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SYC
SYC
SYC - Sycom Property Fund - Audited Group results and declaration of the final
distribution for the year ended 31 March 2010
SYCOM PROPERTY FUND
JSE SHARE CODE: SYC
ISIN NO: ZAE000019303
AUDITED GROUP RESULTS AND DECLARATION OF THE FINAL DISTRIBUTION FOR THE YEAR
ENDED 31 MARCH 2010
The directors of Sycom Property Fund Managers Limited, the management company of
Sycom Property Fund (Sycom) or (the Fund), submit their report on the audited
results of Sycom for the year ended 31 March 2010.
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2010
2010 2009
R`000 R`000
Rental revenue 446 732 425 998
Contractual rental revenue and 462 879 430 995
recoveries
Straight-lining of rental revenue (16 147) (4 997)
adjustment
Property operating expenses (71 838) (70 690)
Net rental and related revenue 374 894 355 308
Investment income 9 793 11 668
Fair value gain on investment 175 148 39 784
property and investments
Deficit on disposal of investment
property - (64)
Fair value gain on investment 277 382 84 088
property
Fair value deficit on listed (102 234) (44 240)
investments
Administrative expenses (22 687) (21 427)
Profit before net finance costs 537 148 385 333
Net finance costs (57 658) (76 700)
Interest income 12 162 16 167
Finance costs (69 820) (92 867)
Interest on borrowings (65 726) (67 157)
Interest capitalised 2 242 7 833
Fair value adjustment on interest (6 336) (33 543)
rate swaps
Profit before income tax 479 490 308 633
Taxation - 1 513
Profit and total comprehensive 479 490 310 146
income for the year
Basic earnings per unit (cents)* 233.78 151.21
*The Fund has no dilutionary instruments in use
Reconciliation of earnings to headline earnings
and distributable earnings:
Earnings 479 490 310 146
Realised deficit on disposal of
property - 64
Unrealised surplus on revaluation of
investment properties (277 382) (84 088)
Unrealised deficit on revaluation of 102 234 44 240
investment in listed investments
Headline earnings 304 342 270 362
Taxation - (1 513)
Straight line rental income accrual 16 147 4 997
Unrealised deficit on interest rate
swaps 6 336 33 543
Distributable earnings 326 825 307 389
cents cents
Earnings per unit 233.78 151.21
Headline earnings per unit 148.38 131.82
Distribution per unit 159.34 149.87
Number of units in issue (`000) 205 107 205 107
Weighted number of units (`000) 205 107 205 107
STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2010
2010 2009
R`000 R`000
ASSETS Restated
Property assets 5 150 956 4 673 229
Investment properties 4 999 600 4 408 836
Straight-line lease income accrual 151 356 167 503
5 150 956 4 576 339
Investment property under development - 96 890
Other non-current assets
Listed investment 213 778 316 012
Current assets 193 577 202 426
Rental and other receivables 36 939 42 553
Dividends receivable 4 435 6 350
Cash and bank balances 152 203 153 523
Total assets 5 558 311 5 191 667
UNITHOLDERS` FUNDS AND LIABILITIES
Unitholders` funds
Unitholders` capital 1 661 615 1 661 828
Non-distributable reserves 2 745 596 2 592 931
Total unitholders` funds 4 407 211 4 254 759
Non-current liabilities
Unsecured borrowings 714 424 685 879
Current liabilities 436 676 251 029
Trade and other payables 239 328 65 870
Other financial liabilities 28 743 22 407
Taxation payable - 231
Unitholders for distribution 168 605 162 521
Total unitholders funds and 5 558 311 5 191 667
liabilities
STATEMENTS OF CHANGES IN UNITHOLDERS` FUNDS
FOR THE YEAR ENDED 31 MARCH 2010
Capital Non- Retaine Total
distribu d
table earning
reserves s
R`000 R`000 R`000 R`000
Balance at 1 April 2008 1 661 2 590 - 4 252
828 174 002
Total comprehensive income
for the year - - 310 146 310 146
Transfer to non- - 2 757 (2 757) -
distributable reserves
Unitholders distribution - - (307 (307
389) 389)
Balance at 31 March 2009 1 661 2 592 - 4 254
828 931 759
Capital issue costs (213) - - (213)
Total comprehensive income - - 479 490 479 490
for the year
Transfer to non- - 152 665 (152 -
distributable reserves 665)
Unitholders distribution - - (326 (326
825) 825)
Balance at 31 March 2010 1 661 2 745 - 4 407
615 596 211
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2010
2010 2009
R`000 R`000
Restated
Cash generated from operating
