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TRANSCEND RESIDENTIAL PROPERTY FUND LIMITED - Unaudited condensed interim financial statements for the six months ended 30 June 2017

Release Date: 07/09/2017 08:20
Code(s): TPF     PDF:  
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Unaudited condensed interim financial statements for the six months ended 30 June 2017

Transcend Residential Property Fund Limited 
(Incorporated in the Republic of South Africa) 
Registration number 2016/277183/06
JSE share code: TPF ISIN: ZAE000227765 
(Approved as a REIT by the JSE) 
(“Transcend” or “the Company”)

Unaudited condensed interim financial statements for the six months 
ended 30 June 2017

Commentary

Nature of business
Transcend is a specialist residential Real Estate Investment Trust
(“REIT”) with a residential-only property portfolio.

Property portfolio
Transcend’s property portfolio consists of 13 properties, comprising 
2 472 units, located primarily in Gauteng, as well as Mpumalanga and 
the Western Cape. The combined gross lettable area (“GLA”) is 124 634m2 
and the properties have a combined value of R1.19 billion, as 
determined at 30 June 2017.

Results
On 6 September 2017, the board approved a dividend of 29.80875 cents per 
share for the period ended 30 June 2017.

Period under review
Transcend was incorporated on 8 July 2016, and the comparative reporting 
period therefore covers 6 months from 1 July 2016 to 31 December 2016. 
Note that the prior period results presented in the financial statements 
represent operating activities for 3 months only as Transcend recognised 
income and expenditure from the effective date of the property acquisitions 
as of 1 October 2016. The prior period therefore does not represent a true 
comparative period for the six months ended 30 June 2017.

Preparation
The unaudited condensed interim financial statements were compiled under 
the supervision of David Peter Lange, the Chief financial officer.

Strategy
Transcend’s investment strategy is to acquire and manage income-generating 
residential properties, with a focus on housing opportunities that are 
affordable, lifestyle-enhancing and located in high growth urban areas 
across five provinces in South Africa.

Acquisitions
Transcend has made no further acquisitions during the period under review.

Vacancies and arrears
Vacancies at 30 June 2017 were 4.1% of GLA. Bad debts incurred are 0.95% of 
rental income and the allowance for potential bad debts is at 1.44% of 
rental income.

Funding
Facility drawn down                                    Amount       Margin
                                                    R’million   over JIBAR
                                                               
Tranche 1: Expiry January 2020 (3-year)                   274        1.85% 
Tranche 2: Expiry January 2022 (5-year)                   274        2.35%
                                                   
Interest rate swaps                                    Amount
                                                    R’million         Rate 
Tranche 1: Expiry February 2018 (1-year)                  137        7.51% 
Tranche 2: Expiry February 2020 (3-year)                  137        7.62%

The debt balance as at 31 December 2016 of R547 million from various funders 
was refinanced with a single facility consisting of two tranches from 
Standard Bank on 31 January 2017. This was done in order to consolidate the 
debt funding and secure a lower average cost of debt.

The new Standard Bank facility is secured by the investment properties owned 
by Transcend with a carrying value of R1.19 billion. The 3-year tranche 
currently attracts a floating rate of three-month JIBAR plus 1.85% and the 
5-year tranche attracts a floating rate of three-month JIBAR plus 2.35%. 
Interest is payable quarterly. Transcend currently has interest rate swaps 
on these facilities. The 3-year tranche is 50% hedged by an interest rate 
swap at a fixed rate of 7.51% which expires in February 2018, and the 5-year 
tranche is 50% hedged by an interest rate swap at a fixed rate of 7.62% 
which expires in February 2020.

Percentage of debt hedged
It is the board’s policy to hedge at least 50% of the exposure to interest 
rate risk.

