Strong Performance From Tower’s Properties In Croatia

Cape Town – Tower Property Fund reported a strong performance from its property portfolio in Croatia while weak market conditions in South Africa continued to weigh on the fund’s overall performance in the six months to November 2019.  In this environment Tower performed well to keep its South African net property income unchanged for the period.

Tower owns a portfolio of 43 properties in South Africa and Croatia valued at R5.0 billion. The six properties in Croatia represent 32% of the fund’s total value. Tower’s sectoral focus is mainly on convenience retail (48% by value) and office properties (46% by value).

Chief executive Marc Edwards said the Croatian property portfolio performed well, generating a total return of 8.9% in Euros in the 12-months to November 2019. Net property income grew by 1.4% in Euros over the prior period as a result of inflation-linked escalations while the portfolio value has increased by €5.2 million over the purchase price.

“However, listed property owners continue to face real challenges in the South African operating environment with failing municipalities, power outages and the threat of ratings downgrades. This is particularly evident in our letting activities where vacant space takes longer than expected to fill, while tenant renewals often do not materialise or are concluded at significantly lower levels,” he said.

Tower’s vacancy level across the portfolio is currently 5.5% compared to 4.4% a year earlier.

Edwards said building disruptions, opening delays and tenant changes at three key properties had a R6 million negative impact on the fund’s property income. “These properties have all undergone proactive asset management initiatives or planned changes in tenants which result in temporary vacancies but improve the overall portfolio.”

Revenue increased by 1% to R207 million while rental income was 1% lower at R201 million following the sale of the Medscheme head office and Meadowbrook distribution centre properties during the period.

Operating profit declined 53% to R64 million owing mainly to the impairment of goodwill and fair value adjustments.

Tower’s distribution paid to shareholders was 4.9% lower at 35.0 cents per share as a result of additional fund costs, including interest on capital spent on the South African property portfolio.

Edwards said key strategic decisions made by the company over the past few years have strengthened the balance sheet, improved the defensiveness and marketability of the portfolio and positioned the fund “to weather the storms in these times”.

These strategies include investing in Croatia, reducing the portfolio’s loan to value, particularly paying down Euro debt secured by SA properties, and repositioning the Cape Quarter Precinct as a lifestyle-focused area by developing 55 residential units and redeveloping retail space. The fund has also disposed of non-core properties to reduce debt and invest in properties with better growth prospects, while also refurbishing and reinvesting into properties to enhance the quality of the portfolio.

Edwards said Tower’s focus will remain on developing and selling the residential apartments at Cape Quarter and extracting value from existing properties in key nodes including Croatia, Claremont (Cape Town) and Rosebank (Johannesburg). The fund is also investing significant resources in re-letting the expiring Deloitte and Pernod Ricard premises in the Cape Quarter.

“While we expect distributions for the full year to May 2020 to be slightly down on last year, we are confident that the fund will deliver real growth to shareholders in the medium to long term,” he said.

Ends

For further information kindly contact

Marc Edwards
Tower Property Fund
082 885 8805

Tower Property Fund Digital Newsletter – Jan 2020

Good morning. Welcome to video newsletter number two from Tower Property Fund. We were hoping to get one in towards the end of last year, but time ran away with us. So this is the first one of 2020 and I wish all our shareholders a great, positive year in this tough environment we find ourselves in in South Africa. As with the first Digital Newsletter you can download the podcast on iTunes, Spotify and Google Play and view the video above.

Just to start off we are going to cover four topics. We just thought we’d give shareholders an update as to where we are on four major initiatives in the fund, bearing in mind we are in a closed period. We come out with our results on the 21st of February, so the next newsletter will be post the shareholder presentation, which would have unpacked the results and will go into further detail on the various initiatives we’ll discuss today with things like numbers, etc..

The four initiatives I’ll discuss and I’ll refer to my notes a few times are Croatia and how we’re doing there, Old Cape Quarter and the progress with the development. Included in Old Cape Quarter I’ll discuss Cape Quarter Square with regards to Deloittes and Pernod Ricard and the new tenancies, we will be replacing them with Overtime. We will also discuss the Ubuntu trust and we’ll discuss how we are doing in South Africa in this difficult market we find ourselves in.

So an overall commentary in South Africa is that it is a very tough market. Most rentals, certainly most renewals with tenants that you meet with, are asking for flat rentals or rental reversions. There are a few opportunities where we are pushing up rentals. There are still opportunities in our buildings and our key portfolio, particularly the Sunclare Building where we are getting a new lettable area, that’s also the case with Cape Quarter. But in Johannesburg, particularly the outlying office buildings, it’s not a good story. There is negative rental reversions. I think vacancies in Sandton from all the funds is sitting at around 20% which naturally affects our portfolio too. In our portfolio there’s nine properties which are underperforming and underperforming in terms of vacancies being vacant for longer than anticipated. Those properties are all located in Johannesburg. Other properties which are key properties in Cape Town and in Johannesburg, we have undertaken retrofits on, including Cape Quarter and Sunclare and those properties experience a dip in income as we shut down areas to create additional, more sustainable income going forward, and I’ll discuss those.

So in South Africa, the focus in the past quarter has been on Sunclare. Tower has moved into the sixth floor of the Sunclare Building, we were previously in Rondebosch, and we own five of the seven floors of this property. We are in discussions at the moment to hopefully get some more floors as it is a property we really, really like. The focus area in Claremont has certainly shifted to around Cavendish Square and the Sunclare Building, the square that we have outside of our tenant, Tiger’s Milk. So this is a property that we believe will grow into the future. We changed the sixth floor configuration. We previously had a call centre in the sixth floor and we’ve now replaced them with multi A-grade tenants, which we believe increases the value of the property over time. It certainly reduces the impact of call centres on the buildings facilities, etc.

