Annual Report March 2011

1. REVIEW OF RESULTS AND OPERATIONS
Acucap’s board is pleased to report a distribution of 138.88 cents per unit (cpu) for the six months ended 31 March 2011. This represents growth of 6.4% over the same six month period last year. Together with the interim distribution of 136.75 cpu, this gives unitholders an annual distribution of 275.63 cpu, a growth rate of 6.3% over the previous financial year.

There are mixed signals around the performance of the South African economy. Weak credit extension and money supply growth numbers suggest demand side weakness, pointing to lower output growth and slower job creation, while external factors and administered cost increases are causing inflationary pressures to build on the supply side. In spite of historically low interest rates, businesses and consumers remain cautious, and this is likely to persist until the economic outlook becomes more clear.

Reported tenant revenue in Acucap’s retail portfolio grew by 7.6% in nominal terms for the year to 31 March 2011 compared to the previous year, but by a lower 4.9% for the quarter ended on that date compared to the same quarter last year. While this suggests that consumer spending may be losing momentum, the month of April produced a return to double digit turnover growth, 11.5% higher than the same month last year. Leases for 68,640m2 expired during the year and were renewed at rentals that were, on average, 6.4% higher than the expiry rentals. Leases for 91,593 m² are due to expire in the 2012 financial year, at average rentals of R119.93/m2, and are expected to be renewed at an average of R107.58/m2.

Vacancy rates remained low across Acucap’s retail portfolio, ending the year at 2.9%, and net income growth from the fund’s retail assets was a pleasing 13%. Although rental growth exceeded the underlying growth in tenant turnovers, the rent to turnover ratios remained within comfortable ranges across all retail segments, indicating the sustainability of rental levels in the retail portfolio.

Acucap’s high quality office portfolio performed well in the period under review, and further details are set out under section 3 below.

Development profits from Helderberg Village declined substantially, in line with Acucap’s strategy of ultimately eliminating all sources of non-recurring revenue. Development profits accounted for only 1.9% of distributions compared to 8.6% last year, the remainder comprising sustainable annuity income underpinned by high quality growth assets.

Bad debts written off amounted to R1.25m down from R2.15m in the prior year. Tenant receivables impaired decreased by R896 000 to R3.691m, down from R4.587m in the prior year. The greatest pressure was evident in the restaurant segment, with some of the weaker casual dining formats failing. Nonetheless, the segment as a whole showed positive growth, principally as a result of the more dominant brands gaining market share.

There were no acquisitions in the year under review, and two disposals of non-core assets, being the 10,400m2 Kargo Denver industrial warehouse south of Germiston, and the 5,900m2 Watermeyer Park retail centre in eastern Pretoria. Both were disposed of for net sale prices in excess of their most recent independent valuations. Capital expenditure of R226m has been incurred on the expansion and refurbishment of Bayside Mall and Howard Centre, both of which are now complete and showing strong growth in turnovers.

On the basis of individual assets and asset segments, Acucap’s net income is attributable as follows:

2. SIMPLIFIED FINANCIAL INFORMATION
Simplified financial information is presented to eliminate the effects of IFRS and accounting adjustments that do not form part of Acucap’s distribution.

Simplified distribution income statement for the year ended 31 March 2011

Simplified Balance Sheet at 31 March 2011

3. PORTFOLIO PERFORMANCE

Retail Portfolio
As noted above, the retail portfolio showed a pleasing 7.6% growth in turnover in the year to 31 March 2011 compared to the same period in the prior year. The chart to the right shows the segmental contribution to turnover within Acucap’s retail portfolio.

The change in contribution from Acucap’s major retail segments is reflected on the right. For the year to 31 March 2011, the discount, electronics and homeware segments showed strong growth over the prior year, although for the last quarter of the year, there was a noticeable slow-down in growth from the discount sector. Apparel’s contribution remained relatively flat, and the contribution from the supermarket segment declined slightly. This analysis shows that consumers have directed proportionately more of their spending to discretionary segments and relatively less to supermarket spend.

Rent-to-turnover ratios are also monitored monthly for each tenant, and the segmental movements in these ratios are reflected bottom right. As expected, the strong performance of the discount, electronics, homeware and health & beauty segments has resulted in their rent-to-turnover ratios improving as can be seen in the figure below. The ratio of rent to turnover for food majors continued to deteriorate as supermarket rentals have escalated faster than the growth in their turnovers. Nonetheless, with rental at 2.6% of turnover, this segment remains comfortably within the industry norm of 2.5% to 2.75%. The same applies to the apparel segment where rental has risen slightly from 4.2% to 4.5% of turnover.

Office portfolio
Vacancies remained low in Acucap’s high quality office portfolio, ending the year at 3.5%. Leases totalling 10,112m2 expired during the year at an average rental of R115.56/ m2, and were renewed at an average of R107.01/ m2, a function of the weakness in the office cycle over the last financial year. Leases for 20,775 m2 are due to expire in the 2012 financial year at an average rental of R127.20/ m2, and the board expects to maintain the high retention ratio that has characterised Acucap’s office portfolio.

Sycom
Distributions received from Acucap’s investment in Sycom Property Fund were slightly lower at 156.67 cpu compared to 159.34 cpu in the year to 31 March 2010. This result was largely due to cyclical weakness in the office market, where Sycom’s vacancies increased from an average of 8.2% for the 2010 financial year to an average of 10.9% for the current year. On Sycom’s portfolio of approximately 140,000m2 of offices, this reflects a 4,000m2 increase in vacancies. There are, however, positive signs of an improvement in the market for ‘A’ grade office space, and Sycom has concluded deals for 4,960m2 of vacant space where the leases will come into effect during the 2012 financial year. There is also a meaningful improvement in the number and size of enquiries for new space, suggesting that a recovery in the ‘A’ grade office market is well under way, and this will drive Sycom’s distribution growth in the year ahead.

