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TOWER PROPERTY FUND LIMITED - Unaudited condensed consolidated interim results for the six months ended 30 November 2018

Release Date: 28/02/2019 08:00
Code(s): TWR     PDF:  
 
Wrap Text
Unaudited condensed  consolidated interim results for the six months ended 30 November 2018

Tower Property Fund Limited
Incorporated in the Republic of South Africa
Registration number: 2012/066457/06
JSE share code: TWR
ISIN: ZAE000179040
(Approved as a REIT by the JSE)
("Tower" or the "group" or the "fund" or the "company")


Unaudited condensed  consolidated interim results for the six months ended 30 November 2018

Loan to value down to 33%
from 39% at year end

R300 million
capital proceeds re-invested and used to buy back shares

Tangible net asset value per share up 1.8% to R9.14 from year end

Net asset value per share R9.84

Total return of 10.2%* (12% in South Africa in ZAR and 6.2% in Croatia in Euro)
*On a property level

Vacancies 4.4%

"Interest only" loans secured in Croatia

PROFILE
Tower is an internally managed real estate investment trust (REIT) which owns a diversified portfolio of 44 convenience retail, industrial and office properties valued at R5 billion,
located in South Africa and Croatia. The South African portfolio is located in the country's major metropoles with 43% by value in Cape Town, 43% in Gauteng and 14% in KwaZulu-Natal. The
five Croatian properties represent 29% of the fund's total value. The fund currently has a sectoral spread by value of 47% convenience retail, 48% office and 5% industrial.

The objective of the fund is to deliver attractive, growing, total returns by (i) investing in properties in strong nodes with growth potential; (ii) active property asset management of
our existing portfolio, with a particular focus on unlocking value; (iii) prudent balance sheet management in order to manage risk and create capacity to unlock value; (iv) accepting
variations in income where these can be shown to add sustainable value; (v) selling non-core and ex-growth properties to realise capital for re-investment; and (vi) cost containment, with
a focus on "greening" initiatives.

FINANCIAL PERFORMANCE

In its 2018 annual results, Tower advised shareholders that, given the difficult macro-economic environment in South Africa, it expected flat to low income growth from its South African
property portfolio for the 2019 financial year. The Croatian portfolio was expected to perform well, given the anticipated growth in the Croatian economy, but shareholders were advised
that this would be off-set by the rental reduction in Vukovarska, a stand-alone Konzum store, meaning that property income growth across the combined portfolio was anticipated to be flat.

Property income excludes the straight-line lease accrual and currency fluctuations, and is measured on a like-for-like basis, excluding acquisitions and disposals of property and once off rates
and electricity credits received. Property income expectations across the combined portfolio have largely been met.

Tower's South African property portfolio has performed well with vacancies reducing in what remains a difficult market, with property income remaining flat.

The Croatian portfolio has also performed in line with our expectations, with property income (ignoring currency fluctuations) decreasing by 3% as a result of the agreed rental reduction
on the Vukovarska property. Without this reduction, property income from the Croatian portfolio would have remained flat.

As a result, property income across the combined portfolio was marginally down for the six months broadly in line with guidance for the full year. The company's tangible net asset value
per share increased by 1.8% in the six months and the company's total return on its property portfolio (made up by the percentage increase in property values over the period and the income
earned off the property portfolio, as a percentage of cost) over the past 12 months was approximately 10.2%.

In the 2018 financial results, Tower advised shareholders that, to manage risk and create the necessary debt capacity to unlock value, it would look to reduce its loan to value and its
Standard Bank Euro loans (which are secured against the South African property portfolio). Tower has made very good progress on this front with Tower's loan to value reducing to 33% from
39% at year end and R120 million of the Standard Bank Euro loans being repaid out of the capital proceeds from Oryx Properties Limited's (Oryx) investment into TPF International Limited
(TPF International).

Tower chose not to translate the property income guidance given in its 2018 financial results to distribution guidance as disclosed. Instead, Tower advised shareholders of factors likely
to impact distributable income, including: exchange rate movements, the establishment and running costs of TPF International, the impact of the anticipated partial settlement of the Euro
debt, the value and timing of the sale of non-core properties, management's ability to unlock value from refurbishments, the timing and terms of anticipated refinancing of the group's
various Euro facilities and the reinvestment of proceeds from asset management activities.

A number of these factors, all of which relate to planned transactions and initiatives which strengthen the company in the long term, have resulted in a reduction of Tower's distributable
income during the six-month period under review. These include:

- the decision to repay the R120 million of Standard Bank Euro debt rather than Rand debt reduced Tower's distributable income by approximately R6.9 million, given the approximately
  5.75% difference between the Rand and Euro interest rates;
- the sale of two non-core properties (Pick n Pay Distribution Centre and Nampak) at a book value of R123 million further secures the long-term sustainability of Tower's property
  income, but reduced Tower's distribution by approximately R1.6 million, given that the properties were sold at yields higher than Tower's cost of funding;
- the establishment of TPF International, which facilitated the investment by Oryx and the potential to bring additional external investors into TPF International, brings additional
  running costs of approximately R1 million and tax leakage of R1.5 million;
- there has been an unexpected delay in the acquisition of the Industrial Property in Zagreb, Croatia by TPF International resulting in a six-month cash drag on a capital amount of
  R100 million affecting distributable income by R3.3 million. Building A of the Industrial Property transferred on 21 December 2018; and
- the reduction of the Vukovarska rental by R3 million to secure all other Konzum rental agreements. The funding bank of Vukovarska reduced the interest payable on the loan by
  R1.4 million to the company's benefit.