activities
Cash generated from operations 375 361 348 358
Interest income 12 162 16 167
Finance costs (65 726) (67 157)
Dividends received 11 708 11 834
Distributions paid (320 741) (290 028)
Taxation paid (231) (4 918)
Net cash generated from operating
activities 12 533 14 256
Cash flows from investing
activities
Additions to investment and
development property (42 185) (102 859)
Cash flows from financing
activities
Capital issue costs (213) -
Increase in borrowings 28 545 123 792
Net cash generated from financing
activities 28 332 123 792
Net (decrease)/increase in cash
and cash equivalents (1 320) 35 189
Cash and cash equivalents at
beginning of the year 153 523 118 334
Cash and cash equivalents at end
of the year 152 203 153 523
BASIS OF PREPARATION AND AUDIT OPINION
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) and IAS 34 and interpretations adopted
by the International Accounting Standards Board (IASB) and the Collective
Investment Schemes Control Act, 2002.
The financial statements are prepared on the historical cost basis, except
for investment properties, investment properties held for sale, derivative
financial instruments, financial assets and available-for-sale financial
assets which are measured at fair value.
The financial statements are prepared on the going concern basis and Sycom`s
accounting policies have been applied consistently to all periods presented,
except for IAS1 (revised) which is now applied affecting presentation only.
There has been additional disclosure on the statement of financial position
incorporating the Fund`s share of working capital of their consortium
entities.
KPMG Inc. has audited the financial information set out above. Their
unmodified audit report is available for inspection at the company`s
registered office. The information contained in the commentary below does
not form part of the audit opinion.
COMMENTARY
1. REVIEW OF RESULTS AND OPERATIONS
The board of Sycom Property Fund Managers Limited (`SPFM`) reports a
distribution of 82.2 cents per unit (cpu) for the six months ended 31 March
2010. Together with the interim distribution of 77.14 cpu, this gives
unitholders an annual distribution of 159.34 cpu, a growth rate of 6.32%
over the previous financial year. The results for the second half of the
financial year were adversely affected by an office vacancy rate of around
10% that persisted throughout the six month period ended 31 March 2010,
principally at the Woodlands Office Park, Riverwoods Office Park and
Georgian Crescent. The prevailing weakness in the economic climate also saw
a R2m increase in impairments to debtors balances, as provisions and bad
debt expenses increased from 0.75% to 1.13% of contractual revenue. Lastly,
the results were negatively affected by a 20% decline in the contribution
from Sycom`s investment in Germany through the Stenham European Shopping
Centre Fund (`SESCF"), in the face of a 3% lower Euro distribution from
SESCF, combined with sustained Euro weakness.
2. CHANGES TO BOARD OF DIRECTORS
During the year, both Tim Sewell (chairman) and Gerald Nelson retired from
the board of Sycom Property Fund Managers Limited (`SPFM`) after long and
distinguished service, for which the board records its grateful
appreciation. Geoff Everingham has been appointed as the new chairman, and
both Sello Moloko and Brian Stocks have also been appointed to the board,
Sello as deputy chairman and Brian as chairman of the audit committee.
3. PORTFOLIO ACTIVITIES
Retail portfolio
Sycom`s retail portfolio traded well in the year under review, with tenants
recording a growth in turnover of 6.13% in nominal terms. The strongest
performance was from Vaal Mall, which showed a robust 10.0% increase in
reported turnover. Somerset Mall`s annual turnover growth was a more modest
3.6%, although this mature and well-established asset delivered stronger
growth in the last quarter of the year, with turnover up by 7.2% as some
key tenant remixing decisions have started to show results. Paarl Mall at
7.8%, Fourways Crossing at 5.5% and N1 City at 4.6% turnover growth, in
nominal terms, have all produced commendable results for the year and have
amply illustrated the defensive qualities of Sycom`s major retail assets.
