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SYNERGY INCOME FUND LIMITED - Unaudited condensed interim financial statements for the six months ended 31 December 2014

Release Date: 20/02/2015 08:00
Code(s): SGA SGB     PDF:  
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Unaudited condensed interim financial statements for the six months ended 31 December 2014

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)
Managed by
Capital Land Asset Management Proprietary Limited

UNAUDITED CONDENSED
INTERIM FINANCIAL STATEMENTS
for the six months ended
31 December 2014

Condensed statement of comprehensive income
                                                                              Unaudited        Audited        Unaudited
                                                                             six months           year       six months
                                                                                  ended          ended            ended
                                                                            31 December        30 June      31 December
                                                                                   2014           2014             2013
                                                                                      R              R                R
Revenue
Property portfolio                                                          160 343 236    303 670 446      154 378 525
    Recoveries and contractual rental revenue                               160 919 516    303 110 814      147 659 651
    Straight-line rental income accrual                                       (576 280)        559 632        6 718 874

Rental revenue                                                              160 343 236    303 670 446      154 378 525
Property operating costs                                                   (62 670 116)  (115 265 004)     (57 714 441)
Administration costs                                                        (8 698 581)   (14 300 693)      (6 739 045)
Net operating profit                                                         88 974 539    174 104 749       89 925 039
Fair value adjustments                                                           81 391    196 752 927        7 640 897
    Changes in fair value of investment properties                                    –    195 581 887       14 398 101
    Adjustment resulting from straight-lining of rental revenue                 576 280      (559 632)      (6 718 874)
    Changes in fair value of swaps                                            (494 889)      1 730 672         (38 330)

Profit from operations                                                       89 055 930    370 857 676       97 565 936
Net finance expense                                                        (38 893 421)   (71 817 556)     (34 146 459)
   Finance income                                                               526 134        939 113          468 312
   Finance costs                                                           (39 051 706)   (72 162 200)     (34 342 318)
   Amortisation of loan raising costs                                         (367 849)      (594 469)        (272 453)

Profit before debenture interest and taxation                                50 162 509    299 040 120       63 419 477
Debenture interest                                                         (51 025 247)  (102 322 030)     (49 332 159)
Profit before taxation                                                        (862 738)    196 718 090       14 087 318
Taxation                                                                        138 569      (294 339)            7 192
(Loss)/profit for the period attributable to Synergy shareholders             (724 169)    196 423 751       14 094 510
Total comprehensive loss/ income for the period                               (724 169)    196 423 751       14 094 510
Reconciliation of earnings, headline earnings and distributable earnings
(Loss)/profit for the period attributable to Synergy shareholders             (724 169)    196 423 751       14 094 510
Debenture interest                                                           51 025 247    102 322 030       49 332 159
Basic earnings attributable to linked unitholders                            50 301 078    298 745 781       63 426 669
Changes in fair value of investment properties                                (576 280)  (195 022 255)      (7 679 227)
Headline profit to linked unitholders                                        49 724 798    103 723 526       55 747 442
Amortisation of loan raising costs                                              367 849        594 469          272 453
Straight-line rental income accrual                                             576 280      (559 632)      (6 718 874)
Changes in fair value of swaps (net of deferred taxation)                       356 320    (1 436 333)           31 138
    Changes in fair value of swaps                                              494 889    (1 730 672)           38 330
    Deferred taxation                                                         (138 569)        294 339          (7 192)

Distributable earnings                                                       51 025 247    102 322 030       49 332 159
Distribution for the period                                                  51 025 247    102 322 030       49 332 159
   Distributed to A linked units                                                      –     20 046 792                –
   Distributed to B linked units                                                      –     29 285 367                –
   To be distributed to A linked units*                                      21 049 120     21 049 120       20 046 792
   To be distributed to B linked units*                                      29 976 127     31 940 751       29 285 367

