Centre
in Gugulethu, Western Cape ("Gugulethu Square") (25 322 m2),
King Senzangakhona Shopping Centre in Ulundi, KwaZulu-Natal
(22 325 m2), Atlantis City Shopping Centre in Atlantis, Western
Cape ("Atlantis") (22 112 m2), Setsing Crescent Shopping Centre in
Phuthaditjhaba, Free State (21 542 m2), and Highland Mews Shopping
Centre in Witbank, Mpumalanga ("Highland Mews") (17 032 m2).
Synergy is externally managed by Capital Land Asset Management
(Pty) Ltd.
Synergy has separately listed A and B linked units, each offering
investors a different risk and reward profile. The A linked units have
a preferential entitlement to distributions that escalate at 5% annually
until 30 June 2017 and thereafter at the lower of 5% or CPI. The
remaining distributable income, after payment of distributions to
A linked unitholders, accrues to B linked unitholders. At 30 June
2014 there were 47.4 million A linked units in issue and 106.4 million
B linked units in issue.
Financial results
Despite a continued challenging operating environment the Fund
has grown revenue by 26% to R303 million and distributable income
is up 9% to R102 million. This growth is attributable to the effect of
acquisitions included for the full financial year as well as improved
portfolio performance.
The board of directors of Synergy ("the Board") is pleased to announce
a distribution of 44.45 cents per A linked unit and 30.03 cents per
B linked unit for the six months ended 30 June 2014. Combined with
the interim distribution of 42.34 cents per A linked unit and 27.54 cents
per B linked unit, this gives an annual distribution of 86.79 cents per
A linked unit and 57.57 cents per B linked unit. The distribution to
B linked unitholders represents a 12% growth on distributions for the
comparable period and is in line with the forecast communicated to
investors on SENS on 20 February 2014.
At 30 June 2014, Synergy's property portfolio ("the portfolio")
comprised 15 shopping centres with a total market value of
R2.422 billion. Atlantis was acquired with effect from 1 September
2013. The recognition of investment property at fair value at 30 June
2014 resulted in a fair value gain of R196 million in the current
financial year. The net asset value ("NAV") per combined linked
unit has increased by 15.7% to R9.43 at 30 June 2014, following the
revaluation of investment properties.
No new linked units were issued during the year under review. The
combined market capitalisation at 30 June 2014 increased by 4.1% in
comparison to the prior year.
Borrowings
Synergy had total borrowings of R911 million (before amortised debt
raising costs) at 30 June 2014 with available loan facilities totalling R946
million. The resultant loan to value ratio of the portfolio at the end of
June 2014 was 37.6%. Synergy's interest rates were hedged on 51% of
total borrowings at a weighted average rate of 8.99%, while its weighted
average cost of borrowings was 8.48% at 30 June 2014.
Synergy has recently negotiated improved lending margins with
current loan facility providers. As a consequence, with effect from
July 2014, the weighted average cost of borrowings has reduced to
8.32% with a weighted average cost of fixed debt funding of 8.76%.
The total fixed portion of borrowings remains unchanged.
Property portfolio
Since Synergy listed on the JSE in December 2011, the value creation
and growth in the portfolio has been driven by acquisitions and direct
active management to deliver strong performance to investors. The
cumulative fair value gain on the portfolio, since listing, amounts to
R509 million.
Synergy's property portfolio is geographically diverse with shopping
centres situated in Gauteng, KwaZulu-Natal, North West, Western
Cape, Limpopo, Mpumalanga and the Free State, as illustrated
graphically below. Most of the Synergy shopping centres are located
in township and rural locations targeting the high growth mass
consumer market in South Africa.
Gauteng 12%
KwaZulu-Natal 25%
North West 6%
Western Cape 26%
Limpopo 9%
Mpumalanga 11%
Free State 11%
Redevelopments and upgrades
Over the past year Synergy's strategy has been inwardly focused on
value enhancing redevelopments and upgrades to existing centres in
the portfolio.