Dividends from Sycom’s investment in the Stehnam European Shopping Centre Fund (‘SESCF’) were substantially higher in the second half of the financial year, with the result that total dividends received for the year to 31 March 2011 were 9% higher in Rand terms than for the prior year, although still 7.7% lower than the dividends received in financial 2009, indicating relatively flat income growth from the underlying Nova Eventis shopping centre in Leipzig, Germany.

Sycom’s retail portfolio produced a solid 6.5% growth in turnover, with the segmental contribution to turnover largely unchanged from the prior year.

4. HELDERBERG VILLAGE
Acucap sold 4 units in the year under review. Net development profits were R8.9m, compared to R23m in the prior year. There are 3 units left to sell, all of which are budgeted to be sold in the 2012 financial year. There will be no development profits from Helderberg in the 2013 financial year, and the effects of Helderberg will be out of the distribution base by 2014.

5. BORROWINGS
The company has total borrowings of R2.7 billion (excluding BEE funding). Interest rates are hedged on 59.1% of total borrowings, at a weighted average rate of 10% and a weighted average maturity of 6.6 years. Acucap’s gearing ratio at 31 March 2011 was 34%, down from 36% at the end of March 2010.

The chart below shows Acucap’s borrowings relative to its investment portfolio from date of listing to the current year end. The chart reflects the board’s strategic intent of maintaining the company’s gearing ratio within the 30% to 40% range.



6. PROPERTY PORTFOLIO VALUATION
The Acucap portfolio was independently revalued at 31 March 2011 by independent valuers.  The value of the property portfolio increased from R5.5bn at the end of March 2010 to R6.5bn at the end of the current financial year, an 18.2% increase. Excluding the effects of capital expenditure and also removing the two disposals mentioned under section 1 above from the base, the portfolio value increased by 9.1% over the prior year.

Following the year end revaluation, Acucap’s Net Asset Value (NAV) increased to R30.54 per linked unit. Excluding the effects of deferred tax, the NAV per unit would be R32.13.

7. HISTORICAL LEASE EXPIRIES OVER THE LAST 12 MONTHS
The table below shows a summary of all leasing activity in the Acucap portfolio over the last financial year.

Acucap successfully renegotiated over 82% of expiring leases during the year, with 3.5% of expiries moving into temporary retail vacancies resulting from redevelopment activities. Retail leases were renewed at a weighted average net rental that was 6.6% higher than the expiring rental. Office leases were renewed with an 11.2% negative reversion.

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.

8. FORWARD LEASE EXPIRIES
Over the next financial year, leases for 91,593m2 will expire, representing 20.5% of the portfolio GLA. Details of the expiry rentals are shown below, together with estimated renewal rentals. For offices, there is an expected negative reversion of 13.3%, and for retail, a negative reversion of 9.7%.

Over the longer-term, the fund continues to show a good, long-dated lease expiry profile. Expiries in the office portfolio are approximately 20% by office income per annum over the next two years. The principal renewals in the retail portfolio over the next two years will centre around Festival Mall and Key West.

Sectoral lease expiry profile by revenue

9. MAJOR TENANTS BY AREA AND INCOME
Acucap’s twenty largest tenants account for 50.6% of its rental income, with retail tenants contributing 41.1% and office tenants 9.5%, 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.

10. VACANCIES
Total vacancies by income have reduced slightly from 4.3% at the end of March 2010 to 4.1% a year later.  Excluding the effects of temporary vacancies arising out of redevelopment activities, the vacancy is 2.7% by income.

The graph on the right shows the vacancy attributable to each segment of the Acucap portfolio by GLA.

11. COST TO INCOME
Acucap has exhibited sound long-term control over non-recoverable operating costs, and this has been attributable to two principal factors. The first is the composition of the portfolio, which comprises smaller number of large, good quality properties, and the second is the operation of an in-house property administration business, where cost and quality benefits have been enhanced by the growing scale of the business, and the increasing quality and experience of the administration team.

Administered price increases are still a serious concern, although the board expects that the major base adjustments in rates and taxes is now behind us and increases in the foreseeable future should be more reasonable. Whilst the unit cost of electricity is increasing at a rate well in excess of the CPI, considerable effort is being devoted by both Acucap and many of its tenants to initiatives aimed at reducing energy unit consumption and therefore mitigating overall cost increases.

12. UNITHOLDER SUMMARY
A summary of Acucap’s unitholder profile is set out below. Annual trade in Acucap’s linked units was 23.4% of the total number of units in issue, indicating a sound level of liquidity, particularly considering the long-term nature of many of Acucap’s major unitholders.

13. PROSPECTS
The Acucap property portfolio is well-positioned to continue delivering real growth in distributions, even though economic growth rates in South Africa remain below potential. Household demand is expected to continue its gradual improvement, particularly if interest rates remain low in the coming financial year, and this should support retailers. Signs of an improvement in the market for A Grade offices will also assist Acucap in its renewals for the 2012 financial year. The contribution from development profits continues to diminish, and once these effects are out of Acucap’s income base, growth in distributions can be expected to pick up even further, in line with the potential of Acucap’s high quality property portfolio.


14. ANNUAL GENERAL MEETING
The Annual General Meeting shall take place on 09 September 2011 in Cape Town. To ensure compliance with the new Companies Act, significant changes are required to the form and content of the Annual General Meeting notices and resolutions. Consequently, the formal notice for the Annual General Meeting together with resolutions and a proxy form will be posted to unitholders on 29 July 2011.