Tower Property – Q3 2019 Digital Newsletter

Good morning. My name is Marc Edwards, I’m the CEO of Tower Property Fund. As you would have known from our recent annual results presentation, we wanted to provide newsletters going forward on a quarterly basis, but we wanted to buck the trend of providing everything in written format and give it to you in video and audio format too. You can download the podcast on iTunes, Spotify and Google Play and view the video above.

What I want to take you through this morning, very quickly, is an update as to where Tower is currently and the major issues that we’re dealing with and facing.

Following on from our results presentation, we did say a major focus was on the balance sheet. That continues to be the theme and will be the theme for the remainder of the year. The market in South Africa is still very tough. Croatia is doing well, and our extreme focus has been on tightening up the balance sheet and reducing the loan to value. The loan to value, as we announced on SENS recently, has come down as a result of property sales which I will discuss. The balance sheet is the strongest it’s been since our listing in 2013.

The main themes I’d like to just briefly discuss with you are the development at Old Cape Quarter, how that’s proceeding, Deloitte and the replacement of that tenancy one year from now, Sunclare (the sixth floor) and the renovations we are doing there, how Croatia’s doing and our involvement with the Ubuntu Football Trust and then lastly the sales that we’ve undertaken.

Starting in Old Cape Quarter, you’ll see, for those of you who are watching, video footage of Old Cape Quarter, which was taken showing the update in the construction. The good news is we have appointed 60% of the subcontractors and have managed to save around R16 rand of our budget but we still need to appoint 40% of the subcontractors. We are expecting to come out on parity with those subcontractors and then everything is appointed. Currently, we are in the basement of Old Cape Quarter, which has been a highly complex engineering job but we are out of the ground now. The risk has almost entirely been removed from that process, which was the process with the biggest amount of risk. Now, obviously, it’s going forward and the major risk lies in appointing subcontractors and the prices of things like steel. We managed to fix the price of steel, which actually saved us quite a bit of money. We’ve saved money on air conditioning, lift replacements, electrical installations, etc. So from a cost perspective, the development is going well.

From a sales perspective and an income perspective the market is tight and flat in Cape Town but De Waterkant does still seem to be the shining light in a flat market. We have sold around R60 million worth of apartments to date and there’s a couple more in negotiation as we speak. The fallback position, as we’ve always told shareholders, is that it will be a short term rental market. We currently have around 20 apartments at Cape Quarter and now new ones on Napier Street. These are let out at about 70% occupancy for the past 12 months, which was the most difficult 12 months in the sector. So all in all, all efforts are being undertaken on Old Cape Quarter. It’s a major project for Tower but we are extremely excited. One of the things to advise shareholders of is the end date is still set for March 2021. However, we do expect to have the retail tenants and the office tenants up and trading by Christmas of next year so we’ll get Christmas trade, which we have not budgeted for as yet, which is exciting.

From a Deloittes perspective and the renewal of Deloittes, that ends 30th of October of next year so we’ve got just over one year left. There’s a full team approach to that. The management of Old Cape Quarter or the letting of old Cape Quarter and the letting of Deloittes is being done in conjunction with each other so we can ensure that we replace the rental that Deloittes are currently paying, which has obviously escalated above market over the past 10 years of their lease agreement. We have some good traction so far with bigger office users. Our intention is to break up the space into one or two big office users, to have a section, probably a floor of shared workspace and then smaller offices paying higher rentals. Deloitte’s currently occupy around six thousand square meters so it’s a nice, chunky space for us to work with. There has been significant progress which we hope to update you on as and when we sign a large users.

The format of this of this newsletter will be every quarter and I hope to update you on both Deloittes and Old Cape Quarter as we proceed.

Tower Property Fund is moving its offices to the sixth floor of the Sunclare building. We’ve been in Rondebosch for the last number of years but we’re moving to a Tower building on the sixth floor. We didn’t renew the lease of a call centre which occupied the full floor. The call centre was just a bit hard on the building.

Sunclare is really doing well. We bought the building in 2015 for R190 million. We revalued it this year independently, it’s now valued at R330 million purely because of the move in rentals. Our sixth floor is basically fully let, we about 85% let on that floor. Tower’s taking around 250 square meters only but EOH has taken a large part of the floor and other local tenants. So very exciting! We look forward to welcoming any shareholders who want to come in and see our new premises and have a coffee with us at the Bootleggers downstairs.

From a sales perspective, we recently announced on SENS that we had sold Meadowbrook for R91 million and that we had accepted an offer and concluded a binding sale agreement with Medscheme. The Medscheme building was one that we were intending to sell because we had just re-signed a new seven year lease with Medscheme. It’s a fit for purpose property so if Medscheme were to move out, it would be very difficult to let. We had to take a 30% rental reduction on their recent rental renewal. We wrote the building down and we sold it at slightly below the value, at around 96% of the valuation. With Meadowbrook we achieved 106% of the valuation. Our valuations are accurate and the sales that we are obtaining are reflecting those valuations.