In combination, these factors have resulted in Tower earning distributable income for the six-month period of approximately R117 million and the board of directors of Tower (the board) has
declared a dividend of 36.83000 cents per share (being 9.5% lower than the previous corresponding period).

Revenue decreased by 3% to R206 million when compared to the corresponding period, primarily as a result of certain non-core properties being sold and the rental reduction at Vukovarska.
Similarly, operating profit decreased by 9% to R136 million, as a result of properties being sold as well as the increase in net property operating and administration expenses. The
increase in net property operating expenses when compared to the corresponding period relate primarily to the write off of the pre-9 April 2017 outstanding Konzum debt in the period under
review, and rates and electricity credits received in the corresponding period. R5 million of the administration expenses relate to costs incurred to set up TPF International.

CROATIA

In order to provide the company flexibility with its Croatian portfolio, Tower, during the period under review, set up two new companies, Tower International Treasury Proprietary Limited
("Tower International Treasury") (a Domestic Treasury Management Company) and TPF International (a Mauritian GBL1 company). Tower sold its equity and shareholder loans in the Croatian
subsidiaries to TPF International. All Tower's Euro debt was transferred to Tower International Treasury, who owns 74% of the equity in TPF International. The remaining 26% was acquired by
Oryx.

Tower's investment in Croatia, through its 74% holding in TPF International is stable and income and capital growth is expected in the medium term. The special administration law (Lex
Agrokor) passed to protect the solvency of the parent (Agrokor d.d) of TPF International's largest tenant (Konzum d.o.o.) has been successful and is due to be finalised in the second
quarter of 2019. Konzum remains up to date with all rental payments and the stores are trading well. TPF International's back up lease with Spar, over the Konzum retail stores, remains in
place.

TPF International is expected to grow Tower's distributable income arising from Croatia through asset management activities and accretive acquisitions in its pipeline (the pipeline of new
properties is expected to be funded by in-country institutional equity providers). A major success in the Croatian portfolio has been the offer from local banks of interest only funding
for senior debt on the Croatian properties. This has previously been elusive, however, TPF International is in the process of refinancing the entire portfolio with European banks on an
interest only basis and at reduced interest rates. TPF International's loan to value is low at 25%. Tower continues to assess its investment in TPF International with the strategic
imperative of growing Tower's total return.

PROGRESS ON VALUE-ADD OPPORTUNITIES

As announced in the 2018 annual financial results, Tower generated certain capital proceeds from various initiatives. It has invested those proceeds in the following ways:

- R300 million from Oryx for the investment in TPF International. R120 million placed in Euro loan facilities secured by South African properties. R80 million into South African loan
  facilities and used to buy back shares and R100 million into TPF International for the acquisition of the Industrial Property; and
- the Napier Street development is complete with beneficial occupation having been given to owners. The profits will be used to repay debt and for capital improvements.

The addition of 54 residential apartments to Cape Quarter Piazza (Old Cape Quarter) is underway with construction expected to commence mid-2019.

Other once-off proceeds are expected in the short term as Tower continues to sell non-core properties. The proceeds will be re-invested back into the company to enhance total return.


SALE OF NON-CORE PROPERTIES

The following properties were sold in the period under review:
- Pick n Pay Distribution Centre, KwaZulu-Natal: R96 million; and
- Nampak Industrial, KwaZulu-Natal: R27 million.

The proceeds generated from the sales will be used to reduce gearing and re-invest in the company. There are five properties which are classified as held for sale and management expects
these properties to be sold in the next six months. These properties continue to be actively marketed.

OPERATING PERFORMANCE

The overall quality of Tower's South African portfolio is endorsed by a recent independent MSCI report (a copy of which is available on Tower's website
http://www.towerpropertyfund.co.za/download/msci-re-enterprise-analytics/), which showed Tower's portfolio delivering income and capital growth ahead of many competitors.

The quality of the portfolio and Tower's active property asset management has resulted in pleasing operating performance in a difficult period. Portfolio vacancies have decreased to 4.4%
as at 30 November 2018 (5.1% in South Africa), the lowest on record. South African vacancies are further broken down by 2.3% office, 0.9% retail and 1.2% industrial. A total of 44 645m2
was let during the period. 32 431m2 relates to tenant renewals while the balance of 12 214m2 relates to new leases. The tenant retention rate for the period was 96%. 73% of leases expiring
in the period were renewed (offices 64%, retail 60% and industrial 91%). Average lease escalations within the portfolio are 6.02% retail, 7.5% industrial and 8.02% office, equating to a
weighted average of 7.06%.

New leases signed at Sunclare, De Ville, Musgrave, Napier, Linkhills, Cape Quarter, Constantia View, Clearview Village and Whitby Office Estate have filled stubborn vacancies at these
properties.

The following crucial renewals ensured occupancy levels have remained well above market averages:

Industrial

Isando, Route 21 and Kuit Street had four renewals totalling approximately 10 000m2.

Office
- 15 Wellington Road anchor, Transman (3 380m2) renewed its lease for a further five years.
- Medscheme (8 000m2) renewed its lease for a further seven years.
- Upper Grayston had two tenants totalling 2 800m2 renew for a further three years.
- Woodlands' anchor tenant of 830m2 renewed for a further three years.
- Sunclare - Regus signed a 10-year lease with a five-year rent review, over 3 675m2.