Some specific activities that have added value to the retail portfolio are
detailed below :
Somerset Mall
The relocation of KFC and Aroma Liquors to the Pick `n Pay entrance was
successfully completed at the end of 2009. This redevelopment creates an
opportunity to redevelop the free standing site previously occupied by
Aroma, and it allowed the introduction of a wider apparel offering into the
fashion section on the mall where KFC previously traded.
Dion Wired replaced Stuttafords on approximately 1,700m2 of space and
successfully commenced trading prior to Christmas 2009. Wetherlys relocated
out of the mall and made way for a flagship Incredible Connection store,
which will commence trading on the enlarged platform by July 2010.
Fourways Crossing
Clicks opened in the centre, and both Hi Fi Corporation and Sportsmans
Warehouse completed major internal upgrades.
Paarl Mall
Sycom successfully negotiated the purchase of four adjacent properties for
R10.25m. These properties will permit an increase in the centre`s gross
lettable area and the introduction of an additional anchor tenant to
supplement Paarl Mall`s offering.
Vaal Mall
Opportunities are being explored to expand the centre as well as introduce
a cinema component into the entertainment mix.
Office portfolio
Conditions remained difficult in the office market, and Sycom has had to contend
with a high level of lease expiries through the cyclical downturn, with 35,467m2
or 22.4% of the office portfolio expiring during the year. New leases and
renewals were concluded for 30,374m2, leaving 5,093m2 unlet. The 18,828m2 Veld
Estates development was completed during the year, and 15,834m2 of it has been
let, although 5,473m2 of the letting came from one of the tenants that relocated
from elsewhere in the park. The net result was that the office vacancy increased
to 16,209m2, or 10.2% of the office portfolio. This high level of vacancy has
persisted for much of the second half of the financial year, and reducing this
vacancy is one of the key challenges facing management.
Activity at Sycom`s two major office parks is detailed below:
Harrowdene Office Park, Woodmead
The office park comprises 36,888m2 of gross lettable area (GLA). Renewals
and new leases were concluded over 18,060m2, which includes a 7 year
renewal with Hatch Africa over 10,975m2.
The Woodlands Office Park, Woodmead
The completion of the Veld Estates development during the year under
review, increased the park`s GLA to 114,000m2. The development added
18,828m2 of office space to the park, of which 15,834m2 has now been let.
Elsewhere in the park, leases and renewals over 18,830m2 were successfully
concluded..
Tyger Hills Office Park
Sycom acquired the 10,920mSquared Tyger Hills Office Park in Cape Town for
R164.6m (a yield of 9.2%) effective 31 March 2010. The acquisition fits with
Sycom`s strategy of maintaining a relatively even exposure to the retail and
office segments, and Sycom has found significant advantages in owning large,
high quality office parks in well defined and sought-after nodes. It also
improves Sycom`s exposure to the top end of the Cape Town office market.
4. BORROWINGS
Sycom has an approved facility of R950 million. The facility is subject to
renewal in November 2014. At 31 March 2010, R714 million of this facility
had been utilised, with 70% of borrowings subject to interest rate swaps,
as tabulated below. This level of interest rate hedging is in line with
board policy. The weighted average borrowing cost is 9.7%. Sycom`s gearing
level is presently just under 14%. Including the effects of its investment
in SESCF, Sycom`s `see-through` gearing level is 21.3%, and the board would
be comfortable to increase the overall level of gearing to 30%, subject to
securing suitable acquisition opportunities.
