/ANNUAL REPORT MARCH 2009

1. REVIEW OF RESULTS AND OPERATIONS

Acucap achieved a pleasing growth in distributions for the year ended 31 March 2009 of 10.4% over the previous financial year. With the now weaker South African economy, the performance of local listed property companies will increasingly be differentiated by the quality of their underlying portfolios. Acucap has worked consistently to build a portfolio comprising a smaller number of large, good quality assets, capable of delivering real growth through the economic cycle. Further details of the company’s performance over the last financial year are set out in this executive report.

2. SIMPLIFIED FINANCIAL STATEMENTS

Simplified financial information is presented to eliminate the effects of IFRS and accounting adjustments that do not form part of Acucap’s distribution. The comparative figures have not been re-stated for the change in accounting policy, which has no effect on cash distributions. 

SIMPLIFIED DISTRIBUTION INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2009

NOTES TO THE SIMPLIFIED DISTRIBUTION INCOME STATEMENT

SIMPLIFIED BALANCE SHEET AT 31 MARCH 2009

NOTES TO THE SIMPLIFIED BALANCE SHEET

3.    PORTFOLIO ACTIVITIES


SYCOM

For the year to March 2009, Sycom Property Fund delivered a very sound 11.1% growth in distributions. This strong performance in challenging market conditions underlines the quality of Sycom’s portfolio, and this was the primary rationale for Acucap’s acquisition of a substantial investment in the fund, as well as joint control of its management company. The defensive strength of Sycom’s portfolio was emphasised by a 3.4% appreciation in the value of its investment properties since the last revaluation a year ago, resulting in an NAV of R20.74 at the end of March 2009. The Acucap and Parkdev asset management teams have combined well to increasingly realise the potential of Sycom’s properties, and the intensive style adopted at both asset management and administration levels is expected to continue delivering positive results. The growth in income from Acucap’s investment in Sycom will increasingly replace the Helderberg income stream, referred to in note 4.


ACUCAP RETAIL PORTFOLIO

The fund’s retail portfolio continued to perform well in the year under review, despite South Africa’s economy recording lower levels of consumer spending. In Acucap’s retail portfolio, total retail turnover for the year to March 2009 grew by a nominal 10.43% and foot traffic also showed positive growth, increasing in real terms by 2%. The development activities within the retail sector are summarised below:


Bayside Mall
On 22 May 2009, Acucap announced the acquisition of Old Mutual’s 50% undivided share in this regional mall. Unit holders are referred to the announcement, which contains the terms of the deal and its financial effects. The only condition precedent is approval by the competition authorities. The development of the new store for Mr Price was completed and as anticipated, the reconfiguration has resulted in a more balanced foot flow to this section of the mall, with Mr Price now playing an anchor role in a mall area previously occupied by smaller line shops. Additional bulk rights have been approved to increase the mall’s GLA to 52,000m2, and negotiations are well advanced with two majors to anchor the additional areas and give Bayside a highly competitive tenant mix.

Festival Mall
Paid parking was introduced to Festival Mall in November 2008. The change has been smoothly integrated, and is making a significant contribution to centre revenues. The introduction of the paid parking system necessitated upgrades to the parking area and realignment of internal access roads, as well as resurfacing of the majority of external parking areas. External lights, landscaping, road markings and signage were all upgraded in order to deliver a parking environment that compliments a quality shopping experience offered by the internal malls. The four entrances have been redeveloped, integrated into the structured parking, and the lead-in malls have been upgraded to a more contemporary retail design. The total capital cost of the project was R38m, with the paid parking income and letting of the recently completed external shops resulting in an anticipated first year yield in excess of 9%. This project was the final phase of the redevelopment and extension at Festival Mall which resulted in the introduction of Game, Ster Kinekor and Boardmans as well as an additional 800 structured parking bays.
 

Key West
The introduction of the paid parking system in Key West was put on hold due to internal traffic congestion that was revealed during the testing phase of the system. Currently planning is underway with the aim of introducing an additional 500 parking bays in a structured format in order to meet parking demand and ease congestion. A partial upgrade of the existing parking areas has been completed, including landscaping, fencing of the perimeter of the site, road markings and lighting. The new Virgin Gym entrance was completed at the same time as the internal upgrade to the gym premises. A number of national tenants, including Woolworths, have commenced internal upgrades to their specification.


Rondebosch Village
The final phase of the centre’s redevelopment was completed in the last quarter of the financial year. This phase included the introduction of an additional 105 parking bays, a pedestrian walkway along the Liesbeek Canal, the extension and complete upgrade of the Pick n Pay store, the introduction of a number of new line shops, and finally the conversion of the obsolete cinema space into 1,000m2 of high quality offices.