Retail
- Cape Quarter is fully let and tenant mix and retention continues to improve. Deloitte has provided notice to vacate in October 2020. This premium premises is in high demand with
  multiple options including and in order of preference, shared work space, sectional title offices and small and large office uses being investigated by the company.
- De Ville - despite economic influences and a new neighbouring centre coming on line during 2018, tenant's turnover growth and retention remain strong.
- Musgrave is fully let and continues to show steady growth.

New developments
- 32 Napier Street commercial and residential development and the new underground parking are complete. Tower has entered into sale agreements for 11 of the 16 residential units and
  continues to own 5 units (to be added to our 14 residential units at Cape Quarter on a short let basis).
- Old Cape Quarter - It is anticipated that Tower will begin the development of 54 new residential apartments at Old Cape Quarter on 1 June 2019 for completion in late December
  2020.

Office space has been extremely difficult to let with most renewals commanding flat or lower rentals than previously. Vacancies have reduced which is pleasing, however, these have come at
a cost as longer beneficial occupation periods and lower rents have had to be offered to attract tenants.

There are currently 4.7% vacancies in the Croatian portfolio line shops, however, those are guaranteed by the head leases on the properties.

The weighted average lease expiry of the fund is 4.3 years with the South African portfolio at 2.9 years.


Borrowings
                                Total debt   ZAR debt  Euro debt
Loan facilities (R'000)*         1 820 621    597 074  1 223 547
Weighted cost of funding (%)          5.32       9.19       3.43
Debt expiry profile (years)            3.3**      0.5**      4.7
Percentage hedged (%)                   79         84         77
Hedging expiry profile (years)         2.6***     2.1***     2.7

*   This amount excludes interest rate derivatives, the provision for interest and debt structuring fees.
**  R470 million of the ZAR debt was refinanced in January 2019 for three years at the three-month Jibar plus 180 basis points.
*** On 25 January 2019, the R500 million swap was extended to July 2022 at a rate of 7.59%.

Based on investment properties valued at R5 billion, the loan to value (LTV) ratio of the group was 33% at the end of the period (36% in South Africa and 25% in Croatia). The LTV is
calculated as other financial liabilities less cash, divided by investment property. The LTV post the acquisition of the Industrial Property is estimated to be 34.5%. Tower successfully
reduced the interest rate on its Euro loans which are secured by South African assets, effective 1 November 2018. A saving of 0.45% was achieved resulting in reduced interest costs of R3
million per annum.

A major, strategic breakthrough has been the approval of the refinancing of Tower's Croatian Euro loans to interest-only loans. Euro 14.4 million of this debt has been approved "in
principle" by local banks. This enhances Tower's cash flow from the region. An interest rate saving of 1.45% or R3 million is expected. Tower is in advanced discussions and has "in-
principle" agreements to refinance the remaining Croatian debt on an interest only basis at lower interest rates.


PROSPECTS

Tower's change of strategy from an income focused fund to one equally focused on income and tangible net asset value growth, is slowly taking shape. This change of strategy and resultant
focus on prudent balance sheet management has and may continue to result in the sacrifice of short-term distributable income in favour of long-term sustainable growth of the company.

Property is a long-term business and Tower is confident that this focus will yield positive long-term results.

Our major short-term focus will be:
- the reinvestment of capital proceeds into the property portfolio in value add projects;
- the realisation of profits at the Old Cape Quarter development. As a result of the initiatives to strengthen Tower's balance sheet and reduce gearing, we have received approval for
  balance sheet funding (rather than development only funding) on this project which provides Tower with the capability to complete the development and the flexibility to sell the new units
  or to lease them on a short-term basis;
- raising of new European based capital in TPF International, which has gained traction will allow Tower flexibility in its involvement with TPF International going forward, and
  allow for accretive acquisitions in that company which will boost Tower's earnings; and
- the repurchase of Tower shares should the current attractive pricing remain.

We anticipate that our property income, as forecast in our May 2018 results, will remain within the budgeted range for the period ended 31 May 2019, provided the current 
and anticipated tenancies of the properties remain as forecast. 

These property income forecasts (which have not been reviewed or reported on by the Tower?s auditors) assume a stable portfolio with no major tenant failures and no 
macro-economic surprises. Factors which could influence these forecasts, and/or their impact on Tower?s distributions, include the settlement of Euro debt, the benefit of 
refinancing Euro debt, exchange rate movements, value and timing of the sale of non-core properties, management?s ability to unlock capital value from refurbishments
(including, in particular the Cape Quarter residential development), the timing of the Euro debt refinancing and the reinvestment of proceeds from asset management activities.
All forecasts made are unaudited.


BASIS OF PREPARATION

The unaudited condensed consolidated interim financial results for the six months ended 30 November 2018 (the results), have been prepared in accordance with and containing the information
required by IAS 34 Interim Financial Reporting and the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council. The results comply with the JSE Listings
Requirements and the Companies Act, 71 of 2008. The accounting policies and methods of computation applied in the preparation of the results are in compliance with International Financial
Reporting Standards and are consistent with those used in the preparation of the annual financial results of the group for the year ended 31 May 2018, except for the effect of IFRS 9
Financial instruments and IFRS 15 Revenue from contracts with customers which were adopted during the period under review.