Summary of financial performance

                                          30 June 2017  31 December 2016
Dividend per share (cents)                       29.81              5.61
Shares in issue                             66 305 662        66 305 662
Net asset value per share (Rand)                 R9.93             R9.78
Loan-to-value ratio (1)                          43.0%             44.1% 
Net property expense ratio (2)                   29.6%             28.4% 
Gross property expense ratio (2)                 34.6%             32.9% 
Net total expense ratio (2)                      34.9%             40.0% 
Gross total expense ratio (2)                    39.5%             43.7%

(1) The loan-to-value ratio is calculated by dividing interest-bearing 
    borrowings (net of cash on hand) by the total value of investment 
    property.
(2) For the calculation of net ratios, utility recoveries are excluded from 
    rental revenue, whilst gross ratios include utility recoveries in rental 
    revenue.

Outlook
The Board is confident that Transcend will deliver on its forecast 
distribution of 62.8 cents per share for the year ended 31 December 2017 
as set out in the Listing Prospectus. The forecast statement of 
comprehensive income, the assumptions on which the forecast has been based, 
and the independent reporting accountant’s report thereon are set out in 
the Listing Prospectus.

Condensed statement of financial position

                                                   Unaudited       Audited
                                                     30 June   31 December
                                                        2017          2016
                                                      (R'000)       (R'000)
Assets                                                        
Non-current assets                                 1 189 700     1 189 400
Investment property                                1 189 400     1 189 400
Furniture and fittings                                   300             - 
Current assets                                        48 270        37 305
Trade and other receivables                            4 530        13 805
Cash and cash equivalents                             43 740        23 500
Total assets                                       1 237 970     1 226 705
Equity and liabilities                                                    
Shareholders' interest                               658 697       648 800
Stated capital                                       632 276       632 276
Retained earnings                                     26 421        16 524
Other non-current liabilities                        503 943       330 565
Interest-bearing borrowings                          503 943       330 565
Current liabilities                                   75 330       247 340
Short-term portion of interest-bearing                        
borrowings                                            51 743       216 911
Trade and other payables                              21 899        30 429
Derivative financial liability                         1 688             - 
Total equity and liabilities                       1 237 970     1 226 705

Condensed statement of profit or loss and other comprehensive income

                                                   Unaudited       Audited
                                                    6 months      6 months 
                                                       ended         ended 
                                                     30 June   31 December 
                                                        2017          2016
                                                      (R'000)       (R'000) 
Rental income from investment properties              70 568        33 990
Recoveries of operating costs from tenants             5 439         2 271
Revenue                                               76 007        36 261
Property operating expenses                          (26 316)      (11 940) 
Net operating income                                  49 691        24 321
Other operating expenses                              (3 743)       (3 916) 
Operating profit                                      45 948        20 405
Fair value adjustments on investment properties                
and financial instruments                             (1 688)       11 387
Net finance charges                                  (26 184)      (15 268) 
Finance charges                                      (26 710)      (15 439) 
Finance income                                           526           171
Profit before taxation                                18 076        16 524
Taxation                                                   -             - 
Profit and total comprehensive income for the                  
period                                                18 076        16 524
Basic/diluted earnings per share (cents)               27.26         51.70
Headline/diluted headline earnings per share                   
(cents) (5)                                            27.26         16.07

Condensed statement of changes in equity

                                            Stated     Retained     Total
                                           capital     earnings    equity 
                                            (R'000)      (R'000)   (R'000) 
Balance at 1 July 2016                           -            -         - 
Transactions with owners                
Issue of shares                            639 464            -   639 464
Capitalised listing fees                    (7 188)           -    (7 188) 
Profit and total comprehensive income   
for the period                                   -       16 524    16 524
Audited balance at 1 January 2017          632 276       16 524   648 800
Transactions with owners                
Dividends                                        -       (8 179)   (8 179) 
Profit and total comprehensive income   
for the period                                   -       18 076    18 076
Unaudited balance at 30 June 2017          632 276       26 421   658 697

