Tower fund finding ways to boost income

TOWER Property Fund delivered a total return on its property portfolio of 10.7 percent in the year to May 31, and “value-add opportunities” were being implemented to boost income and balance sheet strength.

Chief executive Marc Edwards said South Africa’s low growth and institutional instability had resulted in a sluggish local economy that has placed downward pressure on rentals.

“The past two years have been the worst in the South African real estate investment trust (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.

The distribution per share fell 7.3 percent to 74.2 cents per share. The group’s 45 convenience retail, industrial and office properties in South Africa and Croatia, valued at R5.2 billion, generated a 13 percent increase in revenue to R472 million.

Factors increasing revenue included the weakening of the rand against the euro and the sale of the Napier Street units.

Operating profit fell 18 percent to R310m. Distributable earnings were down 11 percent to R235m. An increase in net property operating expenses related to rates and electricity credits received in the prior year, the write-off of outstanding Konzum debt and an increase in bad debts written off and provision for doubtful debts in South Africa.

Tower sold two non-core properties – a Pick n Pay distribution centre and Nampak – at valuations and at yields above cost of funding.

TPF International, which houses the Croatia interests, was also established, which facilitated the investment by Oryx of R300m, but which brought additional running costs and tax leakage.

Tower also repaid R117.2m of a Standard Bank euro loan.

There was also a cash drag of R11m on a capital amount due to the delay in the transfer of a new Croation industrial property Yazaki. The lower distribution was also impacted by a rental reduction in one property in Croatia. “All of the initiatives above strengthen the company but reduce the shortterm earnings,” Edwards said.