Upgrades executed during the 2014 financial year include Gugulethu
Square, Highland Mews and Sediba Shopping Centre in Hartbeespoort,
North West ("Sediba"). A R10 million redevelopment of Ruimsig
Shopping Centre in Roodepoort, Gauteng, is scheduled to be
completed during September 2014. The purpose of this redevelopment
is to strengthen the positioning of the centre as a dominant convenience
retail offering in the competitive Roodepoort node.
The upgrade of Phase 3 at Richdens Village Shopping Centre in Hillcrest,
KwaZulu-Natal is currently underway with final completion scheduled
for November 2014. This upgrade will enhance the quality of the retail
and office components of the centre. Synergy has also recently acquired
a property which is situated adjacent to the Ermelo Game Shopping
Centre in Ermelo, Mpumalanga, which is expected to transfer to Synergy
during September 2014. This property is strategic to the proposed
redevelopment plan for this site. The Fund has a further R10 million of
capital expenditure projects planned for 2015 aimed at improving quality,
lettability and operational efficiencies across the portfolio.
Operational performance
The further improvement of operational efficiencies has been a key area
of focus in the year under review. Direct management of operations has
delivered strong financial performance and created efficiencies to drive
distribution growth going forward. Specific focus has been on utilities
management. Recoveries and utility expenses across the portfolio have
been analysed with a view to improving utility recovery ratios.
Leasing performance in the 2014 financial year has been driven by the
direct active management strategy adopted across the portfolio.
National tenant relationships have been embedded and further
improvement in the overall quality of the tenant mix across the portfolio
has been achieved. The ratio of national tenants in the portfolio has
increased from 86% in June 2013 to 89% at 30 June 2014. A tenant
retention ratio of 71% was achieved during the period under review,
partially due to optimisation of the tenant mix across the portfolio.
At 30 June 2014, retail vacancies were 4% of retail gross lettable area
("GLA") compared to 3.3% in the prior year. This increase in the
vacancy ratio is primarily attributable to an increase in vacancies at
Sediba which has been negatively impacted by the prolonged platinum
strikes. Vacant premises are being actively marketed and the retail
vacancy ratio across the portfolio has since been reduced to 3.5%.
Atlantis, which has a current retail vacancy of 7.5%, 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 4.5%.
The weighted average lease expiry for the Synergy retail portfolio at
30 June 2014 was 3.2 years. In the June 2015 financial year 21.5% of
leases (by lettable area) are due to expire. Renewals have already
been signed for a large proportion of expiring leases and as such the
aforementioned figure is reduced to 15.7% and the weighted average
lease expiry extended to 3.5 years. The 30 June 2014 lease expiry
profile is illustrated graphically below. The vacancy figure of 4.9%
below includes Atlantis.
Vacant 4.9%
Monthly 2.8%
June 2015 21.5%
June 2016 17.5%
June 2017 14.6%
June 2018 12.1%
June 2019 13.1%
June 2020 onwards 13.5%
Conversion to a Real Estate Investment Trust ("REIT")
Following the introduction of REIT legislation in South Africa, Synergy
converted to a REIT with effect from 1 July 2013. The capital
restructure, whereby the A and B linked units will be converted to an
all equity capital structure, will be implemented in due course to
ensure compliance with REIT legislation.
Directorate
Mandy Ramsden ("Mandy") resigned from the Board with effect from
1 August 2014. The Board wishes to acknowledge the significant role
that Mandy has played in the achievement of the strategic growth
objectives of Synergy and wishes to extend its gratitude to Mandy for
her valuable contribution as an independent non-executive director
and Chairman of the Audit and Risk Committee of the Fund. The
appointment of the new chairman of the Audit and Risk Committee will
be announced in due course.
Social responsibility initiatives ("SRI")
The strategy and operations of Synergy are directed at building a sustainable
business, and the Fund is mindful of its strategy's short- and long-term
impacts on the economy, society and the environment. A number of SRI
initiatives have been implemented during the year under review which
include a bursary programme, academic prize sponsorships, a computer
literacy project, an internship programme and a rural education initiative.
These initiatives are primarily focused on education, sport and community
upliftment and have been implemented within various communities situated
in close proximity to a number of centres within the portfolio.