Condensed statement of cash flows

                                                   Unaudited      Audited
                                                     30 June  31 December
                                                        2017         2016
                                                      (R'000)      (R'000) 
Net cash generated from operating activities          29 764       23 939
Cash generated from operations                        46 608       37 030
Finance charges paid                                 (17 370)     (13 262) 
Finance income received                                  526          171
Net cash utilised in investing activities               (323)     (13 013) 
Transfer and bond costs                                    -      (13 013) 
Acquisition of furniture and fittings                   (323)           - 
Net cash generated from financing activities          (9 201)      12 574
Repayment of interest-bearing borrowings             (17 817)     (24 425) 
Proceeds from share issue                                  -       36 999
Proceeds from interest-bearing borrowings             16 795            - 
Dividend paid                                         (8 179)           - 
Net movement in cash and cash equivalents             20 240       23 500
Cash and cash equivalents at the beginning of
the period                                            23 500            - 
Cash and cash equivalents at the end of the
period                                                43 740       23 500


Notes to the statement of cash flows

                                                   Unaudited      Audited
                                                     30 June  31 December
                                                        2017         2016
                                                      (R'000)      (R'000) 
Cash generated from operations
Profit before tax adjusted for:                       18 076       16 524
Fair value adjustments on investment
properties and financial instruments                   1 688      (11 387) 
Depreciation                                              23            - 
Finance charges                                       26 710       15 439
Finance income                                          (526)        (171) 
Operating profit before working capital
changes                                               45 971       20 404
Working capital changes                                  637       16 625
Trade and other receivables                            9 275      (13 805) 
Trade and other payables                              (8 638)      30 430
                                                      46 608       37 030

Sectoral split

                                     2017 (Unaudited)    2016 (Audited)
Based on:                           GLA(%) Book value  GLA (%) Book value
Residential                           100%       100%     100%       100%

Lease expiry profile (unaudited)

                                             2017                2016
                                                 Rental            Rental
Based on:                               GLA (%) revenue   GLA (%) revenue
Vacancy                                   4.1%     4.1%     7.0%     6.5% 
Monthly                                  59.7%    59.7%    46.3%    45.7%
30 June 2017                             19.0%    19.1%    28.6%    29.5%
31 December 2017                         16.1%    16.0%    17.0%    17.3%
31 December 2018                          1.1%     1.1%     1.1%     1.0%
                                          100%     100%     100%     100% 

Significant financial statement notes
1. Basis of preparation and accounting policies
The unaudited condensed interim financial statements are prepared in 
accordance with International Financial Reporting Standards, (IAS) 34
Interim Financial Reporting, the SAICA Financial Reporting Guides as 
issued by the Accounting Practices Committee and Financial Pronouncements 
as issued by Financial Reporting Standards Council, the JSE Listings 
Requirements, and the requirements of the Companies Act of South Africa. 
The accounting policies applied in the preparation of these unaudited 
condensed interim financial statements are in terms of International 
Financial Reporting Standards and are consistent with those applied in 
the previous financial statements.

The directors are not aware of any matters or circumstances arising 
subsequent to 30 June 2017 that require any additional disclosure or 
adjustments to the financial statements.

The directors take full responsibility for the preparation of these 
unaudited condensed interim financial statements and for ensuring that 
the financial information has been correctly extracted from the underlying 
unaudited interim financial statements. These unaudited condensed interim 
financial statements have not been reviewed by the Company’s auditors.

2. Segmental analysis
Segmental information
Transcend has fourteen reportable segments based on the entity’s strategic 
business segments. For each strategic business segment, the entity’s 
executive directors review internal management reports on a monthly basis. 
All segments are located in South Africa.