These results were prepared under the supervision of Mrs J Mabin CA(SA) in her capacity as chief financial officer.

The directors take full responsibility for the preparation of the results. The directors are not aware of any matters or circumstances arising subsequent to 30 November 2018 that require
any additional disclosure or adjustment to the results, other than as disclosed in this announcement. These results have not been reviewed or reported on by Tower's auditors.

IFRS 15 Revenue from contracts with customers

IFRS 15 Revenue from contracts with customers has not had an impact on the results of the group. To date the group's revenue has consisted of rental income, which falls outside the scope
of IFRS 15 and within the scope of IFRS 16 Leases, effective for years beginning on or after 1 January 2019. The group's inventories consist of residential units under development, sales
of which had not yet commenced upon IFRS 15 becoming effective.

IFRS 9 Financial instruments

IFRS 9 Financial instruments introduces a new expected credit loss impairment model that replaces the incurred loss model in IAS 39. The group has adjusted its impairment models using the
general approach as envisaged by IFRS 9 to incorporate forward looking information and the time value of money. The impact of the earlier recognition of credit losses under IFRS 9 is not
material.

Fair value measurement of investment property recognised in the statement of financial position

Valuations of all properties were performed by the directors as at 30 November 2018, and have resulted in a net upward re-valuation adjustment of R59 million. Independent external
valuations are carried out on a rotational basis at year end to ensure each property is valued independently at least every three years. Conservative valuation assumptions have been
applied to take account of weakening market conditions. The valuations are based either on the discounted cash flow method or the capitalisation rate of net income method or a combination
of these methods, which is consistent with the basis used in prior years.

The fair value measurement for investment property has been categorised as a level 3 fair value based on the inputs to the valuation technique used.

Significant unobservable inputs used were as follows:
- a capitalisation rate, ranging between 7.25% and 10% (31 May 2018: 7.25% and 10.5%) has been used; and
- the discount rate applied range between 13.5% and 15.5% (31 May 2018: 13.5% and 15.5%).

Fair value of financial instruments recognised in the statement of financial position

The group measures fair values using the fair value hierarchy that reflects the significance of the inputs used in making the measurements.

The valuation of interest rate swaps uses observable market data and requires management judgement and estimation. The availability of observable market data and model inputs reduces the
need for management's judgement and estimation and also reduces uncertainty associated with the determination of fair values.

The fair value of the interest rate swap is determined by the bank using a valuation technique that maximises the use of observable market inputs. Interest rate swaps are valued by
discounting future cash flows using the interest rate yield curve. Interest rate swaps are classified as level 2 financial instruments.

The interest rate has been fixed on R500 million of borrowings at 7.53%, expiring on 30 September 2020. The fair value of the swap at 30 November 2018 was -R1.6 million. The company has
entered into the following Euro denominated swaps:

                                            Notional amount  Fair Value 30 November 2018
                                                 (Euro '000)                  (Euro '000)
Contract 1: 4.10% maturing 3 August 2020              7 000                       (1 365)
Contract 2: 3.70% maturing 18 March 2021              2 540                         (240)
Contract 3: 3.60% maturing 21 June 2021              30 514                       (1 400)
Contract 4: 3.75% maturing 13 January 2022           13 199                       (1 118)


DIVIDEND DECLARATION

Notice is hereby given that a gross cash dividend of 36.83000 cents per share (dividend number 11) has been declared from income reserves in respect of the six months ended 30 November
2018. In accordance with Tower's status as a REIT, shareholders are advised that the distribution meets the requirements of a qualifying distribution for the purposes of section 25BB of
the Income Tax Act, 58 of 1962 (Income Tax Act). The distribution 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.

Accordingly the dividend received by South African tax residents must be included in their gross income and will not be exempt in terms of the ordinary dividend exemption in section 10(1)
(k)(i) of the Income Tax Act, as a result of paragraph (aa) of the proviso thereto which provides that dividends distributed by a REIT are not exempt from income tax.

The 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 dividends are exempt from dividend tax; and
b) a written undertaking to inform the CSDP or broker, 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. Shareholders are advised to contact their CSDP or broker, as the case may be, to arrange for the
abovementioned documents to be submitted prior to the payment of the distribution if such documents have not already been submitted.

Dividends received by non-resident shareholders will be exempt from income tax in terms of section 10(1)(k)(i) of the Income Tax Act. The dividends withholding tax rate is 20%,
accordingly, any dividend will be subject to dividend withholding tax levied at a rate of 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.

Should dividend withholding tax be withheld at a rate of 20%, the net dividend amount due to non-resident shareholders is 29.46400 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 the CSDP or broker, 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 or broker, as the case may be, to arrange
for the abovementioned documents to be submitted prior to the payment of the distribution if such documents have not already been submitted.


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

2019
Last day to trade cum dividend distribution:         Monday, 18 March
Shares trade ex dividend distribution:              Tuesday, 19 March
Record date:                                         Friday, 22 March
Payment date:                                        Monday, 25 March

Share certificates may not be dematerialised or rematerialised between Tuesday, 19 March 2019 and Friday, 22 March 2019, both days inclusive.

The dividend will be transferred to dematerialised shareholders' CSDP accounts or broker accounts on Monday, 25 March 2019.

Certificated shareholders' dividend payments will be paid to certificated shareholders' bank accounts on or about Monday, 25 March 2019.

