/ANNUAL REPORT MARCH 2010

1. REVIEW OF RESULTS AND OPERATIONS

Acucap’s board is pleased to report a distribution of 130.56 cents per unit (cpu) for the six months ended 31 March 2010. This represents growth of 6.36% over the same six month period last year. Together with the interim distribution of 128.7 cpu, this gives unitholders an annual distribution of 259.26 cpu, a growth rate of 6.23% over the previous financial year.

The South African economy is showing clear signs of recovery, although the recovery is expected to be gradual, and may suffer occasional setbacks as the global economy deals with the after-effects of the credit crisis and the more recent budget deficit concerns in parts of the Eurozone. For Acucap, as a predominantly retail fund, the most reliable indicator of South Africa’s economic recovery is the growth in consumer spending, as evidenced by the performance of the fund’s retail tenants. Reported tenant revenue across all Acucap’s retail assets grew by 2.3% in nominal terms for the year to 31 March 2010 compared to the previous year, and by 3.8% for the quarter ended on that date compared to the same quarter last year. The upward trend is clear, although this result was dampened by temporary vacancies arising from a high level of redevelopment activity in Acucap’s retail portfolio. Excluding the assets under redevelopment, annual tenant revenue growth was a nominal 3.1%, and revenue growth for the last quarter was 4.7%. Seen in the context of a declining inflation rate, these trading results show a gradual but encouraging improvement in real consumer spending.

Acucap’s high quality office portfolio performed well in the period under review, with the office vacancy rate remaining constant at around 2.5% and renewal rentals achieved coming in at just over 97% of budget.  In line with forecast, there was once again a lower contribution to profits from Helderberg Village as this development nears completion, but combined income from Acucap’s investment in Sycom Property Fund and its management company Sycom Property Fund Managers (SPFM) continued to show steady growth.
Bad debts written off and tenant receivables impaired amounted to R3.5m, up from R1m in the prior year and R2.6m in 2008, as the effects of the recent recession remained evident throughout the year under review. Smaller retail tenants in particular are likely to remain under pressure until the economic recovery is more firmly established.

No buildings were sold in the period under review, and two acquisitions were announced. The first was the acquisition of the remaining  50% undivided share in Bayside Shopping Centre that Acucap did not already own, announced in May 2009, with transfer on 16 October 2009. The second was the acquisition of Tyger Hills Investments (Pty) Ltd, the co-owner of Cape Town’s prestigious Tyger Hills Office Park. The remainder of this high quality office park is owned by Sycom. The acquisition was announced on 12 March 2010 and transfer will be effected as soon as approval is granted by the competition authorities.

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

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.

SIMPLIFIED DISTRIBUTION INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2010

NOTES TO THE SIMPLIFIED DISTRIBUTION INCOME STATEMENT

SIMPLIFIED BALANCE SHEET AT 31 MARCH 2010

NOTES TO THE SIMPLIFIED BALANCE SHEET

3.    PORTFOLIO ACTIVITIES

SYCOM
For the year to March 2010, Sycom Property Fund delivered 6.32% growth in distributions. Sycom’s performance was negatively affected by two principal factors. The first of these was high office vacancies that persisted for much of the year at the Woodlands and Riverwoods office parks, and at Georgian Crescent. The completion of the 18,828m2 Veld Estates development at Woodlands added a net new 12,301m2 of unlet office space at a time when the office market was moving into a cyclical downturn. Nonetheless, Veld Estates is a top quality extension to what is already a premium office park, and subsequent to year end, the vacancy at Woodlands has reduced from 17,387m2 to 10,867m2. The second factor that adversely affected Sycom’s results was the underperformance of its investment in the Stenham European Shopping Centre Fund (‘SESCF’). Dividends received were down by 3% in Euro terms, and persistent Euro weakness resulted in an overall 20% decline in income from Sycom’s investment in SESCF.