Summarised segmental analysis
For the period ended 30 June 2017

                                                     Acacia      Alpine
R'000                                 67 on 7th       Place        Mews
Revenue                                   5 290       8 414       2 306
Property operating expenses              (1 762)     (2 903)       (756) 
Profit and total comprehensive
income for the period                     3 527       5 492       1 550
Investment property                      91 800     133 800      32 100
Interest-bearing borrowings                   -           -           -

                                         Ekhaya      Ekhaya  Jackalberry
                                       Fleurhof    Jabulani        Close
Revenue                                   4 203       6 132        6 003
Property operating expenses              (1 158)     (1 943)      (1 777) 
Profit and total comprehensive
income for the period                     3 046       4 174       4 226
Investment property                      65 000      88 600     112 400
Interest-bearing borrowings                   -           -           -


                                      Kent Road   Kosmosdal   Parklands
Revenue                                   2 214       8 244       6 333
Property operating expenses                (736)     (2 865)     (2 636) 
Profit and total comprehensive
income for the period                     1 478       5 373       3 697
Investment property                      33 800     135 900      93 500
Interest-bearing borrowings                   -           -           -

                                        Village 
                                         Seven, 
                                          Stone                 Theresa
                                           Arch    Terenure        Park
                                         Estate      Estate     Estates 
Revenue                                   3 772      14 008       6 035
Property operating expenses              (1 688)     (4 534)     (2 473) 
Profit and total comprehensive
income for the period                     2 084       9 466       3 560
Investment property                      54 900     210 000      92 850
Interest-bearing borrowings                   -           -           -

                                                     Entity
                                     Tradewinds       level       Total
Revenue                                   3 053           -      76 007
Property operating expenses              (1 085)          -     (26 316) 
Profit and total comprehensive
income for the period                     1 968     (31 565)     18 076
Investment property                      44 750           -   1 189 400
Interest-bearing borrowings                   -     555 686     555 686

For the period ended 31 December 2016

                                                     Acacia      Alpine
R'000                                 67 on 7th       Place        Mews
Revenue                                   2 540       3 401       1 050
Property operating expenses                (679)     (1 409)       (386) 
Profit and total comprehensive
income for the period                       780        (215)        354
Investment property                      91 800     133 800      32 100
Interest-bearing borrowings              50 895      99 876      14 273

                                         Ekhaya      Ekhaya  Jackalberry
                                       Fleurhof    Jabulani        Close
Revenue                                   2 039       3 020       3 016
Property operating expenses                (479)     (1 188)       (814) 
Profit and total comprehensive
income for the period                     1 979       3 555       1 513
Investment property                      65 000      88 600     112 400
Interest-bearing borrowings              31 403      45 471      23 156

                                      Kent Road   Kosmosdal   Parklands    
Revenue                                   1 079       4 169       3 019
Property operating expenses                (348)     (1 166)       (985) 
Profit and total comprehensive
income for the period                       716         165       5 242
Investment property                      33 800     135 900      93 500
Interest-bearing borrowings              14 194      57 354      37 278

                                        Village 
                                         Seven, 
                                          Stone                 Theresa
                                           Arch    Terenure        Park
                                         Estate      Estate     Estates 
Revenue                                   1 866       6 786       2 791
Property operating expenses                (770)     (2 083)     (1 097) 
Profit and total comprehensive
income for the period                     1 719       8 623      (4 420)
Investment property                      54 900     210 000      92 850
Interest-bearing borrowings              26 837      76 862      49 609

                                                     Entity
                                     Tradewinds       level       Total
Revenue                                   1 485           -      36 261
Property operating expenses                (536)          -     (11 940) 
Profit and total comprehensive
income for the period                       258      (3 745)     16 524
Investment property                      44 750           -   1 189 400
Interest-bearing borrowings              20 268           -     547 476

3. Investment properties
The investment properties were valued by third party independent valuators 
as at 31 December 2016 by capitalising the net contractual income derived 
from the properties for a period of one year in advance by an applicable 
capitalisation rate as determined by the independent valuer. The fair 
values of investment properties remain unchanged as at 30 June 2017, as 
management has assessed that the assumptions underlying the 31 December
2016 valuation have remained unchanged. The net contractual income as at
30 June 2017 is in line with the assumptions used in the valuations, and 
the capitalisation rates remain unchanged.