Shares in issue at date of declaration (excluding treasury shares): 338 452 444.

Tower's income tax reference number: 9607/564/16/9.

By order of the Board



Consolidated statement of profit and loss and comprehensive income
                                                                                                     Unaudited    Unaudited    Audited
                                                                                                      6 months     6 months  12 months
                                                                                                         ended        ended      ended
                                                                                                   30 November  30 November     31 May
                                                                                                          2018         2017       2018
                                                                                                         R'000        R'000      R'000
REVENUE
Contractual rental income                                                                              204 075      209 824    411 827
Straight-line lease accrual                                                                              1 679        2 400      4 593
                                                                                                       205 754      212 224    416 420
Net property operating expenses                                                                 3      (22 458)      (6 343)   (17 385)
NET PROPERTY INCOME                                                                                    183 296      205 881    399 035
Administration expenses                                                                         5      (15 802)      (9 426)   (18 074)
Loss on the disposal on investment property                                                     6       (3 508)        (492)    (1 671)
Disposal of goodwill                                                                            7       (3 490)      (2 871)    (3 468)
Foreign exchange (loss)/gain                                                                    8      (24 120)     (43 415)       937
NET OPERATING PROFIT                                                                                   136 376      149 677    376 759
Fair value gains on investment properties                                                              125 048      151 892    206 275
Fair value losses on investment properties                                                             (66 069)     (62 183)  (172 955)
Fair value adjustments on interest rate derivatives                                                      1 842        7 420      1 653
Profit from operations                                                                                 197 197      246 806    411 732
Finance income                                                                                           1 745        2 707      4 314
Finance costs                                                                                          (53 993)     (62 336)  (120 050)
PROFIT BEFORE TAXATION                                                                                 144 949      187 177    295 996
Taxation                                                                                                  (655)           -          -
PROFIT FOR THE PERIOD                                                                                  144 294      187 177    295 996
Other comprehensive income - items  that may subsequently be reclassified  to profit and loss
Exchange difference on foreign operations                                                               23 967       28 283      1 499
TOTAL COMPREHENSIVE PROFIT  FOR THE PERIOD                                                             168 261      215 460    297 495
Profit for the period attributable to:
Equity shareholders of Tower Property  Fund Limited                                                    136 313      186 919    293 429
Non-controlling interest                                                                        9        7 981          258      2 567
                                                                                                       144 294      187 177    295 996
Total comprehensive income attributable to:
Equity shareholders of Tower Property  Fund Limited                                                    159 808      213 102    294 815
Non-controlling interest                                                                        9        8 453        2 358      2 680
                                                                                                       168 261      215 460    297 495
Basic and diluted earnings per share (weighted average shares in issue) (cents)                           40.2         55.0       86.4



Consolidated statement of financial position
                                                                                                     Unaudited    Unaudited    Audited
                                                                                                      6 months     6 months  12 months
                                                                                                         ended        ended      ended
                                                                                                   30 November  30 November     31 May
                                                                                                          2018         2017       2018
                                                                                                         R'000        R'000      R'000
ASSETS
Non-current assets
Investment property                                                                                  4 659 666    4 703 649  4 378 361
Straight-line lease accrual                                                                             62 917       59 629     60 741
Property, plant and equipment                                                                              185          220        193
Goodwill                                                                                        7      234 136      238 223    237 626
                                                                                                     4 956 904    5 001 721  4 676 921
Current assets
Inventories                                                                                    10       56 171       21 783     35 150
Trade and other receivables                                                                            110 539      111 646    104 776
Cash and cash equivalents                                                                      11      182 422       72 906     92 775
                                                                                                       349 132      206 335    232 701
Investment property held for sale                                                                      250 708      344 534    504 596
                                                                                                       599 840      550 869    737 297
TOTAL ASSETS                                                                                         5 556 744    5 552 590  5 414 218
Equity and liabilities
Equity
Stated capital                                                                                       3 035 344    3 035 344  3 035 344
Treasury capital                                                                               12       (6 966)           -          -
Foreign currency translation reserve                                                                    15 726       17 028     (7 769)
Share-based payment reserve                                                                                 44            -          -
Retained income                                                                                        284 936      292 624    260 933
Shareholders' interest                                                                               3 329 084    3 344 996  3 288 508
Non-controlling interest                                                                        9      283 581       26 985     27 307
Total equity                                                                                         3 612 665    3 371 981  3 315 815
LIABILITIES
Non-current liabilities
Other financial liabilities                                                                          1 310 457    1 794 628  1 361 688
Loan payable to shareholder                                                                             24 683       26 709     23 250
                                                                                                     1 335 140    1 821 337  1 384 938
Current liabilities
Other financial liabilities                                                                            517 336      295 961    653 168
Trade and other payables                                                                       13       91 603       63 311     60 297
                                                                                                       608 939      359 272    713 465
Total equity and liabilities                                                                         5 556 744    5 552 590  5 414 218




