FOUNTAINHEAD PROPERTY TRUST - Unaudited interim results for the six months ended 28 February 2015 and renewal of cautionary announcement

Release Date: 17/04/2015 07:05
Code(s): FPT
 
Wrap Text
Unaudited interim results for the six months ended 28 February 2015 and renewal of cautionary announcement

Fountainhead Property Trust Management Limited
(A collective investment scheme in property registered in terms
of the Collective Investment Schemes Control Act No 45 of 2002
and managed by Fountainhead Property Trust Management Limited)
(Registration number 1983/003324/06)
JSE share code: FPT   ISIN: ZAE000097416
(Approved as a REIT by the JSE)

Unaudited interim results for the six months ended 28 February 2015 
renewal of cautionary announcement

The directors of Fountainhead Property Trust Management Limited ("the board"), manager of Fountainhead Property Trust (“the Trust”
or “Fountainhead”), present the interim results of the Trust for the six months ended 28 February 2015. 

- 5.5% increase in distribution
- R579 million redevelopments in progress
- 34.4% total return to investors
- 48.1% increase in market cap to R12 billion


  Statement of financial position  
                                                                      Unaudited       Unaudited        Audited   
                                                                    28 February     28 February      31 August   
                                                                           2015            2014           2014   
                                                                          R’000           R’000          R’000 
  ASSETS                                                                                                         
  Non-current assets                                                 11 659 899      10 917 208     11 214 867   
  Investment properties                                              11 657 437      10 848 165     11 191 357   
  Fair value of investment properties for accounting purposes        11 228 536      10 484 483     10 776 919   
  Unamortised letting commissions and tenant installations               19 703           7 065         15 520   
  Straight-line rental income accrual                                   409 198         356 617        398 918   
  Interest rate swaps                                                     2 462          69 043         23 510   
  Current assets                                                        703 566       1 444 535      1 386 585   
  Trade and other receivables                                           167 520          77 447        152 271   
  Cash and cash equivalents                                             271 988         422 348        257 590   
  Assets held-for-sale                                                  264 058         944 740        976 724   
  Total assets                                                       12 363 465      12 361 743     12 601 452   
  UNITHOLDERS’ FUNDS AND LIABILITIES                               
  Unitholders’ funds                                                  8 969 673       8 697 598      8 841 591   
  Capital of the fund                                                 2 874 030       2 874 030      2 874 030   
  Retained income                                                       407 770         372 873        398 976   
  Non-distributable reserve                                           5 687 873       5 450 695      5 568 585   
  Other non-current liabilities                                       2 832 542       2 883 619      2 992 679   
  Interest-bearing liabilities                                        2 832 542       2 883 619      2 992 679   
  Deferred taxation                                                           -               -              -   
  Current liabilities                                                   561 250         780 526        767 182   
  Trade and other payables                                              205 461         193 341        176 745   
  Interest-bearing liabilities                                                -         250 000        250 000   
  Unitholders for distribution                                          355 789         337 185        340 437   
  Total unitholders’ funds and liabilities                           12 363 465      12 361 743     12 601 452   
  Number of units in issue                                            1 162 709       1 162 709      1 162 709   
  Net asset value per unit (excluding deferred tax) (cents)              771.45          748.05         760.43   