4. Financial instrument fair value disclosures
Financial assets and liabilities measured at fair value
When measuring the fair value of an asset or liability, the Company uses 
observable market data as far as possible. Fair values are categorised into 
different levels in a fair value hierarchy based on the inputs used in the 
valuation techniques as follows:
* Level 1: quoted prices (unadjusted) in active markets for identical assets 
  or liabilities
* Level 2: inputs other than quoted prices included in level 1 that are 
  observable for the asset or liability, either directly (i.e. as prices) 
  or indirectly (i.e. derived from prices)
* Level 3: inputs for the asset or liability that are not based on
  observable market data

Transfers between level 1, level 2 and level 3
There have been no transfers between level 1, level 2 and level 3 during the 
six months under review.

Interest rate swaps
Transcend uses interest rate swaps to protect the Company against adverse 
movements in interest rates. These interest rate swaps are measured at fair 
value through profit or loss, classified as derivative financial liabilities 
and are categorised in terms of the Company’s fair value hierarchy based on 
a level 2.

The fair value is calculated as the present value of the estimated future 
cash flows. Estimates of future floating-rate cash flows are based on quoted 
swap rates, future prices and interbank borrowing rates. Estimated cash flows 
are discounted using a yield curve constructed from similar sources which 
reflects the relevant benchmark interbank rate used by market participants 
for this purpose when pricing interest rate swaps. The fair value estimate is 
subject to a credit risk adjustment that reflects the credit risk of the 
Company and of the counterparty. This is calculated based on credit spreads 
derived from current credit default swap or bond prices.

As at 30 June 2017, the two derivative financial liabilities relating to the 
interest rate swaps were fair valued, resulting in an increase of
R1 687 967 in the liability and a corresponding fair value movement of
R1 687 967 (FY2016: nil) in the condensed statement of profit or loss and 
other comprehensive income.

The carrying amounts of the debt, trade and other receivables, cash and 
cash equivalents and trade and other payables reasonably approximate their 
fair value.

5. Earnings per share
Basic and diluted earnings per share

                                                           2017      2016
Number of shares in issue at period end (‘000)           66 306    66 306
Weighted average number of shares in issue (‘000)        66 306    31 962

Reconciliation of earnings, headline earnings and 
distributable earnings
                                                           2017      2016
                                                          R'000     R'000
Profit for the year attributable to equity holders       18 076    16 524
(profit after tax)
Less: Change in fair value of investment properties           -   (11 387)
Headline earnings attributable to equity holders         18 076     5 137
Add: Change in fair value of financial instruments        1 688         -
Add: Listing fees expensed                                    -     1 752
Add: Surplus working capital available for
distribution                                                  -     1 290
Clean-out dividend *                                          -    (4 461) 
Amounts available for distribution to shareholders       19 764     3 718
Dividend per share (cents)                                29.81      5.61

* The clean-out dividend is a distribution to Transcend shareholders prior 
to the Transcend listing on the JSE. This dividend is equivalent to the 
distributable earnings for the period 1 October 2016 to 30 November 2016.

6. Related parties
Relationships
Transcend is externally managed by IHS Asset Management (Pty) Ltd (“IHS AM”), 
a private company registered and incorporated in accordance with the laws of 
South Africa and a wholly-owned subsidiary of IHS (RF) (Pty) Ltd. An asset 
management agreement was entered into by Transcend and IHS AM and became 
effective 1 October 2016. IHS AM charged Transcend asset management fees 
of R2 237 775 during the period under review in accordance with the asset 
management agreement.

The property management function of the Company is outsourced on market 
related terms to IHS Property Management (Pty) Ltd (“IHS PM”), a private 
company registered and incorporated in accordance with the laws of South 
Africa. A property management agreement was entered into by Transcend and 
IHS PM on 16 October 2016. IHS PM charged Transcend property management 
fees of R5 438 778 during the period under review in accordance with the 
property management agreement.

