After becoming the country’s first real estate investment trust (REIT) to list on the JSE, in July last year, Tower Property Fund produced a “pleasing” operational and financial performance, generating headline earnings of R35.3-million for the six months ended November 30, 2013.

This enabled the group, which owned a diversified portfolio of 27 commercial and retail properties valued at R1.64-billion, to declare a maiden distribution of 33c a share for the period, exceeding the forecast of 31.4c contained in the group's prelisting statement. 

The results represented an annualised income return to investors of 9.6%, outperforming the listed sector by 2.8%, while the fund's net asset value grew by close to 4% in the period to R9.07 a share.

During the period, the fund had taken on the management of 27 properties, reduced operating costs across the portfolio and engaged with all strategic tenants.

VACANCIES

The level of vacancies in Tower’s portfolio increased to 11.5% at the end of the period, which it said was largely in line with expectations and covered by rental guarantees.

“These vacancies were for a small number of tenants in three of the properties in the portfolio. Management has focused intensely on attracting long-term tenants to reduce vacancies across the portfolio and has been successful in letting 4 746 m² of new space and 6 154 m² of renewable space. At the date of this report, vacancies have been reduced to 8.5%,” the fund stated in its consolidated interim results on Thursday.

In contrast, the fund said vacancies in its flagship property, the Cape Quarter, in Green Point, Cape Town, had dropped by 64% since it took ownership of the asset in June last year. 

BORROWINGS

Looking to borrowings, Tower had loan facilities with Investec Bank and Standard Bank totalling R6.6-billion on November 30, with interest rates hedged on 52% of the total loan facility and the weighted average rate of interest at 7.53% for the portfolio.

Based on investment properties valued at R1.64 billion, the loan-to-value (LTV) ratio of the fund was 40.2% at the end of the period, close to its LTV target of 40%. 

GREENING THE PORTFOLIO

Tower said it was committed to a strategy of “greening” its portfolio to increase the competitiveness and values of buildings in the portfolio, initially focusing on strategies with no or low upfront capital costs.

“The focus is on improving energy efficiency, which serves to reduce operational costs and lower carbon footprints, making properties more valuable and marketable to prospective tenants. The reduced demand for energy also mitigates against inevitable electricity tariff hikes,” stated the fund.

The first of several planned lighting retrofit programmes across the portfolio had been initiated at the Cape Quarter with “low” capital cost to the property.

This was expected to reduce operating expenditure by more than R800 000 a year, as well as lower kilowatt hours by 69% and reduce carbon emissions by 69%. 

Tower's portfolio included a 5-Star Green-Star SA-rated property, with a 6-Star rating expected on Block F, upper Grayston drive, in Sandton, which was recently completed. 

ACQUISITIONS

After the end of the reporting period, Tower concluded the acquisition of two small properties with a combined value of R34.3-million.

These properties were 19 Section street, in Paarden Eiland, Cape Town, at a cost of R22.6-million and Section 3, in Constantia View, Cape Town, at a cost of R11.7-million.

The latter property was the final section of the Constantia View Office Park, which was owned by Tower. 

PROSPECTS

Looking ahead, Tower said it would continue to focus on the acquisition of strategic properties to ensure the sustainability of the fund and enhance returns for investors.

Commercial property totalling R300-million was currently under negotiation with a pipeline of a further R500-million in acquisitions being evaluated.

The fund would continue to upgrade and add value to buildings over time, as well as seeking “greenable” properties as the portfolio was expanded.

“We also aim to reduce debt costs by funding a portion of the debt through the debt capital markets as the fund grows. Tower will look to further fix the fund's debt exposure on a sustainable basis,” it noted.