Type Maturity Effective Value % of
Date total
Rate R`000
SWAP 1 June 2011 8.8% 100,000 14%
SWAP June 2012 8.67% 100,000 14%
SWAP 17 Mar 2014 11.05% 200,000 28%
SWAP 9 April 2014 10.76% 100,000 14%
500,000 70%
Floating 30 November 7.50% 30%
2014 214,424
9.72% 714,424 100.0%
5. PROPERTY PORTFOLIO VALUATION
Sycom`s property portfolio, excluding Southgate Mall and Value Mart, was
independently valued by Quadrant Properties at 31 March 2010, as set out in
the table below. The Southgate properties were revalued by One Focus
Property Consultants. Excluding the effects of additions and transfers from
development property, the result was a satisfactory 8.04% increase in the
overall value of the portfolio. The condensed results of the independent
valuations are shown in the table below :
Sector Valuation at 31 Weighted average Weighted
March 2010 capitalisation average
rate valuation
per m2
Retail 2,797,137 8.4% R18,223
Office 2,353,819 8.9% R15,047
TOTAL 5,150,956 8.6% R16,772
6. STENHAM EUROPEAN SHOPPING CENTRE FUND (`SESCF`)
SESCF`s only asset, the 96,000m2 Nova Eventis shopping centre situated in
Leipzig, Germany was revalued at the end of December 2009 at Euro339m, a
decline in value since acquisition of 6.5%. The outlook for the German
economy is generally positive as sustained Euro weakness improves the
prospects for export driven sectors, although the weakness of the Euro zone
as a whole poses a challenge to regional growth.
At 31 March 2010, Sycom`s investment in SESCF was valued at R213.8m
compared with its March 2009 value of R316.0m as the dual effect of Euro
weakness and a lower property valuation led to an impairment of R102m in
the value of this investment.
In terms of income, the dividend from SESCF for the year ended 31 March
2010 was down to R9.2m from R11.5m in the prior year, a substantial decline
of 20% due to the strengthening of the Rand. In Euro terms, the dividend
was down 3%.
As a result of prevailing market conditions in Europe, certain subordinated
note holders in Stenham`s funding consortium have differed with the board`s
independent valuation of Stenham`s investment in the Nova Eventis Shopping
Centre, and effectively called for additional capital to be introduced into
Stenham in order to reduce its gearing ratio. The board of Stenham has
disputed the valuation obtained by the note holders, although as a matter
of prudence, it will consider re-capitalising the fund, given that
Stenham`s funding is in any event due to be re-negotiated in 13 month`s
time and some form of re-capitalisation is likely to be required at that
time. The additional capital may be raised by way of a rights issue by
SESCF, and preliminary estimates indicate that Sycom`s share of the re-
capitalisation could be in the order of R90m to be funded out of existing
Sycom facilities.
7. SOUTH AFRICAN RETAIL PORTFOLIO PERFORMANCE
The eight defined segments in Sycom`s South African retail portfolio
contributed to total retail turnover as shown in the chart below, with food
and apparel making up nearly 60% of all turnover. Together, these two
categories contribute just under 50% of Sycom`s rental income from its
retail portfolio :
SYCOM Retail Segments - Contribution to Turnover
Segment Segment: % of Turnover
Food Majors 26.3%
Apparel 30.4%
Home & Furniture 4.9%
Electronics & Music 11.3%
Mass Discounters 5.3%
Health & Beauty 9.3%
Food Service & Entertainment 7.1%
Other 5.4%
100.0%
Annual turnover in Sycom`s retail portfolio grew by 6.13% over the prior
year, and by 7.93% for the quarter ended 31 March 2010 compared with the
same quarter last year. The segmental mix of Sycom`s retail portfolio is
one of the reasons for this strong performance - the fund`s exposure to
food majors / supermarkets is relatively low, and it has a larger exposure
to apparel, which showed good growth, particularly in the last quarter. The
robust performance of the health & beauty segment also contributed to the
strong turnover growth reported. Further details of segmental performance
are shown in the chart below:
Retail Segments: Turnover Growth
Segment Quarter-on-Quarter Year-on-Year
Total Turnover 9.1% 7.4%
Food Majors 3.2% 5.0%
Apparel 10.8% 5.7%
Home 8.4% 3.1%
Electronics 3.0% -2.5%
Mass Discounters 9.5% -0.7%
Health & Beauty 11.5% 17.4%
Food Service 5.2% 4.1%
Besides the good results from the apparel and health & beauty segments,
there was a pleasing recovery in the homeware, mass discounters and
electronics segments in the last quarter.
