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.