Prospects
Synergy continues to operate in a challenging macro-economic and
social environment which has been characterised by subdued economic
growth, rising inflation and interest rates, high unemployment, overly
indebted consumers and reduced consumer spending. Robust
distribution growth has been achieved despite this tough operating
environment. A significant part of Synergy's distribution growth over
the past three years can be attributed to acquisitive growth and the
successful implementation of value enhancing acquisitions.
The distributions for 2015 for Synergy's A linked units are expected to be
91.13 cents per unit.The Board expects B linked unit distributions for 2015
to increase by approximately 6% compared to 2014, in line with the South
African listed sector average. The forecast is based on the assumption that
a stable macro-economic environment will prevail, no major corporate
failures will occur and tenants will be able to absorb the recovery of rising
utility costs. The forecast further assumes that the prime interest rate will
increase by approximately 1% by the end of the financial year and does
not include advisory costs in relation to any potential corporate action.
Budgeted rental income is based on contractual escalations and market-
related renewals. The forecast does not include any rental adjustments
which may occur due to African Bank Investments Limited's ("ABIL") wholly
owned subsidiary, Ellerine Furnishers (Pty) Ltd going into business rescue.
Synergy's total exposure to ABIL is 2.4% of monthly income and 1.65% of
GLA. The forecast information has not been reported on by the Fund's
independent external auditors, Moore Stephens BKV Inc.
Synergy would like to take this opportunity to thank its investors for
the instrumental role which they have played in supporting Synergy's
growth since the listing of the Fund in December 2011. In order to
further Synergy's strategic growth objectives, the Fund will be relying on
the continued support of its unitholders in raising the necessary equity
funding to finance future acquisitions.
Potential corporate action and renewal of cautionary
announcement
As communicated in a number of cautionary announcements through
the course of this calendar year, Synergy remains in discussion with
Vukile Property Fund Limited ("Vukile"), its largest unitholder, regarding
a potential transaction between Vukile and Synergy unitholders.
An independent sub-committee of the Board has been established to
facilitate these discussions, evaluate the outcome thereof in relation to
their impact on Synergy unitholders and make the requisite
recommendations, to the extent necessary, at the appropriate time and
in the appropriate forum and format. Synergy unitholders will be
notified without delay at the conclusion of these discussions as to their
outcome and are accordingly advised to continue to exercise caution
when dealing in their linked units.
Payment of final distributions
Notice is hereby given that the Board has declared final distributions of
44.45 cents per A linked unit and 30.03 cents per B linked unit for the six
months ended 30 June 2014.The issued linked unit capital at the declaration
date comprises 47 352 203 A linked units and 106 352 670 B linked units.
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 Fund, 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 Fund, 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 Fund, 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 37.78250 cents per A linked unit and
25.52550 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 Fund, in respect of certificated linked units:
a) a declaration that the distribution 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 Fund, 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 Fund, 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 for the final distributions will be as follows:
2014
Last day to trade cum distribution Friday, 12 September
Linked units trade ex distribution Monday, 15 September
Record date Friday, 19 September
Payment date Monday, 22 September
Linked unitholders may not dematerialise or rematerialise their linked
units between Monday, 15 September 2014 and Friday, 19 September
2014, both days inclusive.
A linked units in issue at the date of declaration of final distribution:
47 352 203
B linked units in issue at the date of declaration of final distribution:
106 352 670
Synergy income tax reference number: 9068723171
Preparation, accounting policies and audit opinion
The summarised audited financial statements for the year ended
30 June 2014 have been prepared in accordance with International
Financial Reporting Standards and presented in accordance with the
minimum content, including disclosures, prescribed by IAS 34 applied
to year-end reporting, the SAICA Financial Reporting Guides as
issued by the Accounting Practices Board, the JSE Listings
Requirements and the requirements of the South African Companies
Act, 2008. The summarised audited financial statements for the year
ended 30 June 2014 are prepared on a going concern basis and
Synergy's accounting policies have been applied consistently to all
periods presented. The summarised audited financial statements for
the year ended 30 June 2014, which comprise the statement of
financial position at 30 June 2014 and the statement of comprehensive
income, statement of changes in equity and statement of cash flows
for the year then ended, have been audited by Moore Stephens BKV
Inc., and their unmodified audit report is available for inspection at the
Fund's registered office situated at 3rd Floor, 200 on Main, Corner of
Main and Bowwood Roads, Claremont.