Consolidated statement of changes in equity
                                             Stated  Treasury  Foreign currency  Share-based   Retained  Shareholders'  Non-controlling      Total
                                            capital   capital       translation      payment     income       interest         interest      R'000
                                              R'000     R'000    reserve (FTCR)      reserve      R'000          R'000            R'000
                                                                          R'000        R'000
Balance at 1 June 2017                    3 039 980    (4 636)           (9 155)           -    237 031      3 263 220           24 627  3 287 847
Treasury shares cancelled                    (4 636)    4 636                 -            -          -              -                -          -
Profit for the period                             -         -                 -            -    186 919        186 919              258    187 177
Foreign currency translation differences          -         -            26 183            -          -         26 183            2 100     28 283
Dividends paid                                    -         -                 -            -   (131 326)      (131 326)               -   (131 326)
Balance at 30 November 2017               3 035 344         -            17 028            -    292 624      3 344 996           26 985  3 371 981
Profit for the period                             -         -                 -            -    106 510        106 510            2 309    108 819
Foreign currency translation differences          -         -           (24 797)           -          -        (24 797)          (1 987)   (26 784)
Dividends paid                                    -         -                 -            -   (138 201)      (138 201)               -   (138 201)
Balance at 31 May 2018                    3 035 344         -            (7 769)           -    260 933      3 288 508           27 307  3 315 815
Acquisition of treasury shares                    -    (6 966)                -            -          -         (6 966)               -     (6 966)
Acquisition of foreign subsidiary                 -         -                 -            -     24 401         24 401          249 284    273 685
Profit for the year                               -         -                 -            -    136 313        136 313            7 981    144 294
Share-based payment                               -         -                 -           44          -             44                -         44
Foreign currency translation differences          -         -            23 495            -          -         23 495              472     23 967
Dividends paid                                    -         -                 -            -   (136 711)      (136 711)          (1 463)  (138 174)
Balance at 30 November 2018               3 035 344    (6 966)           15 726           44    284 936      3 329 084          283 581  3 612 665



Segmental analysis
                                                                      South Africa                             Croatia (including Mauritius)
For the 6 months ended 30 November 2018 (R'000)            Retail        Office  Industrial      Total     Retail   Office      Total  Grand Total
Property assets*                                        1 325 107     2 013 202     235 215  3 573 524  1 025 454  430 669  1 456 123    5 029 647
Segment liabilities**                                     496 999       775 734      88 887  1 361 620    375 533  157 387    532 920    1 894 540
Fair value adjustment to investment properties             14 504        42 734       1 741     58 979          -        -          -       58 979
Straight-line lease accrual                                32 306        27 130       3 481     62 917          -        -          -       62 917
Revenue (excluding straight-line lease adjustments)        53 427        83 178      12 356    148 961     38 762   16 352     55 114      204 075
Net operating costs                                        (6 940)       (5 188)     (1 754)   (13 882)    (8 056)    (520)    (8 576)     (22 458)
Segment profit                                             46 487        77 990      10 602    135 079     30 706   15 832     46 538      181 617
Straight-line lease adjustment                                                                                                               1 679
Non-property related expenses                                                                                                              (15 802)
Loss on the disposal of investment property                                                                                                 (3 508)
Disposal of goodwill                                            -             -      (3 490)    (3 490)         -        -          -       (3 490)
Foreign exchange loss                                                                                                                      (24 120)
Net operating profit                                                                                                                       136 376
For the 6 months ended 30 November 2017 (R'000)
Property assets*                                        1 337 211     1 849 942     381 740  3 568 893  1 111 173  449 749  1 560 922    5 129 815
Segment liabilities**                                     543 606       819 147     158 028  1 520 781    456 120  176 473    632 593    2 153 374
Fair value adjustment to investment properties             65 320        39 577     (15 188)    89 709          -        -          -       89 709
Straight-line lease accrual                                31 982        26 801         846     59 629          -        -          -       59 629
Revenue (excluding straight-line lease adjustments)        57 455        81 984      15 970    155 409     38 707   15 708     54 415      209 824
Net operating costs                                           568        (4 864)     (1 550)    (5 846)         -     (497)      (497)      (6 343)
Segment profit                                             58 023        77 120      14 420    149 563     38 707   15 211     53 918      203 481
Straight-line lease adjustment                                                                                                               2 400
Non-property related expenses                                                                                                               (9 426)
Loss on the disposal of investment property                                                                                                   (492)
Disposal of goodwill                                       (2 607)            -        (264)    (2 871)         -        -          -       (2 871)
Foreign exchange loss                                                                                                                      (43 415)
Net operating profit                                                                                                                       149 677
For the year ended 31 May 2018 (R'000)
Property assets*                                        1 338 536     1 910 688     351 763  3 600 987    969 861  408 193  1 378 054    4 979 041
Segment liabilities**                                     587 104       880 973     155 442  1 623 519    325 080  125 777    450 857    2 074 376
Fair value adjustment to investment properties               (707)       66 430      12 119     77 842    (42 964)  (1 558)   (44 522)      33 320
Straight-line lease accrual                                31 500        27 151       2 090     60 741          -        -          -       60 741
Revenue (excluding straight-line lease adjustments)       110 587       165 247      29 539    305 373     75 691   30 763    106 454      411 827
Net operating costs                                        (3 620)       (8 676)     (4 116)   (16 412)         -     (973)      (973)     (17 385)
Segment profit                                            106 967       156 571      25 423    288 961     75 691   29 790    105 481      394 442
Straight-line lease adjustment                                                                                                               4 593
Non-property related expenses                                                                                                              (18 074)
Loss on the disposal of investment property                                                                                                 (1 671)
Disposal of goodwill                                       (2 607)            -        (861)    (3 468)         -        -          -       (3 468)
Foreign exchange gain                                                                                                                          937
Net operating profit                                                                                                                       376 759



