Tower Annual Results May 2020

STRENGTHENED BALANCE SHEET AIDS TOWER PROPERTY FUND IN WEATHERNING THE COVID-19 STORM

Cape Town – Tower Property Fund’s strategy to strengthen its balance sheet over the past 12 months through the disposal of non-core properties and the reduction and refinancing of debt, particularly Euro denominated debt, proved beneficial in managing the impact of Covid-19 in the financial year to end May 2020.

Tower owns a portfolio of 42 properties in South Africa and Croatia valued at R4.8 billion. The five properties in Croatia represent 37% of the fund’s total value. Tower’s sectoral focus is mainly on convenience retail (46% by value) and office properties (46% by value).

Chief executive Marc Edwards said management’s focus has been on ensuring the company and its tenants weather the Covid-19 storm, redeveloping the Old Cape Quarter, selling non-core assets in South Africa and unlocking value and income growth in the Croatian portfolio.

“Our cash reserves were strong going into lockdown which has assisted us in managing the portfolio in these turbulent times,” he said.

After the financial year end, Tower further reduced its Euro debt secured by South African properties to limit currency risk, repaying Euro 6.5 million debt from the proceeds of the sale of Vukovarska and refinancing Euro 31.5 million of debt with Rand denominated debt.

Total property sales of R620 million have been achieved in the past 12 months. Two non-core properties in Gauteng, the Meadowbrook distribution centre in Edenvale and Medscheme office block in Florida North, were sold for R189 million. In Croatia, the sales of Vukovarska and the non-core supermarket property, Velika Gorica, generated Euro 21.5 million.

Tower’s convenience retail properties in Croatia and South Africa as well as certain of the well located office properties in South Africa have proved the most defensive during lockdown. Rental concessions totalling R6.2 million have been granted to tenants impacted by the lockdown, with a further R5.2 million offered in rental deferrals.

The fund’s revenue decreased by 16.1% to R396 million for the year owing to a reduction in rental due to the sale of non-core properties and the inclusion of R55 million revenue from the sale of Napier Street residential units in the prior year. This was partially offset by the acquisition of Yakazi Block B in Croatia and the weakening of the Rand.

Net property income decreased by 3.5% to R361 million, attributable mainly to the sale of properties and the impact on rentals during the lockdown, partly mitigated by the weakening of the Rand.

Tower’s total dividend for the year was reduced by 40% to 44.5 cents per share, mainly due to the decision of the company to retain maximum earnings during these times by only paying out 75% of its distributable income, comprising an interim dividend of 35.0 cents and a final dividend of 9.5 cents.

Vacancies in the portfolio were 7.9%,with vacancies in the South African portfolio at 9.5%.

The redevelopment of the Old Cape Quarter property, previously known as The Piazza, continued with the addition of 55 residential apartments and renovation of two floors of commercial space. Seven apartments have been sold for a total of R68 million. Sales have slowed as potential buyers adopt a cautious approach to the recovery of the market.

Based on the property portfolio valued at R4.8 billion, the loan-to-value of the fund increased to 39.1% at year end. This was due to the increase in the exchange rate, the reduction in the valuation of the properties and the development of the Old Cape Quarter.

On the outlook for the fund in the current uncertain climate, Edwards said there will be areas of good growth for Tower, particularly in Croatia and surrounds.

“We are assisting TPF International’s management in growing property income in the Croatian portfolio by increasing rentals and turnover and recycling capital into higher growth opportunities.”

The Cape Quarter and Old Cape Quarter will remain our focus in the short-term as we finalise the development, dispose of residential units and let the 8 000m² from the expiring Deloitte and Pernod Ricard leases.”

Edwards said South African growth is expected to suffer in the current environment, with vacancies rising over the short to medium-term. “The recycling of capital through the sale of properties that have reached their potential, or are not sufficiently defensive, will remain a key focus. However, we recognise the challenges of disposing of properties at reasonable prices in the current market and we will remain disciplined sellers,” he said.