This report was compiled under the supervision of Anton Raubenheimer
CA (SA), the financial director of the Fund.
The directors are not aware of any matters or circumstances arising
subsequent to 30 June 2014 that require any additional disclosure or
adjustment to the financial statements and which are not disclosed in
this announcement.
By order of the Board
Synergy Income Fund Limited
Cape Town
28 August 2014
Condensed statement of comprehensive income
Audited Audited
Year ended Year ended
30 June 30 June
2014 2013
R R
REVENUE
Property portfolio 303 670 446 253 366 497
Recoveries and contractual rental revenue 303 110 814 240 010 489
Straight-line rental income accrual 559 632 13 356 008
Rental revenue 303 670 446 253 366 497
Property operating costs (115 265 004) (90 732 526)
Administration costs (14 300 693) (12 875 626)
Net operating profit 174 104 749 149 758 345
Fair value adjustments 196 752 927 149 862 250
Changes in fair value of investment property 195 581 887 160 657 440
Adjustment resulting from straight-lining of rental revenue (559 632) (13 356 008)
Changes in fair value of swaps 1 730 672 2 560 818
Profit from operations 370 857 676 299 620 595
Non-recurring capital raising expenses – (2 500 954)
Net finance expense (71 817 556) (43 110 632)
Finance income 939 113 1 597 227
Finance costs (72 162 200) (48 096 897)
Interest received on linked units issued cum distribution – 3 884 150
Amortisation of loan raising costs (594 469) (495 112)
Profit before debenture interest and taxation 299 040 120 254 009 009
Debenture interest (102 322 030) (93 786 818)
Profit before taxation 196 718 090 160 222 191
Taxation (294 339) 28 520 195
Profit for the year attributable to Synergy shareholders 196 423 751 188 742 386
Total comprehensive income for the year 196 423 751 188 742 386
Reconciliation of earnings, headline earnings and distributable earnings
Profit for the year attributable to Synergy shareholders 196 423 751 188 742 386
Debenture interest 102 322 030 93 786 818
Basic earnings attributable to linked unitholders 298 745 781 282 529 204
Changes in fair value of investment properties (net of deferred taxation) (195 022 255) (176 299 168)
Changes in fair value of investment properties (195 022 255) (147 301 432)
Deferred taxation – (28 997 736)
Headline profit attributable to linked unitholders 103 723 526 106 230 036
Non-recurring capital raising expenses – 2 500 954
Amortisation of loan raising costs 594 469 495 112
Straight-line rental income accrual (559 632) (13 356 008)
Changes in fair value of swaps (net of deferred taxation) (1 436 333) (2 083 276)
Changes in fair value of swaps (1 730 672) (2 560 818)
Deferred taxation 294 339 477 542
Distributable earnings 102 322 030 93 786 818
Distribution for the year 102 322 030 93 786 818
Distributed to A linked units 20 046 792 19 092 408
Distributed to B linked units 29 285 367 26 322 286
To be distributed to A linked units* 21 049 120 20 048 923
To be distributed to B linked units* 31 940 751 28 323 201
Total distributions 102 322 030 93 786 818
Actual number of A linked units in issue 47 352 203 47 352 203
Actual number of B linked units in issue 106 352 670 106 352 670
Weighted number of A linked units in issue 47 352 203 44 705 871
Weighted number of B linked units in issue 106 352 670 102 436 772
Earnings per A share (cents) 127.79 128.27
Earnings per A linked unit (cents) 214.58 215.82
Earnings per B share (cents) 127.79 128.27
Earnings per B linked unit (cents) 185.36 181.62
Headline earnings per A share (cents) 0.91 8.46
Headline earnings per A linked unit (cents) 87.70 96.01
Headline earnings per B share (cents) 0.91 8.46
Headline earnings per B linked unit (cents) 58.48 61.80
Distribution per A linked unit paid (cents) 42.34 40.32
Distribution per A linked unit payable (cents)* 44.45 42.34
Distribution per B linked unit paid (cents) 27.54 24.75
Distribution per B linked unit payable (cents)* 30.03 26.63
*This amount will be distributed on 22 September 2014.