Total distributions                                                          51 025 247    102 322 030       49 332 159
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     47 352 203       47 352 203
Weighted number of B linked units in issue                                  106 352 670    106 352 670      106 352 670
(Loss)/earnings per A share (cents)                                              (0.47)         127.79             9.17
Earnings per A linked unit (cents)                                                43.98         214.58            51.51
(Loss)/earnings per B share (cents)                                              (0.47)         127.79             9.17
Earnings per B linked unit (cents)                                                27.71         185.36            36.71
Headline (loss)/earnings per A share (cents)                                     (0.85)           0.91             4.17
Headline earnings per A linked unit (cents)                                       43.61          87.70            46.51
Headline (loss)/earnings per B share (cents)                                     (0.85)           0.91             4.17
Headline earnings per B linked unit (cents)                                       27.34          58.48            31.71
Distribution per A linked unit paid (cents)                                           –          42.34                –
Distribution per A linked unit payable (cents)                                    44.45          44.45            42.34
Distribution per B linked unit paid (cents)                                           –          27.54                –
Distribution per B linked unit payable (cents)                                    28.19          30.03            27.54

*This amount will be distributed on 16 March 2015
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
                                                                                   2014           2014             2013
                                                                                      R              R                R
ASSETS
Non-current assets                                                        2 451 925 892  2 422 321 660    2 233 143 504
Investment properties and related receivables                             2 451 702 301  2 422 100 000    2 232 756 951
Investment properties                                                     2 433 645 824  2 403 467 243    2 207 964 952
  Straight-line rental income accrual                                        18 056 477     18 632 757       24 791 999
Derivative financial instruments                                                      –        136 638                –
Deferred taxation                                                               223 591         85 022          386 553
Current assets                                                               35 835 572     25 546 233       33 070 751
Trade and other receivables                                                  23 578 197     21 324 146       24 158 185
Cash and cash equivalents                                                    12 257 375      4 222 087        8 912 566
Total assets                                                              2 487 761 464  2 447 867 893    2 266 214 255
EQUITY AND LIABILITIES
Stated capital and reserves                                                 495 481 182    496 205 351      313 876 110
Stated capital                                                                1 537 049      1 537 049        1 537 049
Reserves                                                                    493 944 133    494 668 302      312 339 061
Non-current liabilities                                                   1 891 581 702  1 862 455 261    1 865 138 845
Debenture capital                                                           952 971 382    952 971 381      952 971 381
Interest-bearing liabilities                                                937 811 780    909 043 591      910 094 811
Derivative financial instruments                                                798 540        440 289        2 072 653
Current liabilities                                                         100 698 580     89 207 281       87 199 300
Trade and other payables                                                     49 673 333     36 217 410       37 867 142
Debenture interest payable                                                   51 025 247     52 989 871       49 332 158
Total equity and liabilities                                              2 487 761 464  2 447 867 893    2 266 214 255

Net asset value per linked unit *                                                  9.42           9.43             8.24
Net asset value per A linked unit * ^                                             10.64           8.76             8,79
Net asset value per B linked unit *                                                8.88           8.73             7.72

* Net asset value includes total equity attributable to equity holders and linked debentures.
^ 60-day volume weighted average trading price at 31 December 2014, 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
                                                                                   2014           2014             2013
                                                                                      R              R                R
Balance at the beginning of the period                                      496 205 351    299 781 600      299 781 600
Total comprehensive loss/ income for the period                               (724 169)    196 423 751       14 094 510
Total stated capital and reserves                                           495 481 182    496 205 351      313 876 110

Condensed statement of cash flows
                                                                              Unaudited        Audited        Unaudited
                                                                             six months           year       six months
                                                                                  ended          ended            ended
                                                                            31 December        30 June      31 December
                                                                                   2014           2014             2013
                                                                                      R              R                R
Cash flows from operating activities
Cash generated from operations                                              100 752 691    179 726 634       88 203 375
Interest income                                                                 526 134        939 113          468 312
Interest paid                                                              (92 041 577)  (169 866 483)     (82 714 443)
Net cash inflow from operating activities                                     9 237 248     10 799 264        5 957 244
Net cash outflow from investing activities                                 (29 602 301)  (349 444 113)    (341 284 850)
Net cash inflow from financing activities                                    28 400 341    337 562 602      338 935 838
Net movement in cash and cash equivalents                                     8 035 288    (1 082 247)        3 608 232
Cash and cash equivalents at beginning of the year                            4 222 087      5 304 334        5 304 334
Cash and cash equivalents at the end of the year                             12 257 375      4 222 087        8 912 566

