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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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