Consolidated statement of cash flows
                                                                                               Unaudited    Unaudited      Audited
                                                                                                6 months     6 months    12 months
                                                                                                   ended        ended        ended
                                                                                             30 November  30 November       31 May
                                                                                                    2018         2017         2018
                                                                                                   R'000        R'000        R'000
CASH GENERATED FROM OPERATIONS                                                                   161 628      176 173      354 184
Finance income                                                                                     1 745        2 707        4 314
Finance costs                                                                                    (55 426)     (61 136)    (116 485)
Tax paid                                                                                            (127)           -            -
Net cash from operating activities                                                               107 820      117 744      242 013
Cost capitalised to investment property                                                          (23 348)     (18 094)     (55 269)
Property, plant and equipment acquired                                                               (40)         (65)         (77)
Proceeds on sale of investment property                                                           16 899          140       13 615
Net cash from investing activities                                                                (6 489)     (18 019)     (41 731)
Proceeds from the sale of interest to non-controlling shareholders                               175 515            -            -
Acquisition of treasury shares                                                                    (6 966)           -            -
Local loans raised                                                                               141 389      138 150      322 250
Local loans repaid                                                                              (167 916)     (77 744)    (185 021)
Foreign loans repaid                                                                             (16 738)     (17 052)     (33 215)
Non-controlling interest loan repayment                                                                -         (166)      (1 077)
Dividends paid                                                                                  (138 174)    (131 326)    (269 527)
Net cash from financing activities                                                               (12 890)     (88 138)    (166 590)
Net movement in cash and cash equivalents                                                         88 441       11 587       33 692
Cash and cash equivalents at beginning of period                                                  92 775       58 945       58 945
Foreign exchange differences on cash balances                                                      1 206        2 374          138
Cash and cash equivalents at end of period                                                       182 422       72 906       92 775




Reconciliation of earnings and headline earnings
                                                                                                            Unaudited    Unaudited      Audited
                                                                                                             6 months     6 months    12 months
                                                                                                                ended        ended        ended
                                                                                                          30 November  30 November       31 May
                                                                                                                 2018         2017         2018
                                                                                                                R'000        R'000        R'000
                                                                                                   Gross          Net          Net          Net
PROFIT ATTRIBUTABLE TO  ORDINARY EQUITY HOLDERS                                                               136 313      186 919      293 429
Adjusted for:
Change in fair value of investment properties net of non-controlling interests                   (58 979)     (58 979)     (89 709)     (33 631)
Disposal of goodwill                                                                                            3 490        2 871        3 468
Profit on sale of investment property                                                                           3 508          492        1 671
Headline earnings                                                                                              84 332      100 573      264 937
Weighted average number of shares in issue                                                                339 076 685  339 549 647  339 549 647
Headline and diluted headline earnings per share (weighted average shares in issue) (cents)                      24.9         29.6         78.0



Notes:
                                          Unaudited    Unaudited    Audited
                                           6 months     6 months  12 months
                                              ended        ended      ended
                                        30 November  30 November     31 May
                                               2018         2017       2018
                                              R'000        R'000      R'000
1) Segmental analysis
   Investment property                    4 659 666    4 703 649  4 378 361
   Straight-line lease accrual               62 917       59 629     60 741
   Property, plant and equipment                185          220        193
   Inventories                               56 171       21 783     35 150
   Investment property held for sale        250 708      344 534    504 596
   * Property assets                      5 029 647    5 129 815  4 979 041
   ** Segment liabilities                 1 894 540    2 153 374  2 074 376
   Non-segment liabilities
   - Trade and other payables                   455          526        777
   - Loan to non-controlling interests       24 683       26 709     23 250
   - Oryx guarantee                          24 401            -          -
   Total liabilities                      1 944 079    2 180 609  2 098 403



Reconciliation of headline earnings to distributable earnings
                                                                               Unaudited    Unaudited      Audited
                                                                                6 months     6 months    12 months
                                                                                   ended        ended        ended
                                                                             30 November  30 November       31 May
                                                                                    2018         2017         2018
                                                                                   R'000        R'000        R'000
                                                                      Gross          Net
  Headline earnings                                                               84 332      100 573      264 937
  Adjusted for:
  Straight-line lease accrual                                                     (1 679)      (2 400)      (4 593)
  Equity-settled share-based payment reserve                                          44            -            -
  Change in fair value of interest rate derivatives                               (1 842)      (7 420)      (1 653)
  Distributable profit                                                            80 855       90 753      258 691
  Adjusted for:
  Foreign exchange loss                                              24 120       69 491       42 949        2 292
  Realised foreign exchange profit                                               (47 018)           -            -
  TPF International set up costs                                                   4 685            -            -
  Konzum arrears                                   14                              8 056            -        1 959
  Amortisation of debt raising fees                                                  879        1 175        2 313
  Distributable earnings                                                         116 948      134 877      265 255
  Development income lost                          15                              7 705        3 324        9 657
  Distribution paid                                                              124 653      138 201      274 912
  Distribution paid                                                              124 653      138 201      274 912
  Taxable dividend (declared on 13 February 2018)                                      -      138 201      138 201
  Taxable dividend (declared on 31 July 2018)                                          -            -      136 711
  Taxable dividend (declared on 28 February 2019)                                124 653            -            -
  Number of shares in issue at year end (including treasury shares)          339 549 647  339 549 647  339 549 647
  Number of shares in issue at year end (excluding treasury shares)          338 452 444  339 549 647  339 549 647
  Distribution per share                                                            36.8         40.7         81.0
  Six months ended 31 May                                                              -            -         40.3
  Six months ended 30 November                                                      36.8         40.7         40.7
  Distributable earnings per  share (weighted average  shares in issue) (cents)     34.5         39.7         78.1
  Net asset value per share (shares in issue at period end) (cents)                  984          985          968
  Tangible net asset value per share (shares in issue at  period end) (cents)        914          915          899

