CT– The strategy to dispose of non-core properties and reduce and refinance mainly Euro-denominated debt helped Tower Property Fund weather the impact of Covid-19 in the half-year to November 2020.
Tower owns a diversified portfolio of 41 properties in South Africa and Croatia valued at R4.5 billion. The four properties in Croatia represent 34% of the fund’s total value.
The fund’s Croatian portfolio produced a Euro-based total property return of 5.9% compared to the return on the local portfolio of -11.6%.
Chief executive Marc Edwards said management’s focus has been on ensuring that the company and its tenants weather the crisis and navigate the second wave of the pandemic while reducing portfolio risk by selling non-core assets in South Africa.
“Tower’s cash reserves were strong going into lockdown. The sale of R392 million of commercial property has enabled the fund to reduce debt and further strengthen its balance sheet,” he said.
Owing to the current uncertainty around tenant performance due to the second wave of Covid-19, the directors have decided to retain cash reserves and deferred the interim dividend. A decision on the payment of a final dividend for the year to May 2021 will be made at the time of the release of the full-year results in August 2021.
Edwards said property performance was negatively affected in the first half of the financial year, as expected. “Lockdown impacted certain sectors more than others. Our convenience retail properties in Croatia and South Africa, as well as certain better-located office properties in South Africa, have proved the most defensive during lockdown, however, all sectors have been hit and hit hard.”
Rental concessions totalling R14.6 million were granted to tenants impacted by the lockdown, with a further R5.7 million in rental deferrals. Collections have steadily improved as trading has normalised, with total collections of 94% for the period from April 2020 to January 2021.
He said vacancies had increased to 15.2%, the highest level ever for the fund.
“The vacancy level in South Africa was 17.9%. Most of these vacancies are concentrated in the Cape Quarter with the departure of Deloitte, the anchor office tenant of the property who moved into their own new building in Cape Town. Pernod Ricard also vacated on the expiry of their lease while another tenant went into liquidation.”
“It is most encouraging that all retail space at Cape Quarter Square is now under offer to lease, including the Deloitte premises, with total vacancies in the portfolio expected to improve towards 12% by year-end in May 2021,” he said.
Tower’s lower LSM retail portfolio has proven to be resilient, with no vacancies being caused by the pandemic. Unfortunately, Link Hills in KwaZulu-Natal and Cape Quarter were severely impacted by the lower consumer demand, with the Cape Quarter being particularly vulnerable given the large numbers of office tenants in the property who usually frequent the retail shops.
Edwards said the Croatian portfolio proved defensive in challenging market conditions. Sub City shopping centre in Dubrovnik was adversely impacted by a poor tourist season and as a result, the anchor tenant Konzum experienced a 16% decline in turnover. The Konzum store in the Meridijan 16 shopping centre in Zagreb showed a 5% growth in turnover.
“A new cable car development adjacent to the Meridijan centre was completed recently and the increased foot traffic in the area is expected to boost the long-term growth prospects of our shopping centre in Zagreb,” he said.
The fund’s revenue decreased by 17% to R171 million owing to a reduction in rental due to the sale of non-core properties, Covid-19 rental concessions granted to tenants, and increased vacancies. This was partially offset by the weakening of the Rand.
Net property income decreased by 22% to R151 million, attributable mainly to the sale of properties and the impact on rentals during the lockdown. Net property operating expenses were R7 million higher due largely to increased bad debts written off during the period.
Based on the property portfolio valued at R4.5 billion, the loan-to-value of the fund increased to 40.1%. This was due to the reduction in the valuation of the properties and the redevelopment of the Old Cape Quarter which is 100% debt-funded.
This redevelopment of the Old Cape Quarter, previously known as The Piazza, includes the addition of 55 residential apartments and the renovation of two floors of commercial space. The project is due for completion in August 2021. Tower has secured offers for all the retail space and has received encouraging interest for the office space. Seven apartments have been sold for a total of R72 million. Sales have slowed as potential buyers adopt a cautious approach to the recovery of the market. The proceeds from these sales will be used to pay down debt in the portfolio.
Edwards said in the current weak economic conditions, which have been exacerbated by Covid-19, the fund’s priorities are to aggressively lease vacant space and to continue the disciplined sale of non-core properties to manage debt levels in the environment of declining property values. The Croatian portfolio faces fewer headwinds and is likely to outperform the South African portfolio in the near term, he added.