  Statement of comprehensive income 
                                                                      Unaudited       Unaudited        Audited   
                                                                    28 February     28 February      31 August   
                                                                           2015            2014           2014   
                                                                          R’000           R’000          R’000                                                                                                              
  Revenue                                                                                                        
  Property portfolio                                                    627 929         632 234      1 282 033   
  - Contractual rental income                                           617 649         618 718      1 242 414   
  - Straight-line rental income accrual                                  10 280          13 516         39 619   
  Direct property operating expenses                                   (124 297)       (145 676)      (272 630)   
  Net property income                                                   503 632         486 558      1 009 403   
  Changes in fair values of properties and financial instruments        118 545         434 975        552 865   
  Loss on disposal of investment properties                                (743)              -              -   
  Administrative expenses                                               (33 971)        (34 587)       (73 448)   
  Income from operations                                                587 463         886 946      1 488 820   
  Net finance costs                                                    (103 592)       (101 270)      (218 714)   
  - Interest income                                                      10 716          14 539         25 882   
  - Interest expense                                                   (114 308)       (115 809)      (244 596)   
  Profit before taxation                                                483 871         785 676      1 270 106   
  Taxation                                                                    -               -              -   
  Profit and total comprehensive income                                 483 871         785 676      1 270 106   
  Basic and diluted earnings per unit (cents)                             41.62           67.57         109.24
  Headline earnings and distributable income reconciliation                                                 
  Profit for the period                                                 483 871         785 676      1 270 106   
  Loss on the disposal of investment properties                             743               -              -   
  Fair value adjustments to investment properties                      (139 594)       (444 168)      (607 591)  
  Headline earnings                                                     345 020         341 508        662 515   
  Less: Straight-line lease adjustment                                  (10 280)        (13 516)       (39 619)  
  Less: Fair value adjustments on interest rate swaps                    21 049           9 193         54 726   
  Distributable income                                                  355 789         337 185        677 622   
  Headline earnings per unit (cents)                                      29.67           29.37          56.98   
  Distribution per unit (cents)                                           30.60           29.00          58.28   
  Units in issue ('000)                                               1 162 709       1 162 709      1 162 709   


  Statement of cash flows 
                                                                      Unaudited       Unaudited        Audited   
                                                                    28 February     28 February      31 August   
                                                                           2015            2014           2014   
                                                                          R’000           R’000          R’000   
  CASH FLOWS FROM OPERATING ACTIVITIES                                                                           
  Cash generated from operations                                        475 098         461 793        831 213   
  Interest income                                                        10 716          14 539         25 882   
  Interest expense                                                     (114 308)       (115 809)      (244 596)   
  Income distributions                                                 (340 437)       (277 771)      (614 956)   
  Net cash generated from/(utilised in) operating activities             31 069          82 752         (2 457)   
  CASH FLOWS FROM INVESTING ACTIVITIES                                                                           
  Acquisition and development of investment properties                 (748 506)       (231 243)      (419 853)   
  Proceeds on disposal of investment properties                       1 141 972               -              -   
  Net cash generated from/(utilised in) investing activities            393 466        (231 243)      (419 853)   
  CASH FLOWS FROM FINANCING ACTIVITIES                                                                           
  Repayment of interest-bearing borrowings                             (410 137)              -     (2 881 319)   
  Proceeds from interest-bearing borrowings                                   -         252 300      3 242 679   
  Net cash (utilised in)/generated from financing activities           (410 137)        252 300        361 360   
  Net increase/(decrease) in cash and cash equivalents                   14 398         103 809        (60 950)   
  Cash and cash equivalents at beginning of the period                  257 590         318 540        318 540   
  Cash and cash equivalents at end of period                            271 988         422 349        257 590   


  Statement of changes in unitholders’ funds  
                                                                                           Non-       
                                                                     Capital of   distributable       Retained           
                                                                       the fund         reserve       earnings           Total   
                                                                          R’000           R’000          R’000           R’000   
  Balance at 1 September 2013                                         2 874 030       5 015 720        359 357       8 249 107   
  Profit and total comprehensive income for the period                        -               -      1 270 106       1 270 106   
  Transactions recorded directly in equity                                    -         552 865     (1 230 487)       (677 622)  
  Fair value adjustment on investment properties transferred to               -         647 210       (647 210)              -   
  non-distributable reserve                                                                                                      
  Straight-line lease adjustment                                              -         (39 619)        39 619               -   
  Fair value adjustment on interest rate swaps                                -         (54 726)        54 726               -   
  Income distributions                                                        -               -       (677 622)       (677 622)  
  Balance at 31 August 2014                                           2 874 030       5 568 585        398 976       8 841 591   
  Profit and total comprehensive income for the year                          -               -        483 871         483 871   
  Transactions recorded directly                                              -         119 288       (475 077)       (355 789)  
  in equity                                                                                                                   
  Profit and fair value reserve realised                                      -             743           (743)              -   
  on sale of properties transferred to                                                                                        
  non-distributable reserve                                                                                                   
  Fair value adjustment on investment properties transferred to               -         149 874       (149 874)              -   
  non-distributable reserve                                                                                                      
  Straight-line lease adjustment                                              -        (10 280)         10 280               -   
  Fair value adjustment on interest rate swaps                                -        (21 049)         21 049               -   
  Income distributions                                                        -              -        (355 789)       (355 789)  
  Balance at 28 February 2015                                         2 874 030      5 687 873         407 770       8 969 673   