Rent to turnover ratios remained fairly consistent over the year. This acid
test of rental affordability is one of the measures used by the fund to
form a view on the sustainability of rental levels.
Retail Segments: Rent to Turnover Ratio
Segment Rent Ratio 2009 Rent Ratio 2010
Food Majors 1.7% 1.7%
Apparel 5.4% 5.5%
Home 8.9% 9.5%
Electronics 2.0% 2.3%
Mass Discounters 3.0% 3.3%
Health & Beauty 2.7% 2.5%
Food Service 8.0% 8.3%
8. LEASE EXPIRY AND RENEWALS OVER THE LAST 12 MONTHS
In the office portfolio, renewals and new leases for 30,374m2 were
concluded, and vacancies increased from 2,649m2 on 1 April 2009 to 16,209m2
at 31 March 2010, representing 10.2% of office GLA. The expiring leases
terminated at an average rental of R116.04/m2, and were renewed at an
average of R115.96/m2 (including parking in both cases).
In the retail portfolio, 22,140m2 or 13.7% of that portfolio expired during
the year at an average rental of R142.96/m2. Of this, 21,814m2 was let or
renewed at an average of R148.74/m2, with the retail vacancy increasing
marginally from 1.5% to 1.7% by GLA.
Offices Retail Total
31-March-09 Let m2 137,161 158,776
295,937
Vacant m2 2,649 2,438
5,087
Total m2 139,810 161,214
301,024
Additions m2 18,631 9
18,640
Expiries m2 35,467 22,140 57,607
Average R/m2 116.04 142.96 126.39
New lets & m2 30,374 21,814 52,188
renewals
R/m2 115.96 148.74 129.66
Additions m2 10,164 0 10,164
already under
lease
31-March-10 Let m2 142,232 158,450 300,682
Vacant m2 16,209 2,773
18,982
Total m2 158,441 161,223
319,664
9. FORWARD LEASE EXPIRIES
The forward lease expiry profile shows relatively high levels of renewal
activity ahead in the 2011 and 2012 financial years. Paarl Mall reaches its
first 5 year renewal cycle in 2011, and early indications are encouraging
for a high tenant retention rate, although rental levels may come under
some pressure. There will also be substantial re-letting activity at N1
City, where some of the anchor tenants are up for renewal. In 2012, the
Discovery House renewal will dominate letting activity. After 2012, lease
expiries diminish substantially. The expiry profile by revenue is shown
below:
Lease expiry profile by revenue by sector
Retail Offices Total
to Mar-11 13.3% 8.6% 21.9%
to Mar-12 13.1% 17.7% 30.8%
to Mar-13 7.7% 3.3% 11.0%
to Mar-14 6.6% 2.0% 8.6%
to Mar-15 4.3% 5.0% 9.3%
thereafter 7.4% 11.0% 18.4%
Looking ahead, the table below shows details of the retail and office
expiries for the financial year ending 31 March 2011, with expiry rentals
and expected renewal rentals:
Expiring Expiry Market % change
before rent rent
31-3-2011 (R/m2) (R/m2)
(m2)
Retail 39 795 121.55 128.00 5.3%
Offices 24 640 111.30 124.40 11.8%
Total 64 435 117.63 126.62 7.65%
Portfolio
10. MAJOR TENANTS BY AREA AND INCOME
The graph below reflects the contribution to income by Sycom`s 10 largest
tenant groups. Four of the five largest are office tenants and contribute
24.7% of Sycom`s annual rental. The other six are retail groups,
contributing 17.3% of rental income.
Hatch Africa 7.7%
Discovery Health 7.4%
Deloitte 6.1%
Pepkor Group 3.5%
Edward Nathan Sonnenbergs 3.5%
Foschini Group 3.3%
Edcon 3.2%
Pick & Pay 2.9%
Mr Price Group 2.6%
Masstores 1.8%
11. VACANCIES AND BAD DEBTS
The table below provides details of Sycom`s vacancies for the 2009 and 2010
financial years, expressed by area.
