Niche retail strategy boosts Synergy’s FY showing, ups distributions
Synergy CEO William Brooks discusses the company's year-end results
Announcing distribution growth of 5% for it's A-linked unit holders and 12% for its B-linked unit holders for the year to June 30 on Thursday, retail property fund Synergy CEO William Brooks said the strong year-on-year performance could largely be credited to the group’s specialist market position as a pure retail fund with focused exposure to the high-growth lower-Living Standards Measure market.
The JSE-listed Real Estate Investment Trust (REIT), which specifically focuses on medium-sized community and small regional shopping centres in high-growth rural and township nodes, declared final distributions of 44.45c for every A-linked unit and 30.3c for every B-linked unit.
Targeting the high-growth mass consumer market in South Africa, Synergy currently owned 15 shopping centres in seven South African provinces, spanning some 200 000 m2.
“Synergy’s robust financial performance, supported by strong operational delivery, contributed positively to our sixth set of results as a listed company. As a specialised fund, we have strategically grown our focused portfolio of retail assets ten-fold over the past three years, from R240-million to R2.4-billion,” he said at the company’s results presentation in Johannesburg.
Brooks added that the company’s showing was further boosted by acquisitions – which bolstered the fund’s portfolio – and an improved performance of the portfolio as a result of more direct and active management.
Despite a continuing challenging operating environment, Synergy grew revenue by 26% to R303-million, while achieving a distributable income increase of 9% to R102-million and maintaining an expense ratio of around 20%.
“We are still in an extremely tough macroeconomic and social environment, which is characterised by subdued economic growth, rising inflation and interest rates, high unemployment, overly indebted consumers, labour unrest and increasing pressure on consumer spending.
“But this is not a new phenomenon to us. We have faced these challenges for some time now and have built operational capabilities to deal with them to the extent that we can,” he noted.
Meanwhile, Synergy’s rental reversions trended upwards by 4.5%, achieving a noteworthy tenant retention ratio of 71%. Synergy’s combined market capitalisation grew by R52-million to R1.32-billion over the same period.
The fund’s national tenant ratio also increased to 89% from 86% a year ago, indicating a further improvement in the quality of its rental income, with its largest tenants being Spar Group, Massmart, Pepkor and Shoprite.
Focusing on value-enhancing redevelopments and upgrades to centres in its portfolio, Synergy upgraded Gugulethu Square, in Cape Town, Highland Mews, in Mpumalanga, and the Sediba shopping centre, in Hartebeespoort, during the year.
The group’s R10-million redevelopment of the Ruimsig shopping centre, in Gauteng, was scheduled for completion next month and was expected to strengthen the centre into a dominant retail offering in the competitive Roodepoort node.
Synergy was also upgrading Phase 3 at the Richdens Village shopping centre, in KwaZulu-Natal, for completion in November, and had recently acquired a strategic property adjacent to the Ermelo Game shopping centre, in Mpumalanga.
“We have a further R10-million of capital expenditure projects planned for 2015, aimed at improving quality, appeal and operational efficiencies across our portfolio,” stated Brooks.
Looking to borrowings, Synergy’s loan-to-value ratio was a conservative 37.6% at year-end, down from 40.8% at the half-year, with interest rates hedged on 51% of its total borrowings at a weighted average rate of 8.9%.
The fund’s total weighted average cost of borrowings at the end of the year was 8.48%.
“Synergy recently negotiated improved lending margins with current loan facility providers. As a consequence, the weighted average cost of borrowings reduced to 8.32% with a weighted average cost of fixed debt funding of 8.76% with effect from July,” said Brooks.
He believed that the REIT’s differentiated positioning, investment focus and operational capabilities would drive future growth and further its record of delivering investor value.
Brooks explained that, against this backdrop, Synergy’s B-linked unit distributions for 2015 were expected to increase by around 6%, while A-linked unit distributions were likely to hit 91.13c.
This assumed that the prime interest rate would increase by no more than 1% in the 2015 financial year, and that there would be a stable macroeconomic environment and no major corporate failures.
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