Commentary
Fountainhead is a property unit trust listed on the Johannesburg Stock Exchange. The Trust owns 46 (2014: 64)
investment properties (including assets held-for-sale) valued at R11.9 billion (2014: R11.8 billion). Fountainhead’s portfolio,
which is predominantly focused on retail assets located in South Africa’s major metropolitan areas, includes Centurion
Mall, Boulders Shopping Centre, Benmore Gardens Shopping Centre, Bryanston Shopping Centre, Blue Route Mall, Kenilworth
Centre and a majority share (58%) in the N1 City Mall.

1. Basis of preparation and accounting policies
The condensed interim financial statements are prepared in accordance with International Financial Reporting Standard,
(IAS) 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices
Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the
Collective Investment Schemes Control Act of South Africa. The accounting policies applied in the preparation of these
interim financial statements are in terms of International Financial Reporting Standards and are consistent with those
applied in the previous annual financial statements. 

The results were prepared under the supervision of Lesley Dukes CA(SA), Fountainhead’s Financial Director. These
condensed interim financial statements have not been reviewed or audited by Fountainhead’s independent auditor, KPMG Inc.

2. Financial results
Fountainhead has declared a distribution of 30.60000 cents per unit (2014: 29.00000 cents) for the six months to 
28 February 2015, an increase of 5.5% on the comparable period and in line with the guidance provided to the market. The
Trust’s core portfolio (excluding properties acquired, sold and under development) achieved contractual rental and net
property income growth of 2.1% (2014: 6.4%) and 2.5% (2014: 7.3%) respectively. Operating costs net of electricity and
utility recoveries represented 20.1% (2014: 23.5%) of contractual rental income, the improvement arising mainly from higher
recoveries. Operating costs were 35.2% (2014: 39.5%) of contractual rental income. 

                                                              Unaudited      Unaudited       Audited  
                                                            28 February    28 February     31 August  
                                                                   2015           2014          2014    
  Distributable income summary                                    R’000          R’000         R’000  
  Rental income (excluding straight-line rental adjustment)     617 649        618 744     1 072 958  
  Net property expenses                                        (129 510)      (150 521)     (122 691) 
  Property expenses                                            (230 998)      (260 643)     (501 464) 
  Recovery of property expenses                                 101 488        110 122       378 773  
  Net property income                                           488 139        468 223       950 267  
  Sundry revenue                                                  5 213          5 134        19 517  
  Net finance costs                                            (103 592)      (101 270)     (218 714) 
  Interest income                                                10 716         14 539        25 882  
  Interest expense                                             (114 308)      (115 809)     (244 596) 
  Trust expenses                                                (33 971)       (34 900)      (73 448) 
  Distributable income                                          355 789        337 187       677 622  
  Units in issue                                              1 162 709      1 162 709     1 162 709  
  Interim distribution (cents per unit)                           30.60          29.00         29.00  
  Final distribution (cents per unit)                                 -              -         29.28  

3. Strategy
Fountainhead continues to build a portfolio capable of achieving sustainable long-term growth over the property
cycles. The Trust has successfully implemented a strategy whereby it has reduced its exposure to smaller, riskier and
underperforming assets, illustrated by the sale of non-core industrial property assets and of its undivided shares in Westgate
and Southgate. Fountainhead continues to improve the quality of its portfolio through the redevelopment and refurbishment
of core properties. The Trust’s strategy extends beyond retail investments to large properties in metropolitan areas in
other sectors that offer low-risk growing income streams and value added opportunities as illustrated by the
acquisition of the Robor building and the redevelopment of the AMR office park during the period.