With Old Cape Quarter, the development is on track to be completed at the end of February. We do have a number of delayed days from weather, but we’re working hard to try and get those delayed days back. We still have sold 7 of the 55 apartments. There are a number of apartments that are under discussion at the moment and we are confident about those sales going forward. As we’ve always said to shareholders, Plan B is to retain the units and let them out on a short term rental, as we do with the 14 apartments we currently have in the property.

In terms of our big tenant expiries, Deloitte being the biggest occupier on 5000 square meters of space. Their lease expires at the end of October. They’ll be moving to the Waterfront and Pernod Ricard and move out at the end of July of this year. There are a number of negotiations underway with some major international hotel groups having expressed interest in that space. We’ve received letters of intent from two of them. We wanted to make sure that those offers provide a security in terms of a lease agreement and not a management agreement. So we are in discussion on that side. We are also looking at breaking the space up into multiple smaller offices with a large proportion of shared workspace which would increase the rental and bring the overall rental closer to where Deloittes were. Deloittes was a long 10 year lease and that lease has escalated over time to around R330 a square meter on expiry. The market now is considerably below that at about R180 a square meter so we’re doing our very best to get the right tenants for the property who would assist us with the retail as well as the offices, and to make sure that we try and get as close to the expiring Deloittes rental as we can. As we make progress, we’ll certainly be announcing that to shareholders and we hope to give a more detailed presentation at our upcoming results.

With regards to Croatia, Croatia is doing very well for us. We’ve had net rental growth of 1.5% in Euros from the property. We’ve had yield compression on all of the properties. There’s been interest in certain of our non-core, standalone hypermarket type properties over there and we are in discussion now with potential buyers. The idea would be to sell those properties and to deploy the capital into yield enhancing properties in Croatia still.

We’ve got excellent, we believe, market leading relationships in Croatia and we will look to exploit that as much as possible going forward. Croatia’s net income growth augments South Africa’s negative growth, obviously not entirely, given that it’s only around 30% of our fund. It is nice to have that hedge in our portfolio and Croatia is certainly an area that we believe will be a key node for us going forward, along with Cape Town, Sunclare, Cape Quarter and particularly our Sturdee Avenue Rosebank property where there are development opportunities.

If I can just take you on to further information on Cape Quarter. We’ve just today received an offer to lease, well actually a letter of intent, hopefully to be followed by an offer to lease in due course, by one of the large pharmaceutical groups in the country offering to take 650 square meters on the main square across from Bootleggers. That naturally allows us to relocate some office tenants into the soon to be vacated Deloitte and Pernod Ricard space.

In Croatia, we’ve recently managed to renegotiate and refinance a large portion of our debt, the debt that’s associated with the Sub Dubrovnik Shopping Centre and the industrial property Yazaki has successfully been refinanced. Previously we were paying 4.35% interest, we are now moving on to 2.7% interest so it’s quite a significant saving there. That is interest only, no capital repayments required in the period of the loan. And all our portfolio is now on interest only or moving towards interest only payments. We’re seeing quite a compression in the interest rates that we are being charged on that side, which is a testament to the strength of that business. Our income vacancies actually are 0 there due to the head leases that we have and the properties. Our VMD head lease expires in June of this year, there are no vacancies in their property. We’re in discussions with VMD at the moment on them continuing with the management. We think they’ve done a fantastic job and we’re just in discussions on the pricing of that. And in terms of the balance of the portfolio, the real vacancies have come down from around 6% to around 2% with the BLOCK B of Sub Dubrovnik being let out and some excellent work being done in the Meridian property.

We are currently bullish on Croatia and we are not concerned. I suppose we are as concerned as everybody else is on South Africa at the moment and there are a number of headwinds in the market with the Eskom woes that we face, municipalities looking to increase rates wherever they can, Johannesburg electricity recoveries being difficult to work with and that negative sentiment being seized upon by tenants in terms of renegotiation. So we hoping to weather the storm of the current climate.

Our loan to value is the lowest it’s ever been. At last reported is was around 33%, which allows us, we believe, the best opportunity to weather the current economic environment that South Africa presents.

The last commentary is on Ubuntu Trust. Ubuntu had a stellar year last year. Ubuntu is a Trust and a Charity that Tower has supported for a while now. We are extremely proud of our relationship with them. They have recently received quite a large grant from one of Tower’s shareholders, not through our influence, but through that company’s employees deciding to support Ubuntu as well as a number of other charities.

Ubuntu has had their best soccer performance year of the past twelve months. They won every age category. They won the trophy in terms of the league for every age category that they entered, Under 12, 14, 16 and 18, which is remarkable. They are dominating the high performance league in Cape Town, which again is remarkable against some major, major clubs, and most importantly, their school is starting to work nicely. The first Matrics from their school graduated last year and they are really making an enormous difference in our community.

As per the last video and as per every interaction I have with shareholders, I really would urge you to get involved with them. There are stellar bunch of guys. We will put a link to this video now where you can click and visit the Ubuntu site and at the same time we’ll put another link, which will be a link to the Old Cape Quarter development where you can go in and have a look at apartments and have a look at floor layouts, etc, etc..

And we have to bring you further information on some successful lettings at Cape Quarter in our annual results and thereafter. So thanks very much for listening to this brief chat. We will chat to you all soon. Thank you.

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