CAPE TOWN – Tower Property Fund reported a strong performance from its properties in Croatia, but weak market conditions in South Africa continued to weigh on the fund’s overall performance in the six months to November 2019.
In this environment Tower did well to keep its South African net property income unchanged for the period, chief executive Marc Edwards said on Friday. The share price increased R4.87 percent to R4.09 on Friday afternoon, before closing unchanged at R3.90.
Although the fund was “nicely hedged in Croatia”, it was also firmly rooted in South Africa, where it intended to persevere, even though the market was difficult, it said.
The distribution paid to shareholders was 4.9 percent lower at 35 cents per share as a result of additional fund costs, including interest on capital spent on the South African property portfolio.
Tower owns 43 properties in South Africa and Croatia valued at R5 billion. The six in Croatia represent 32 percent of the fund’s value. The sectoral focus is on convenience retail (48 percent by value) and offices (46 percent). The Cape Town portfolio is 47 percent, while Gauteng is 42 percent.
Vacancies were at 5.5 percent versus 4.4 percent a year earlier. Loan to value was 33.7 percent, and the intention was to keep it below 35 percent.
Edwards said the Croatian property portfolio did well, generating an 8.9 percent return in euros in the 12 months to November 2019. Net property income grew by 1.4 percent in euros over the prior period from inflation-linked escalations, while the portfolio value had increased by 5.2 million (R84.54m) over the purchase price.
However, in South Africa, failing municipalities, power outages and the threat of ratings downgrades added to the tough market challenges.
“This is particularly evident in our letting activities where vacant space takes longer than expected to fill, while tenant renewals often do not materialise or added to, or are concluded at significantly lower levels,” he said.
Building disruptions, opening delays and tenant changes at three properties had a R6m negative impact on the fund’s property income.
“These properties have undergone proactive asset management initiatives or planned changes in tenants, which result in temporary vacancies, but improve the overall portfolio,” he said.
Revenue increased 1 percent to R207m in the six months, while rental income was 1 percent lower at R201m following the sale of the Medscheme head office and Meadowbrook distribution centre properties.
Operating profit fell 53 percent to R64m owing mainly to goodwill impairments and fair value adjustments.
Edwards said key decisions over the past few years had strengthened the balance sheet, improved the defensiveness and marketability of the portfolio and positioned the fund “to weather the storms in these times”.
These strategies included investing in Croatia, reducing loan to value, and repositioning the Cape Quarter Precinct as a lifestyle-focused area by developing 55 residential units and redeveloping retail space.
The up-market units were expected to be completed by March 2021, and some had already been sold, mostly to foreign buyers, in a very tough residential market, he said.
Other strategies that were now enhancing the resilience of the fund included disposing of non-core properties to reduce debt and invest in properties with better growth prospects, while properties were also refurbished and reinvested in, to enhance the quality of the portfolio.
He expected distributions for the full year to May 2020 to be slightly down on last year, but “we are confident the fund will deliver real growth to shareholders in the medium to long term”.