4. Major Capital Projects
Centurion Mall
A phased upgrade and expansion is underway totalling 6 540m² at a cost of R318 million with an estimated yield of
7.1%. The expected date of completion is March 2016. R43.4 million of the approved project cost has been spent to date.
Further expansion of this asset is being considered as part of a master plan for this asset.

Kenilworth Centre 
R197 million is being spent on creating 4 834m² of new gross lettable area (“GLA”) on the upper level, and adding
reconfigured parking which will significantly improve access and egress to the centre at an estimated income yield of 6%.
The project commenced during September 2014 and completion is scheduled for September 2016. R16.4 million of the approved
project cost has been spent to date.

AMR Office Park
The refurbishment of AMR Buildings 1 and 2 in Bedfordview and tenant installation to accommodate a CTI education
campus has been completed. CTI entered into a 10-year lease for 8 100m² in two of the three buildings in the office park. The
approved cost of the project is R64 million which is anticipated to yield 7.1% in the first year and 10.0% in the
second year due to the tenant taking staggered occupation commencing February 2015 and December 2015. R35.9 million of the
approved project cost has been spent to date.

Various energy efficient building technologies, together with mechanical and electrical initiatives are being
implemented in all of the redevelopments as part of Fountainhead’s continued focus on sustainability and cost efficiency.
Fountainhead is taking steps to ensure that there is uninterrupted electricity supply at its retail properties.

5. Acquisitions and Disposals
The Robor industrial property situated in Elandsfontein was acquired for R570.5 million and transferred on 3 September
2014. This acquisition will show an initial yield of 8.5% escalating at 8% per annum with a lease period of 10 years.
Fountainhead’s undivided share in Westgate Shopping Centre was transferred on 19 September 2014 realising R720 million
and the transfer of Southgate Mall and Southgate Value Mart took place on 14 October 2014 for a cash consideration of R260
million. The aggregated estimated forward yield on these two disposals was 8.1%.

In line with Fountainhead’s long-term strategy to focus on its core portfolio, the Trust disposed of a further 16
properties to various parties with a combined GLA of 36 508m² for an aggregate consideration of R161.8 million and an
average yield of 10.6%. Subject to the normal conditions precedent, Fountainhead has concluded sale agreements for a further
seven properties for an aggregate consideration of R264 million and GLA of 59 428m² at an average yield of 9.6%
(including Brightwater Commons). These assets have been categorised as assets held-for-sale on the statement of financial
position. Proceeds from disposals will be used to fund redevelopment activities. 

6. Segmental information

                                       Unaudited months        Unaudited months             Audited     
                                       28 February 2015       28 February 2014            31 August 2014
                                            Net                        Net                       Net         
                              Revenue   income   % of     Revenue   income    % of     Revenue   income     % of  
                                   Rm       Rm   total         Rm       Rm   total         Rm        Rm    total       
  Retail                          414      322      90        439      326      97        887       676      100   
  Office                          115       93      26        115       92      27        229       185       27   
  Industrial                       68       58      16         46       37      11         88        69       10   
  Specialised                      21       21       6         19       19       6         39        39        6   
  Trust and administration          -     (138)    (38)         -     (137)    (41)         -      (291)     (43)  
  Total                           618      356     100        619      337     100      1 243       678      100   

7. Portfolio Valuation 
             
                                                       Cents/    Cents/    Cents/       % of portfolio         
                                             Income      unit      unit      unit                              
                                    Value    28 Feb    28 Feb    28 Feb    31 Aug    28 Feb    28 Feb    31 Aug 
  Sector                              (Rm)     2015      2015      2014      2014      2015      2014      2014 
  Retail                            8 378       322       721       762       785        70        75        75
  Office                            1 950        93       168       162       167        16        16        16
  Industrial                        1 195        58       103        60        61        11         6         6
  Specialised                         399        21        34        31        33         3         3         3
  Total properties                 11 922       494     1 026     1 015     1 046       100       100       100
  Interest-bearing liabilities     (2 833)               (244)     (270)     (279)
  Net current liabilities            (561)                (48)      (46)      (44)
  Other assets                        442                  38        49        37 
                                    8 970                 772       748       760 
  Total properties includes assets held-for-sale of R264 million.                 