We intend using that cash (from the sales) to reduce debt. In fact, it’s already gone into debt and it has reduced the loan to value to the lowest level. We would like to reduce the loan to value further so that our balance sheet can be as bulletproof as it can be. Obviously, the way we have funded Croatia, effectively, is 100% funding. We’d like to reduce the Standard Bank Euro loans we have. Our intention is to increase the Croatian in-country loans to reduce that currency risk we face with the Rand blowing out.

From a Croatian perspective, trading the densities are up 7% in our portfolio for the past 12 months. We have four retail properties there as you know, one office and one industrial property. We are looking at potentially recycling some assets that we’ve received some excellent offers on, considerably above our valuation, to reinvest into other assets which we think will show higher growth. Those discussions with potential buyers are underway. In that period we’ve managed to increase as much as 12% turnover growth at a property called Velika Gorica and on our bigger one Sub Dubrovnik by 2%, so on average 7%. We expect that to translate to turnover a rental in 2020, although a slight amount.

The last point to mention to you is our sponsorship of the Ubuntu Trust. I am very pleased to advise you that Ubuntu has just won the Engine Champion of Champions Trophy which is basically the winners of the regional championships from all across South Africa in the youth demographic. They then played the Champion of Champions in Jo’burg and Ubuntu won it. They beat the likes of Ajax, etc. So we’re incredibly proud of our sponsorship.

What is very exciting is one of our major shareholders has also sponsored the Ubuntu Trust with a big sum of money which is going to assist them in the operations for the next two years. We currently put around 80 children through school through that process and we would welcome any initiatives that you guys have if you would like to support them in any way possible. They’ve got a house where a lot of the boys stay, which often requires things like computers and couches and things like that. If you want to sponsor a rand value, please do phone me directly or get hold of Ubuntu, their website is: www.ubuntufootball.com

So that’s it! I just wanted to update you on the major initiatives of Tower. We look forward to catching up at our AGM next week and then one more of these will follow before the end of the year and our half year results will be out in February of 2020.

Thanks very much.

Media Release

TOWER PROPERTY FUND
MEDIA RELEASE

TOWER SHOWS ITS RESILIENCE WITH DISTRIBUTABLE EARNINGS UP 18%

Cape Town – Cape-based Tower Property Fund delivered a resilient
performance in an extremely challenging operating environment in the year to
May 2017, increasing revenue by 19% to R447 million and distributable earnings
by 18% to R262 million.

During the year Tower further diversified its portfolio with the acquisition of a
R1 billion (€66.4 million) retail property portfolio in Croatia comprising four high-quality
shopping centres. This brings the value of Tower’s properties in the
country to R1.4 billion (€96 million). Tower’s Croatian office property, VMD,
continues to perform well and is widely regarded as the highest quality office
property in Zagreb.

Tower declared a distribution of 77.1 cents per share for the year, 16% lower
than the prior year mainly due to the decision to no longer distribute once-off
earnings to shareholders as well as the uncertainty around the payment of arrear
rental of its largest Croatian tenant, Konzum. The number of shares in issue
increased by 42%.

Chief executive Marc Edwards said the Tower board believes that the distribution
of once-off earnings is detrimental to the sustainable growth in core property
earnings, and this is in line with best practice recommendations of the SA Real
Estate Investment Trust (REIT) Association.

Tower internalised its asset management company earlier in the year, with
management and shareholders now directly aligned to grow Tower’s core
earnings in the future.

Tower’s R5 billion portfolio of 49 properties is spread across retail (46%), office
(47%) and industrial (7%). Nine non-core properties valued at R519 million are
currently being sold and the proceeds will be invested in the fund to maximise
returns.

Tower’s shopping centres in Croatia are anchored by Konzum, the largest retailer
in the country. The fund experienced unexpected problems when Konzum was
placed under tremendous financial pressure as a result of its parent company,
Agrokor, being placed under business rescue due to large debt levels. Tower is
co-operating with the commissioner of Agrokor to ensure the fund’s rights are
protected. Tower’s retail properties are strategically important to Konzum and
should deliver strong growth into the future, said Edwards.

“The tenant failure in Croatia and the deteriorating political landscape in South
Africa has made recent months particularly difficult for Tower. The slowing
consumer economy has negatively affected the performance of several large
retailers which is affecting the property market and sentiment in the country.”
“It is most encouraging, however, that Tower’s properties are performing above
the SA Property Owners Association benchmarks,” he said.

Tower expects to generate once-off capital profits in the next 6 to 36 months
through a range of asset management initiatives in the portfolio. This includes the
development of between 70 and 90 residential apartments at the Cape Quarter,
Tower’s largest asset in South Africa. The capital profits will be reinvested in the
fund.

The first phase of the project at 32 Napier Street, which includes 19 apartments,
has progressed well and is expected to be completed by mid-2018. A further 54
to 74 apartments will be developed at the adjacent Cape Quarter Piazza, with construction commencing in the second quarter of 2018.

For further information kindly contact

Marc Edwards
Tower Property Fund
082 885 8805