Digital Newsletter – July 2020

 

Good morning. Welcome to an update on Tower Property Fund. I hope you’re all well and surviving this strange time we’re in. I just wanted to update you, we sent a SENS announcement this morning on an update around our Croatian debt, which I’d like to talk through today and I’d also like to talk through how we are doing in terms of COVID collections, et cetera, et cetera.

So to start on COVID collections, in April of this year, which was the start obviously of the national lockdown’s, we collected 76% of our rental. In May we were very surprised that it went up to 78% and in June we collected 74%. In July we are currently at 60% of the month, which is tracking slightly ahead of all of the other months. We’ve given around 5.5 million, excluding VAT of rental concessions, and we’ve given around 5 million rands worth of rental deferments. That’s against invoices of around 40 million rand per month, which we bill to our commercial tenants. Those deferments typically are repayments of between 6 and 12 months and we’ve certainly tried to categorise tenants into those which are most impacted by COVID and those which could work from home, et cetera, et cetera, and who utilise our office space for storage.

In terms of the sectoral breakdown of those collections – I’m talking about a total for the 3 months now ­– the total for the 3 months has been 78% of rental collected. That is net of credit notes supplied, so to those concessions that I spoke of. That’s broken down into retail office and we call retail office a category, so that’s for example, a building like Cape Quarter which has 50% of both. We’ve collected 77% of rentals, in the retail sector alone 76%, office 80%, and industrial 76%. Again of rentals, less their credit notes.

So we certainly seeing from a rental perspective, things are getting better. Our concern now on the ground is how many tenants who haven’t been able to trade in this time, restaurants, beauticians, hairdressers, et cetera. How many of those tenants simply won’t come back to work when they are able to? One of the concerns, obviously, at the moment is gyms. We have a gym at De Ville Shopping Centre, which expires at the end of this year. We are in negotiations with them in terms of the renewal. So I think from a commercial property perspective, the next few months are going to be crucial. And you’ve seen a number of announcements from Rietz where cash flow is becoming really important to consider.

From Cape Quarter perspective, from our development there, we pleased to say that we are back on site and going great guns. We expect completion now, which was initially expected in February/March ’21 to now be Q3, 2021. Sales there have stalled. We are reassessing the selling prices in the area. As I’ve mentioned before, we were achieving very high selling prices of around R80,000 a square metre. The market certainly has come off considerably to around R46,000 a square metre. That still leaves us with quite a decent profit. However, we are considering a number of different options for those units, whether it be for us to hold ourselves and to rent those units out, either short or long term. In fact, we have taken our 14 apartments on Cape Quarter, on the existing Cape Quarter, and we are renting those out on a short too long term basis between 3 and 12 month leases. And that process with a business called Neighbourgood has gone actually quite well. We’ve appointed them from the 1st of July and so far they have rented 13 of 20 apartments. So in this market, I think that it is quite impressive.

With regard to Croatia. So Croatia came out of the lockdown a little bit earlier than South Africa. The commercial activity is back to normal. Restaurants and coffee shops are open. Their COVID cases are slightly increasing as they are around the world. The government has said that they won’t go into another lockdown if there is a second wave there. We did mentioned in our SENS announcement the rental concessions which we had given to both the VMD tenants and to the Agrokor tenants, the Konzum tenants. But trade is going quite well. We are expecting to end our head lease with VMD at the end of this month. It ends the 5 year head lease. We are reappointing VMD to manage our building over there. They’ve been an outstanding partner for Tower and we concluding that agreement with them now. It certainly gives us more involvement into our tenant leasing and activity, but has them as property manager and facilities manager so they cover maintenance items, etc. in that building, and they’ve done an outstanding job for us so we’re very excited about that.

We recently announced the sale of Vukovarska and this morning we announced that the sale of Velika Gorica property is now unconditional. We expect transfer to go through on the 28th of July and that’s for 9.1 million euros. We intend bringing that cash back to South Africa, or at least our portion of that cash, which is 74% of that. The balance goes to our partners, Oryx, who are our partners in TPF International.

The last point to discuss is the SENS announcement of this morning, which is the Standard Bank debt. Shareholders will be aware that the way we funded Croatia was through our South African properties, acting as security for a euro denominated loan from Standard Bank, which they loaned us through their Isle of Man branch. We’ve taken the decision to reverse that loan or refinance that loan into Rand. The problems we were potentially facing was if the currency blew out, the Rand/Euro currency exchange rate blew out, the loan to value of our properties would be under pressure and would potentially lead to us being in breach of covenants, et cetera.

It’s been a long discussed point with shareholders where some felt very strongly that we should immediately switch those rates. The structure was put in place for a reason that allowed us to invest in the Croatian asset. But we do feel now with balance sheet strength being the most important thing in our business the time was right to switch that debt, and particularly with the fact that South African interest rates have come off by around 2.5% in the last three months. So it allowed us to switch this morning, in fact, last night and announced this morning, at JIBAR plus 2.7%. We fixed the JIBAR rate at 4.6. So the all-in rate was 7.3% against 3%, which we’re paying in Euros and previously that spread was naturally much wider.

That increases our debt costs given that increased interest rate. But it dramatically serves to prevent our business from any external catastrophe with regard to loan to value. So we extremely proud of making that decision and we think it’s in the best interests of shareholders, given that the income generated by Tower going forward will be considerably more sustainable. That amount was for 31.5 million euros. The balance of the 9 million euros will be settled with the sale of Velika Gorica and the financing of a previously ungeared property in Croatia called Meridien.

So that’s it for Tower at the moment. I think we remain, as everyone does, very concerned with the commercial situation, particularly in South Africa. I mean, at the moment I’m sitting in Sunclare, our offices are a real ghost town at the moment with everyone having the ability to work from home. I think that’s certainly going to impact on commercial office tenants going forward. If the lockdown is extended any longer or we go into any greater level or worse level, I think there could be potential problems for the office sector. However, Tower so far, has handled the process well and certainly the interventions we had pre-COVID on our balance sheet, reducing that euro debt, etc. have certainly stood us well during this difficult time. So I will update you in about a quarters time as to how we progress. But it looks like so far so good. Thanks very much.