  Investment property value by sector
  Retail              70%
  Office              17%
  Industrial          10%
  Specialised          3%
  
  Contribution to distribution by sector
  Retail              65%
  Office              19%
  Industrial          12%
  Specialised          4%
  
The valuation of investment properties (including those held for sale) as determined by the board, resulted in a
positive fair value adjustment of R140 million (2014: R430 million) for the period. In terms of IAS 40 and IFRS 7,
Fountainhead’s investment properties are measured at fair value and are categorised as level 3 investments. There were no
transfers between levels 1, 2 and 3 during the financial period. 

8. Letting activity
The table below reflects the tenant retention ratio:

                 Retention    
  Sector                 %   
  Retail                87   
  Office                62   
  Industrial            90   
  Total                 82   

9. Vacancy levels
During the period vacancies decreased to 6.8% (2014: 9.1%). Vacancy levels in terms of rentable area were as follows:

                    GLA (m2)     GLA (m2)     GLA (m2)         
                   February     February       August    February 2015     February 2014     August 2014   
  Sector               2015         2014         2014                %                 %               %                                                                                                          
  Retail             11 475       16 836       22 509              3.0               3.8             5.1   
  Office             35 300       34 632       45 966             20.0              19.7            26.1   
  Industrial         11 405       22 635       23 129              4.0              13.6            13.8   
  Specialised             -            -            -                -                 -               -   
  Total              58 180       74 103       91 604              6.8               9.1            11.3   

The retail vacancies were 3.0% of which 1.7% relates to Brightwater Commons (which has been included in assets
held-for-sale). The balance of the vacancies primarily relate to Centurion Mall which is undergoing redevelopment. Office
vacancies within the Centurion Mall precinct amount to over 60% of the reported 20% vacancy. 9 156m² is vacant at Lakeside A
and 12 519m² at Die Anker. Industrial vacancies have reduced to 4.0% mainly as a result of the sale of the non-core
properties and the acquisition of fully let Robor building during the period. A significant portion of the vacancy is at
Nashua House (7 551 m²). 

10. Lease expiry profile
                        2015     2016     2017     2018     2019     >2019

  Retail              33 788   35 153   39 783   20 599    4 833   123 128
  Office              50 293   15 569   14 636   30 550   15 235    46 189
  Industrial          63 943   48 888   78 047   43 717   44 832   115 535
  Specialised              -        -        -        -        -    26 970
                     148 024   99 610  132 466   94 866   64 900   311 822

11. Borrowings
The weighted average cost of debt for the period was 8.1% (2014: 8.0%) and 94% (2014: 76%) of debt is hedged against
interest rate risk (including forward starting swaps) for a weighted average period of 3.4 years (2014: 4.2 years). 
As at 28 February 2015, Fountainhead’s debt net of cash represented 23.8% (2014: 24.5%) of the fair value of its property 
assets, including those held for sale. 

                                          Loan           
                         Facility      balance       Facility      Fixed/           All in  
  Funding provider          R’000        R’000       maturity    floating           margin 
  Rand Merchant Bank    1 900 000    1 900 000    15 Aug 2019    Floating    JIBAR + 1.57%   
  Rand Merchant Bank      385 000      182 542    15 Aug 2019    Floating    PRIME - 1.73%   
  Rand Merchant Bank      225 000      225 000     4 Feb 2019    Floating    JIBAR + 1.61%   
  Rand Merchant Bank      525 000      525 000     4 Feb 2019    Floating    JIBAR + 1.61%   
  Total                 3 035 000    2 832 542  