Highlights                                                         Year on year
- Distributions to A linked unitholders of 44.45 cents per unit    UP 5%
- Distributions to B linked unitholders of 28.19 cents per unit    UP 2.4%
- Investment property valued at R2.452 billion                     UP 1.2%

COMMENTARY

Profile

Synergy Income Fund Limited ("Synergy" or "the Company" 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 nodes within South Africa. 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 44.45 cents per A linked unit and
28.19 cents per B linked unit for the six months ended
31 December 2014. The distribution to B linked unitholders
represents an increase of 2.4% compared to the corresponding
interim period ended 31 December 2013.

The trading period to 31 December 2014 takes into account
15 proper ties, all of which were on the statement of financial
position for the full period.

Corporate action update

On 5 December 2014, Vukile Property Fund Limited ("Vukile")
posted a circular to Synergy unitholders in respect of a mandatory
offer to acquire Synergy B linked units at an offer consideration
of 1 Vukile linked unit for every 2.67 Synergy B linked units and
a comparable offer to acquire Synergy A linked units for an
offer consideration of 1 Vukile linked unit for every 1.65 Synergy
A linked units. Synergy has received notification from Vukile of the
acquisition by Vukile of Synergy A linked units such that Vukile's
total beneficial interest in Synergy A linked units has increased
from 0% to 8.41%; and of the acquisition by Vukile of Synergy B
linked units such that Vukile's total interest in Synergy B linked
units has increased from 57.76% to 75.16% of Synergy's B linked
units. Synergy is therefore a listed subsidiary of Vukile.

It is estimated that the total advisory costs to Synergy in respect this
corporate action will amount to R2.6 million of which approximately
R1 million has already been incurred to date.

Borrowings

Synergy had loan facilities totalling R996 million in place as at
31 December 2014, following the approval of a new R50 million
facility from Standard Bank Limited to partially fund various projects
requiring capital expenditure. The Company had total borrowings
of R938 million at 31 December 2014, leaving unutilised long-term
facilities of R58 million at this date. At the end of December 2014,
interest rates were hedged on 50% of total borrowings at a
weighted average rate of 8.69%. Synergy's total weighted average
cost of borrowings at 31 December 2014 was 8.26%. The Company's
loan to value ratio in relation to its property portfolio at the end of
December 2014 was 38%.

Property portfolio

Synergy's property portfolio comprised 15 properties with a total
gross lettable area ("GLA") of 199 080m2 and a market value of
R2.452 billion as at 31 December 2014.

Redevelopments and upgrades

Synergy upgraded Ruimsig Shopping Centre in Roodepoort,
Gauteng ("Ruimsig") and Richdens Village Shopping Centre in
Hillcrest KwaZulu-Natal ("Richdens") during the six months ended
31 December 2014. On 5 September 2014, Synergy took transfer of
a property adjacent to the Ermelo Game Shopping Centre in
Ermelo, Mpumalanga. The capital expenditure associated with the
upgrades of Ruimsig and Richdens and the aforementioned
acquisition combined with some minor capital expenditure across
the remainder of the portfolio has led to an increase in the carrying
value of the property portfolio from R2.422 billion at 30 June 2014
to R2.452 billion at 31 December 2014.

Operational performance

Synergy continues to operate in a challenging macroeconomic and
social environment which has been characterised by subdued economic
growth, rising inflation, high unemployment, overly indebted consumers
and reduced consumer spending.

The operational performance for the six months ended
31 December 2014 has been impacted by African Bank Investments
Limited's ("ABIL") wholly-owned subsidiary, Ellerine Furnishers
Proprietary Limited ("Ellerines") going into business rescue. Synergy's
total exposure to ABIL was 2.4% of monthly income and 1.65% of GLA.
A number of the Ellerines premises were vacated during November
and December 2014 which has impacted the December 2014 vacancy
and tenant retention ratios. These ratios are, however, expected to
improve during the course of the next six months to June 2015 due to
the successful conclusion of several lease negotiations.