2)Related party transactions included:
  Property management fees  paid to Spire Property Management
  Proprietary Limited (R'000)                                                      9 443        8 894       19 002
  Relationship: Key management personnel services entities
  Share-based payments                                                                44            -            -
  During the period under review, share options were offered
  to the directors and senior management of the company.
  These options will vest in equal tranches in three to five years, subject
  to the achievement of agreed upon vesting conditions
  contained in the rules of the scheme.

3)Net property operating expenses
  Insurance                                                                        1 041          763        1 666
  Letting commission                                                               3 387        3 378        6 804
  Municipal expenses                                                              52 724       44 423       93 831
  Other operating expenses                                                        13 179        4 384        7 784
  Property management fees                                                         7 480        6 180       13 958
  Repairs and maintenance                                                          3 792        3 309        6 485
  Security and cleaning                                                           10 051        9 769       19 955
  Gross property expenses                                                         91 654       72 206      150 483
  Operating expense recoveries                                                   (69 196)     (65 863)    (133 098)
  Net property operating expenses                                                 22 458        6 343       17 385
                               
4)Property ratios
  Net property expense ratio                                                          19%          13%          14%
  Gross property expense ratio                                                        34%          26%          28%
  Rental reversions: retail                                                           13%          12%           8%
  Rental reversions: office                                                           (1%)         10%           2%
  Rental reversions: industrial                                                        4%          (1%)          6%
  Tenant retention ratio                                                              96%          93%          90%
  Occupancy ratio                                                                     96%          88%          95%
  Trading density growth                                                              11%          10%           3%
                               
5)Administration and  corporate costs
  Salaries                                                                         5 477        4 803        9 830
  Professional service fees                                                        6 753        1 756        2 607
  Other                                                                            3 572        2 867        5 637
  Total                                                                           15 802        9 426       18 074
  
The increase in professional fees in the current period are as a result of the costs paid to set up TPF International and the sale of 26% thereof to Oryx.

6) Loss on disposal of investment property in the current year relates to the sales of Nampak and the Pick n Pay Distribution Centre and in the prior year it relates to the sales of
   Shoprite Brits and Arrowfield.

7) Goodwill of R3 million has been disposed of during the period. R145 million of goodwill was raised on the acquisition of Tower Asset Management (Pty) Ltd. The goodwill is allocated on a
   pro rata basis to the properties which were held by the fund when the asset management company, Tower Asset Management (Pty) Ltd, was internalised.
   As two of these properties, namely Nampak and the Pick n Pay Distribution Centre, were disposed of, the goodwill allocated to them was derecognised.

8) The foreign exchange (loss)/gain relates to the foreign denominated loan that was granted by Standard Bank to fund the acquisition of VMD KVART and the Agrokor portfolio.

9) Non-controlling interests relates to the Oryx 26% holding in TPF International and VMD Grupa d.o.o 20% holding in Tower Europe d.o.o.

10) Inventory relates to the costs incurred to date on the development of the Napier Street residential units.

11) The increase in cash and cash equivalents during the period is as a result of R100 million held in TPF International to acquire the Industrial Property.

12) The company acquired 1.1 million of its own shares during the period under review. The acquisition of these shares is yield accretive to the fund. The shares were acquired at an
    average share price of R6.50.

13) Trade and other payables has increased in the current period as a result of the R24 million guarantee received from Oryx. Oryx paid Euro 1.6 million (R24 million) for Tower to
    guarantee to pay Oryx any shortfall in the difference between the contracted rental and the rental received from the Agrokor portfolio for a period of two years.
14) The remaining pre-9 April 2017 (the date Agrokor, the holding company of Konzum, was placed under administration) Konzum arrears has been written off in the period under review.
    These arrears were deducted from the distributable income in the May 2017 results and have therefore been added back in the reconciliation of distributable earnings in the period under
    review.

15) Development income lost relates to the untenanted properties under development during the period.

16) Subsequent events
    On 21 December 2018 Block A of the Industrial Property transferred to TPF for Euro 5.1 million (R82 million). This was settled in cash. Building B is expected to transfer in the next few
    months for Euro 3.4 million (R54 million) and will be settled through debt funding.

28 February 2019



Registered address        2nd Floor, Spire House, Tannery Park, 23 Belmont Road,
                          Rondebosch, 7700 (PO Box 155, Rondebosch, 7701)
Contact details           +27 (0)21 685 4020/info@towerpropertyfund.co.za
Company secretary         Ovland Management Services Proprietary Limited
Auditors                  Mazars
Sponsor                   Java Capital
Transfer secretaries      Link Market Services South Africa Proprietary Limited
Directors                 A Dalling* (chairman), M Edwards (chief executive officer)
                          J Bester*, M Evans*, J Mabin (chief financial officer),
                          A Magwentshu*, N Milne*, R Naidoo*
                          * Non-executive


Date: 28/02/2019 08:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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