7. Payment of dividend
The board has approved and notice is hereby given of an interim dividend 
of 29.80875 cents per share for the six months ended 30 June 2017.

In accordance with Transcend’s status as a REIT, shareholders are advised 
that the dividend 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”). The dividend on the shares will be deemed to be a 
dividend, for South African tax purposes, in terms of section 25BB of the 
Income Tax Act.

The dividend received by or accrued to South African tax residents must be 
included in the gross income of such shareholders 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 it is a dividend distributed by a REIT. This
dividend is, however, exempt from dividend withholding tax in the hands 
of South African tax resident shareholders, provided that the South African 
resident shareholders provide 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 dividend is exempt from dividends tax; and
b) a written undertaking to inform the CSDP, broker or the Company, as the 
   case may be, should the circumstances affecting the exemption change or
   the beneficial owner cease to be the beneficial owner,
   
both in the form prescribed by the Commissioner for the South African 
Revenue Service. Shareholders are advised to contact their CSDP, broker or 
the Company, as the case may be, to arrange for the abovementioned documents 
to be submitted prior to payment of the dividend, if such documents have not 
already been submitted.

Dividends received by non-resident shareholders will not be taxable as income 
and instead will be treated as an ordinary dividend which is exempt from 
income tax in terms of the general dividend exemption in section 10(1)(k)(i) 
of the Income Tax Act. On 22 February 2017, the dividends withholding tax 
rate was increased from 15% to 20% and accordingly, any distribution received 
by a non-resident from a REIT will be subject to dividend withholding tax 
at 20%, 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 shareholder. Assuming dividend withholding tax 
will be withheld at a rate of 20%, the net dividend amount due to non-resident 
shareholders is 23.84700 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 their CSDP, broker or the Company, as the 
   case may be, should the circumstances affecting the reduced rate change or 
   the beneficial owner cease to be the beneficial owner,

both in the form prescribed by the Commissioner for the South African Revenue 
Service. Non-resident shareholders are advised to contact their CSDP, broker 
or the Company, as the case may be, to arrange for the abovementioned 
documents to be submitted prior to payment of the dividend if such documents 
have not already been submitted, if applicable.

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

Last day to trade cum dividend                     Tuesday, 26 September 2017
Share traded ex dividend                         Wednesday, 27 September 2017
Record date                                         Friday, 29 September 2017
Payment date                                           Monday, 2 October 2017

Share certificates may not be dematerialised or materialised between Wednesday, 
27 September 2017 and Friday, 29 September 2017, both days inclusive.

In respect of dematerialised shareholders, the dividend will be transferred to 
the CSDP/broker accounts on Monday, 2 October 2017. Certificated shareholders’ 
dividend payments will be deposited on or about Monday, 2 October 2017.

Shares in issue at the date of declaration of this dividend: 66 305 662. 
Transcend’s income tax reference number: 9015377253

By order of the board

Robert Nicolaas Wesselo                                David Peter Lange
Chief Executive Officer                                Chief Financial Officer

Johannesburg
7 September 2017

Directors: Robert Reinhardt Emslie(1) (Chairperson); Robert Nicolaas Wesselo 
(Chief executive officer); David Peter Lange (Chief financial officer); 
Solly Mboweni (Chief operating officer); Cathal Padraig Conaty; 
Faith Nondumiso Khanyile(1); Michael Simpson Aitken(1); Michael Louis Falcone
((1)Independent non-executive director)

* There were no changes to the board during this period.

Registered office: 54 Peter Place, Block G, Peter Place Office Park, 
Bryanston, 2191

Transfer secretaries: Link Market Services South Africa Proprietary Limited, 
13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein, 2001, 
PO Box 4844, Johannesburg, 2000

Designated advisor: Java Capital

Company secretary: Karen Waldeck-Kruger
Date: 07/09/2017 08:20:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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