2010 2009
Retail 1.7% 1.5%
vacancy
Office 10.2% 1.9%
vacancy
Total vacancy 5.9% 1.7%
Average rentals for the retail portfolio are R120/m2 and offer upside
growth on renewal. For the office portfolio, the average of R121.85/m2 is
considered close to market for the portfolio as a whole, although any
softening in office rentals will expose potential over-rents, with the
associated reversionary risk.
Bad debts written off or provided for in the 2010 financial year represent
1.13% of rental income and amount to R5.2m. The comparative write-off for
2009 was 0.75% of rental income, or R3.2m.
12. COST TO INCOME
The ratio of net property operating expenses to contractual income and
recoveries increased from 13.9% in 2009 to 14.6% in the current year,
largely as a result of the increase in vacancy that resulted in reduced
contractual income. Controllable costs were well contained, and the overall
cost to income ratio for 2010, although higher than last year`s result, is
still lower than the 2008 level of 15.6%.
13. UNIT HOLDER SUMMARY
Sycom`s major unit holders at 31 March 2010 are shown below, with a
comparison to the prior year.
Major unitholders
2010 2009
Hyprop 36.7% 36.7%
Acucap 18.3% 18.3%
PIC 4.2% 3.4%
Redefine 3.2% 3.2%
Stanlib 3.0% 2.5%
Nedbank 2.8% 2.8%
Old Mutual 2.6% 2.9%
Investec 0.4% 5.5%
71.2% 75.3%
14. PROSPECTS
The good defensive qualities of Sycom`s retail portfolio have been evident
throughout the last financial year. The pleasing turnover growth rates
achieved and the stable occupancy levels point to a definite recovery in
consumer spending, although the board expects this recovery to be gradual.
The office sector remains challenging, and Sycom will once again have to
contend with a high level of lease expiries in the 2011 financial year.
There has, however, been a discernable increase over the last quarter in
the number and quality of enquiries for office space, suggesting that the
downward office cycle may be nearing a turning point.
Sycom`s long-term objective has been to deliver real growth in
distributions, and over the last 14 years, cumulative distribution growth
has exceeded cumulative CPI growth by 0.24%. Its results in the year ahead
will remain closely linked to the demand for office space, and may also be
affected by the possible early re-capitalisation of its investment in
Stenham. In the long-term, the portfolio remains well positioned to
continue delivering real distribution growth.
At the same time, the board will continue seeking opportunities to grow the
fund through good quality acquisitions and through the on-going development
and extension of its existing portfolio.
The above information has not been reported on by Sycom`s auditors.
15. PAYMENT OF INTEREST
Notice is hereby given of the declaration of distribution number 50 in
respect of the six months to 31 March 2010. The distribution is paid out of
property income which is classified as interest from a unitholder`s
perspective for SARS reporting purposes. The final distribution of 82.2
(eighty two comma two) cents per unit has been approved in respect of the
six month period ended 31 March 2010. The last date to trade the units cum
distribution is Friday, 18 June 2010 and the record date will be Friday, 25
June 2010. The units will start trading ex-distribution from Monday, 21
June 2010. Distributions will be made to unit holders on Monday, 28 June
2010.
Unit certificates may not be dematerialised or rematerialised between
Monday, 21 June and Friday, 25 June 2010 both days inclusive.
On behalf of the Board
G K EVERINGHAM PA THEODOSIOU
Chairman CEO
Sycom Property Fund Managers Ltd Sycom Property Fund Managers
Ltd
3 June 2010
Registered Office
Suite A11 Westlake Square
Westlake Drive
Westlake
CAPE TOWN
Transfer secretaries:
Computershare Investor Services (Proprietary) Limited
70 Marshall Street
JOHANNESBURG
http://www.sycom.co.za
Share Code: SYC
ISIN : ZAE 000019303
Directors of Sycom Property Fund Managers Limited:
GK Everingham (Chairman), SM Moloko (Deputy Chairman),
FM Berkeley, JPD Flanagan, BM Stocks, L Norval *, NFJ Haasbroek*, SJ Wentzel*,
PA Theodosiou*# (CEO), CB Marlow*, GR Jones*
* Executive ; # British
Sponsor
Nedbank Capital
Date: 03/06/2010 15:07:02 Produced by the JSE SENS Department.
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