TOWER PROPERTY FUND
30 August 2019
TOWER PRODUCES TOTAL PORTFOLIO RETURN OF 10.7% IN SLOW YEAR FOR LISTED REITs
Cape Town – Cape-based Tower Property Fund delivered a total return on its property portfolio of 10.7% for the year to May 2019 as the fund continues to make good progress on its asset management activities and gains traction in the local and Croatian property markets.
Tower owns a portfolio of 45 properties in South Africa and Croatia valued at R5.2 billion. The six properties in Croatia represent 32% of the fund’s total value. Tower’s sectoral focus is mainly on convenience retail (46% by value) and office properties (47% by value).
The fund achieved a number of its strategic targets in the past year, including the completion of the refurbishment of 32 Napier Street, the start of the refurbishment of Old Cape Quarter, securing interest-only loans in Croatia, reductions in interest rates on loans in South Africa and Croatia, increased interest rate hedging (now at 81%), the reduction in loan to value of 34.1%, the reduction in Euro debt, low vacancies of 5.6% and the establishment of TPF International Limited resulting in a R300 million investment by Namibian based, Oryx Properties Limited.
Chief executive Marc Edwards said South Africa’s low growth and institutional instability has resulted in a sluggish local economy which has placed downward pressure on rentals.
“The past two years have been the worst in the South African REIT sector’s history, with distributions reducing across the industry. Property is a long-term asset class and the occasional reduction in rentals and the resultant drop in earnings should be expected by the sector. Outperforming inflation should be the realistic benchmark for any asset manager investing in a REIT,” he said.
Tower’s distribution paid has reduced by 8.4% for the year to R250.7 million or 74.2 cents per share. The decline is attributable mainly to the repayment of Euro-denominated debt, the sale of non-core properties at yields above the cost of funding and the establishment of TPF International (housing Tower’s Croatian properties) which brings additional running costs and tax leakage in Mauritius. “While these initiatives have put the company in a more sustainable position, they do come at a cost to distributions,” said Edwards.
Revenue increased by 13% to R471.7 million owing to the weakening of the Rand against the Euro and the sale of units in the refurbished 32 Napier Street development in Cape Town. Non-core properties sold during the year reduced rental income.
Operating profit declined by 18% to R310 million as a result of the increase in net property operating expenses and property sales, with headline earnings 26% lower at R197 million.
Tower continues to focus on generating proceeds from asset management initiatives in the portfolio. The refurbishment of 32 Napier Street, which is part of the Cape Quarter Precinct, has been completed and generated profits of R16 million. Tower has sold 11 of the residential units in the development at prices up to R90 000 per m² and continues to own the remaining five units for short-term rentals.
Construction at the Old Cape Quarter redevelopment has commenced and is expected to be completed by January 2021. The project includes the development of 55 residential apartments together with an upgrade of the retail space and parking. Tower has sold five apartments, including two penthouses, at a total value of R60 million, generating the highest ever selling price for an apartment in the De Waterkant area.
The fund has experienced strong leasing activity over the past year, letting 12 900m² to new tenants and 44 200m² in renewals, with 70% of expiring tenants renewing their leases. The overall vacancies in the portfolio are 5.6%, with vacancies in South Africa at 6.6%.
In line with Tower’s strategy to dispose of non-core properties, the Pick n Pay distribution centre and Nampak industrial in KwaZulu-Natal were sold for a combined R123 million. After year end the Meadowbrook distribution centre was sold for R91.6 million, realising a profit of R4.3 million, and transfer is expected shortly.
Tower’s Croatian portfolio is performing well with increasing rentals in the office property VMD Block B as well as turnovers increasing in the retail portfolio. Oryx invested R300 million in TPF International which was applied in reducing Tower’s Euro debt exposure (R117 million), the Yazaki industrial property transaction
(R100 million) and South African debt and share repurchases (R83 million).
Edwards said Tower’s focus in the short term would be on the Old Cape Quarter redevelopment, the ongoing sale of non-core assets, unlocking value and income growth in the Croatian portfolio and reducing Euro debt. “Net property income in the year ahead is expected to grow by 3.5% in South Africa and 1-2% in Croatia, which should result in distribution growth as well,” he said.
Issued by Tier 1 Investor Relations on behalf of Tower Property Fund
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