                                                         Nominal
                                                           value 
  Swaps provider                             Status        R’000       Maturity     Rate 
  Rand Merchant Bank                        Current      500 000    22 May 2018    5.87%   
  Absa Capital                              Current      300 000    19 Sep 2016    6.58%   
  Absa Capital                              Current      300 000    17 Oct 2016    6.27%   
  Absa Capital                              Current      500 000     9 Apr 2019    7.79%   
  Rand Merchant Bank    Forward start - 22 May 2015      350 000    22 May 2018    6.47%   
  Rand Merchant Bank    Forward start - 22 May 2015      500 000    22 May 2020    7.06%   

In terms of IAS 39 and IFRS 7, Fountainhead’s interest rate swaps are measured at fair value 
through profit or loss and are categorised as level 2 investments. There were no transfers between levels 1, 2 and 3
during the reporting period. 

12. Prospects
Fountainhead expects that growth in distribution of 5% to 6% will be achieved from the current portfolio for the 12 months 
to 31 August 2015 compared to the annualised distribution for 12 months of 58.28 cents to 31 August 2014, not withstanding 
the current challenging environment and the dilutive impact of implementing the strategy of improving the quality of the 
portfolio. This forecast is the responsibility of the directors of the manager and has not been reviewed or reported on by 
Fountainhead’s auditor.

13. Potential aquisition by Redefine
On 27 March 2015 the board was advised that Redefine Properties Limited (“Redefine”) reached agreement with significant 
Fountainhead unitholders representing 35.7% of the votes capable of voting on the proposed transaction who have irrevocably 
undertaken to vote in favour of the acquisition by Redefine of all of Fountainhead’s assets in exchange for 85 new Redefine shares 
for every 100 Fountainhead units in issue and the assumption of all of Fountainhead’s liabilities. Redefine has also obtained 
non-binding indications of support from a further 14.3% of those unitholders capable of voting. The board has established an 
independent sub-committee which, together with its advisors Bowman Gilfillan Inc and RMB, will consider the proposal. Questco 
Proprietary Limited has also been appointed by the independent committee to provide a fairness opinion on the proposal. 
Fountainhead unitholders are accordingly advised to continue exercising caution when trading in Fountainhead units until a further
announcement is made.

14. Changes to the board
Len van Niekerk resigned from the board and Andrew Konig was appointed as the Chief Executive 
Officer with effect from 30 November 2014. Lesley Dukes was appointed as Financial Director with effect from
28 October 2014 (subject to FSB approval).

15. Declaration of distribution
Notice is hereby given of distribution number 64 of 30.60000 cents per unit for the six months ended 28 February 2015.

Last date to trade cum distribution           Friday, 8 May 2015
Commence trading ex distribution             Monday, 11 May 2015
Record date                                  Friday, 15 May 2015
Payment date                                 Monday, 18 May 2015
            
Unit certificates may not be dematerialised or rematerialised between Monday, 11 May 2015 and Friday, 15 May 2015,
both dates inclusive. In respect of dematerialised unitholders, the distribution will be transferred to the CSDP
account/broker accounts on Monday, 18 May 2015. Certificated unitholders’ distribution payments will be posted on or about
Monday, 18 May 2015. An announcement informing unitholders of the tax treatment of the distribution will be released
separately on SENS.

By order of the board
Fountainhead Property Trust Management Limited
Registration number 1983/003324/06

16 April 2015

Transfer secretaries: 
Computershare Investor Services Proprietary Limited, 70 Marshall Street, Johannesburg, 2001 
(PO Box 61051, Marshalltown, 2107) 

Secretary: 
Java Capital Trustees and Sponsors Proprietary Limited
 
Registered office: 
Redefine Place, 2 Arnold Road, Rosebank, Johannesburg (PO Box 1731, Parklands, 2121)
 
Directors: 
WM Kirchmann@ (Chairman), AJ Konig*  (CEO), LY Dukes* (FD), M Barkhuysen@, VA Christian@,   HY Laher@, B Nackan, 
DH Rice*+, DS Savage@, M Wainer*, T Wixley@ (*Executive, +British, @Independent) 

Sponsor
Java Capital

17 April 2015
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