 
Howard Centre
Plans to redevelop the centre are well advanced, and will result in the creation of an additional 2,500m2 of GLA, as well as an expansion of Woolworths, the realignment of the old food court, and a general upgrade to entrances, public facilities and mall finishes. The estimated capital cost of the project is R62m with a projected first year yield of 11%.
 

Westville Mall
Planning is also underway to upgrade the Westville Mall. The existing facade, parking area, and internal mall finishes are to be upgraded, and the existing GLA will be extended by 800m2. The estimated capital cost for the project is in the order of R23m with an indicative first year yield of 9%. The work is scheduled for completion towards the end of 2009.

ACUCAP OFFICE PORTFOLIO

There were no new developments or acquisitions in the office portfolio, but significant leasing activity occurred in the year under review. Leases for 37,876m2 expired during the year, and new leases or renewals were concluded for 39,192m2 of space.


Illovo Boulevard node
Acucap has 18,866m2 of office space in the prime Illovo Boulevard office precinct. Leases over 9,706m2 expired during the year, and new leases or renewals were concluded for 9,015m2 of this space at gross rentals of between R120/m2 and  R125/m2. Negotiations are well advanced for 538m2 of the unlet area at a gross rental of R120/m2, and 153m2 remains vacant, representing 0.8% of Acucap’s office exposure in this node.


Golf Park, Mowbray
This office park comprises 16,257m2 of GLA, of which 4,885m2 expired during the current year and was successfully renewed.


Mutual Terrace, Pinelands
Old Mutual renewed its lease over this 4,493m2 building at a market-related rental, resulting in an 18.5% upward reversion.


Albion Springs, Rondebosch
A five year renewal was concluded with the anchor tenant for 2,809m2 of office space.


135 West Street, Sandton
The property was sold for a consideration of R50m, against its March 2008 valuation of R40,6m. Transfer was effected in May 2009.


ACUCAP INDUSTRIAL PORTFOLIO

Acucap’s industrial interests are represented in the N1 and Montague business parks. and although they currently represent a small proportion of the fund’s portfolio, they will comprise a more meaningful proportion of Acucap’s investment properties once the build-out of the respective parks is complete. The current status of the developments is summarised below:


N1 Business Park
Tenant demand has remained firm for space in this premium industrial park. The latest signing is Digistics for a 7,821m2 facility on terms that will provide an initial yield of 10.33%. This deal takes the total leased area at N1 Business Park to 26,488m2, out of a total anticipated build out of approximately 115,000m2.


Montague Business Park
Land use, traffic and environmental approvals have all been obtained, and a site development plan has been submitted for a mixed use build-out of the site, incorporating both industrial and retail elements totaling 236,225m2 of bulk. Negotiations are progressing well for a proposed retail development on the Koeberg / Plattekloof corner of the site, and there is sufficient power available to complete this project. Eskom has confirmed that the site’s additional power requirements will be provided in two phases, with the first tranche of additional capacity coming on stream in January 2010. The remainder of the site’s requirements will be delivered by March 2011.
 

4. HELDERBERG VILLAGE

Acucap had budgeted to sell 20 units in the current financial year, and by year end, a total of 19 units had been sold. This pleasing result, in a distressed residential market, underlines both the uniqueness of Helderberg’s offering and the profile of many of its buyers, who are less reliant on bank funding. Net revenue from Helderberg sales was R42m, compared to R9m in the prior year. There are 17 units left to sell, with 12 units budgeted to be sold in the 2010 financial year, and the remaining 5 units in financial 2011.

5.  BORROWINGS

The company has total borrowings (net of BEE transaction) of R2.286 billion as tabulated on the next page. Interest rates are hedged on 84% of total borrowings, at a weighted average rate of 10.53% and a weighted average maturity of 8 years. The Nedbank facilities are subject to renewal in two tranches, the first renewal for the R977m facility effective 31 March 2012, and the second renewal for the R792m facility effective 31 March 2013. The smaller Omsfin and Standard Bank facilities run to 31 March 2011 and 30 June 2010 respectively. Acucap’s gearing ratio at 31 March 2009 was 39.13%.
 

6. PROPERTY PORTFOLIO EVALUATION

The Acucap portfolio was independently revalued at 31 March 2009 by the fund’s appointed valuers, Quadrant Properties in Gauteng and Natal, Magnus Penny in the Western Cape and Majola & Boyd in the Eastern Cape. In addition, when prevailing market conditions are considered to be unusual, independent peer review valuations are commissioned. The board considered this appropriate in the current year, and independent peer review valuations were performed on a sample of the fund’s properties. Their results concurred with those of the fund’s independent valuers, and a complete property valuation schedule is set out on pages 94 to 97. In addition to independent values and capitalisation rates, the schedule also indicates average net through rentals per m2 for each property, as well as its occupancy level. In the case of the office segment, average net rental rates per m2 include parking revenue.