The Fund has no dilutionary instruments in issue.
Condensed statement of financial position
Audited Audited
as at as at
30 June 30 June
2014 2013
R R
ASSETS
Non-current assets 2 422 321 660 1 877 453 361
Investment properties and related receivables 2 422 100 000 1 877 074 000
Investment properties 2 403 467 243 1 859 000 875
Straight-line rental income accrual 18 632 757 18 073 125
Derivative financial instruments 136 638 –
Deferred taxation 85 022 379 361
Current assets 25 546 233 29 293 927
Trade and other receivables 21 324 146 23 989 593
Cash and cash equivalents 4 222 087 5 304 334
Total assets 2 447 867 893 1 906 747 288
EQUITY AND LIABILITIES
Stated capital and reserves 496 205 351 299 781 600
Stated capital 1 537 049 1 537 049
Reserves 494 668 302 298 244 551
Non-current liabilities 1 862 455 261 1 525 892 224
Debenture capital 952 971 381 952 971 381
Interest-bearing liabilities 909 043 591 570 886 520
Derivative financial instruments 440 289 2 034 323
Current liabilities 89 207 281 81 073 464
Trade and other payables 36 217 410 32 701 340
Debenture interest payable 52 989 871 48 372 124
Total equity and liabilities 2 447 867 893 1 906 747 288
Net asset value per linked unit * 9.43 8.15
Net asset value per A linked unit * ^ 10.99 11.58
Net asset value per B linked unit * 8.73 6.62
* Net asset value includes total equity attributable to equity holders and linked debentures.
^ 60-day volume weighted average trading price at 30 June 2014, limited to combined net asset value,
in accordance with the provisions of the Fund's debenture trust deed.
Condensed statement of changes in equity
Audited Audited
Year ended Year ended
30 June 30 June
2014 2013
R R
Balance at the beginning of the year 299 781 600 110 482 187
Issue of linked units – 557 027
Total comprehensive income for the year 196 423 751 188 742 386
Total stated capital and reserves 496 205 351 299 781 600
Condensed statement of cash flows
Audited Audited
Year ended Year ended
30 June 30 June
2014 2013
R R
Cash flows from operating activities
Cash generated from operations 179 726 634 141 146 202
Interest income 939 113 5 481 377
Interest paid (169 866 483) (118 799 535)
Net cash inflow from operating activities 10 799 264 27 828 044
Net cash outflow from investing activities (349 444 113) (545 116 560)
Net cash inflow from financing activities 337 562 602 518 435 137
Net movement in cash and cash equivalents (1 082 247) 1 146 621
Cash and cash equivalents at beginning of the year 5 304 334 4 157 713
Cash and cash equivalents at the end of the year 4 222 087 5 304 334
Directors: M Kuscus* (Chairman), W Brooks (CEO), A Raubenheimer (FD), U Meyer^, S Segar*, M Mdlolo*, L Mtumtum*
*Non-executive Independent ^Non-executive
Registered office: 3rd Floor, 200 on Main, Cnr Main and Bowwood Roads, Claremont, 7708
Transfer secretaries: Computershare Investor Services (Pty) Ltd
Sponsor: Java Capital
Company secretary: CIS Company Secretaries (Pty) Ltd
SYNERGY INCOME FUND LIMITED
3rd Floor, 200 on Main, Cnr Main and Bowwood Roads, Claremont, 7708 | Postnet Suite 1, Private Bag X1005, Claremont, 7735
www.synergyincomefund.com
Managed by
Capital Land Asset Management Proprietary Limited
Date: 28/08/2014 08:27:00 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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