A retail vacancy ratio of 6.3% existed at 31 December 2014, 1.8% of
which is attributable to the abovementioned business rescue
proceedings. This represents an increase of 2.3% in comparison to the
vacancy ratio of 4% which was reported at 30 June 2014. It is
anticipated that the current vacancy ratio will reduce to
approximately 4% in the next few months. Rental reversions across
the portfolio of 7.4% have been achieved.

Synergy had a national tenant ratio of 85% at 31 December 2014 in line
with Synergy's target ratio. A tenant retention ratio of 68% was
achieved during the period under review.

The weighted average lease expiry period for the property portfolio
at 31 December 2014 was 3.58 years up from 3.22 years at
30 June 2014. This improvement is mainly attributable to the fact that
a large number of leases which are due to expire in the current
financial year ending 30 June 2015 have already been renewed.

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
conversion, whereby the A and B linked units will be converted to
an all equity capital structure, is currently underway, subject to
unitholder approval, and will be completed by 30 June 2015.

Prospects

Linked unitholders are referred to the market guidance previously
provided in the prospects section of the June 2014 results
announcement which was published on SENS on 28 August 2014 and,
which included reference to forecasted growth in B linked unit
distributions for 2015 in comparison to the prior year of approximately
6%. In terms of the aforementioned forecast unitholders were advised
that no provision had been made for the inclusion of any rental
adjustments which may occur as a consequence of the Ellerines business
rescue proceedings. Furthermore, unitholders were advised that the
forecasted B linked unit distribution growth did not make provision for
advisory costs in relation to any potential corporate action. It is
estimated that the total advisory costs in respect of the recent
corporate action involving Vukile and Synergy and/or Synergy linked
unitholders will amount to R2.6 million of which approximately
R1 million has already been incurred.

It is forecasted that total annual 2015 distributions for Synergy's A linked
units will be 91.13 cents per unit. Taking into account rental adjustments
for Ellerines and advisory and other costs associated with the Vukile
transaction, the Board expects Synergy's B linked unit distribution
growth to be flat for the 2015 financial year. This forecast is based on the
assumption that a stable macroeconomic environment will prevail, no
major additional corporate failures will occur and that tenants will
continue to be able to absorb the recovery of rising 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 44.45225 cents per A linked unit and 28.18559 cents per B linked unit
for the period 1 July 2014 to 31 December 2014 (collectively, "the Interim
Distributions").

As Synergy has 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 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 37.78441 cents per A linked unit and 23.95775
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 Interim Distributions will be as follows:

                                     2015
Last day to trade cum distribution   Friday, 6 March
Linked units trade ex distribution   Monday, 9 March
Record date                          Friday, 13 March
Payment date                         Monday, 16 March

Linked unitholders may not dematerialise or rematerialise their linked
units between Monday, 9 March 2015 and Friday, 13 March 2015, 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 unaudited condensed interim financial statements for the six
months ended 31 December 2014 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 No 71 of 2008. The accounting policies adopted are consistent
with those applied in the prior period with the exception of the first-
time adoption of new and revised standards and interpretations of
IFRS which became effective during the period.

The following new standards were adopted during the period:

- Amendment to IAS 32 – Offsetting Financial Assets and Financial
  Liabilities;
- Amendment to IAS 36 – Recoverable amount disclosures for non-
  financial assets;
- Amendment to IAS 39 – Novation of derivatives and continuation
- of hedge accounting; and
- IFRIC 21 – Levies.

None of these standards had a material impact on these interim
results.

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 directors are not aware of any matters or circumstances arising
subsequent to 31 December 2014 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 2015

Directors:             M Kuscus* (Chairperson), W Brooks (CEO), A Raubenheimer (FD), U Meyer^, S Segar*, M Mdlolo*, L Mtumtum*
                       *Independent non-executive ^Non-executive
                       M Ramsden resigned from the Board with effect from 4 August 2014.
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:     CIS Company Secretaries Proprietary Limited

www.synergyincomefund.com

Date: 20/02/2015 08:00:00 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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