7. RETAIL PORTFOLIO PERFORMANCE

Segmental contribution to turnover within the Acucap retail portfolio is shown in the pie chart below.
Just over 67% of turnover is attributable to food and apparel, and these two segments contribute 54% of Acucap’s rental income.

The performance of Acucap’s major retail segments for the full year and for the last quarter of the year to March 2009 are shown in the chart alongside. For the year, the graph shows positive growth across all segments except for mass discounters, where discretionary spend on durable goods has been under pressure for most of the year. In the quarter to March, the growth rate has generally slowed, largely due to Easter falling in April this year. This is shown by a muted 2.05% turnover growth in March, compared to a more robust 5.16% turnover growth in April 2009.

The strong performance of the Home segment in the last quarter of 2009 was influenced by the opening of the new format Mr Price store in Bayside referred to previously. The Health & Beauty segment also proved resilient, outperforming its strong annual showing in the last quarter.

 
Acucap monitors each tenant’s rent to turnover ratio on a monthly basis to determine if there are any early signs of stress, typically indicated by rent to turnover ratios exceeding segmental industry norms. The graph on the right shows these ratios for each of the seven major segments in Acucap’s retail portfolio. The Home and Mass Discount segments have deteriorated the most, although both remain with industry norms at 9.4% and 5.5% rent to turnover respectively.

8.  HISTORICAL LEASE EXPIRES OVER THE LAST 12 MONTHS

The table below shows a summary of all leasing activity in the Acucap portfolio over the last financial year:

The uplift in office rentals was higher than reversions achieved in retail rentals, although retail reversions are expected to outperform office reversions in the year ahead, as shown in section 9 below. Significantly, there has been no material change in average escalation rates, and these contractual rent increases will continue to underpin distribution growth through the economic cycle. The pattern of expiries and renewals can be seen in the context of Acucap’s overall portfolio in the table below, which reconciles the opening and closing gross lettable area, taking into consideration expiries, renewals, new leases, extensions to GLA, and acquisitions and disposals.

9. FORWARD LEASE EXPIRES

Over the next financial year, leases for 79,792m2 will expire, representing 19% of the portfolio GLA. Details of the expiry rentals are shown below, together with estimated renewal rentals. For offices, there is an expected downward reversion of 8%, and for retail, an upward reversion of 12%.

Over the longer term, the fund continues to show a good, long-dated lease expiry profile. Expiries in the office portfolio are between 3% and 5% by income per annum over the next 4 years. The retail portfolio shows higher levels of expiry by income over the next three years, centred largely around Festival Mall and Key West, where low average through rentals of just over R100/m2 present an opportunity for meaningful upward rental reversions. The expiry profiles are shown on page 25.

10. MAJOR TENNANTS BY AREA AND INCOME

Acucap’s twenty largest tenants account for 49.4% of its rental income, with retail tenants contributing 38% and office tenants 11.4%, in line with the fund’s high retail weighting in its property portfolio. The tenants listed below indicate the high quality of Acucap’s rental cash flows.

11. VACANCIES

Total vacancies by income have remained low at 2.82%. The pie chart below shows the vacancy attributable to each segment of the Acucap portfolio. Included is 0.76% for planned retail vacancies, where tenants have been relocated and temporary vacancies created to allow for redevelopment activities. Excluding these effects, the vacancy is 2.06% by income.

12. COST TO INCOME

 Costs remain well controlled, with the net cost to income ratio at 11.3%, which is now at its lowest level in the last 5 yeas. Acucap has established its own in-house administration business, Acucap Management Services (‘AMS’), a wholly owned subsidiary of Acucap. The company is seeing the benefits of in-house administration, which gives improved control at a property level, and it continues to enjoy the advantages of having a smaller number of properties in its portfolio. Acucap has been in the process of rationalising its in-house administration costs since the start-up of this function in the 2008 financial year, and sees further scope for improvement in the cost ratios shown below. 

13. PROSPECTS

While South Africa’s direct property market has so far remained generally sound, a slowing economy will bring pressure to bear on market rental levels, portfolio occupancy rates and the solvency of smaller and more vulnerable tenants. With its defensive portfolio, efficient cost structure and committed management team, Acucap is well placed to weather these challenges and produce a good result for the year ahead, although the expected distribution growth will be lower than the 10% achieved in the current year. The expected distributions for 2010 have not been reviewed and reported on by Acucap’s auditors.

14. DIRECTOR'S ATTENDANCE AT MEETINGS

Attendance of directors at board and sub-committee meetings held during the year remains high at 91%, and indicates an active and committed board.

At the company’s year end, seven of the ten directors were independent non-executives, indicating full compliance with the King II code in this respect.