In all other respects, Sycom’s portfolio performed in accordance with management’s expectations, showing defensive strength in the retail portfolio as overall tenant revenues grew by 6.1% for the year to 31 March 2010 compared to the prior year, and by 7.2% for the quarter compared to the same prior quarter. Net Asset Value increased from R20.74 at the end of March 2009 to R21.49 a year later.

As announced on 12 March 2010, Acucap has reached agreement with Parkdev (Pty) Ltd to acquire Pardkev’s remaining 50% of SPFM and the Sycom asset management contract for R136.3m, and the transaction is now with the competition authorities for approval. Meaningful cost benefits have resulted from the economies of scale inherent in a single team managing both Acucap and Sycom, as shown in the steadily improving cost to income ratio in part 12 of this report. The strongly independent boards of Acucap and Sycom ensure there are no conflicts of interest arising from both funds having a common manager, and the fee structure of Acucap’s contract with Sycom are also tightly prescribed.

ACUCAP RETAIL PORTFOLIO
Tenant revenues at Acucap’s regional retail assets showed little growth over the year, although the quarter ended March 2010 reflected good recovery of 3.3% growth. Revenues at the fund’s community retail assets increased by a solid 5.5% for the year, declining slightly for the March quarter to 4.5%. The overall result is influenced by the high contribution (in excess of 40%) from the supermarket segment, where revenue growth was 2.3% for the year and 3.8% for the quarter as food inflation slowed significantly. At an individual asset level, the following activities are reported:

Bayside Mall
Construction has commenced on a R160m project to introduce Game and Dischem to the centre, create an upper level banking mall and allow the expansion of a number of national fashion retailers. This will re-position Bayside as the first choice regional retail mall within the trade area. The development will increase the mall's GLA to 52,000m2.

Festival Mall
Negotiations have been concluded with Mr Price to almost double the Weekend trading space and Furniture City will come in with a new 1,000m2 store. The mall introduced a number of new smaller national fashion tenants to the fashion mix this year, providing a wider and more interesting offering.
 
Key West
A number of national tenants, including Woolworths, Foschini, Truworths, Pick ‘n Pay and Virgin, have initiated upgrades during the last 12 months.

Howard Centre
The last 6 months of the financial year has seen Howard Centre trading through a major redevelopment and upgrade program.  Three of the four banks are expanding or relocating, the malls and public facilities are being upgraded, and the upper level offices redeveloped. A new central court has been introduced and the Woolworths store extended by just under 1,000m2. Construction has progressed well with completion of the main atrium and malls scheduled for the end of June 2010.  The estimated capital cost of the project is R53m, with a projected first year yield of 11%.
 
Westville Mall
The planned upgrading of Westville Mall is complete after 8 months of redevelopment work. The new-look mall was launched at the end of October 2009 and has been well received by shoppers and tenants. The existing facade, parking area, and internal mall finishes have all been upgraded, and the existing GLA extended by 800m2. The capital cost for the project was R23m with an expected first year yield of 9%.  Based on the solid trading patterns of the mall, Woolworths has agreed to expand the existing food market, and both Checkers and Virgin Gym have indicated an intention to upgrade their offerings in the 2011 financial year. An additional parking deck has been designed for the centre, providing 96 new bays and allowing the construction of an additional 1,600m2 of retail space. This bulk will be utilised to increase the national tenant mix within the centre.

Watermeyer Park Shopping Centre
The centre has been upgraded, including facade treatment, a new vehicle ramp connecting the upper and lower parking levels, improved walkways and public facilities, new shopfronts and new centre signage. The upgrade cost R12.5m and was necessitated by a certain degree of deterioration in the building, as well as its dated look in the face of competing new retail products within its secondary catchment area. As a result of the upgrade, leasing of vacant space has progressed well, supported by a substantial upgrade to the Woolworths Food Store that anchors the centre.  

Village Square Randfontein 
Three adjacent residential properties have been acquired and are now being rezoned in order to facilitate the future expansion of this highly successful shopping centre. The planned expansion will cost in the order of R15m, with an expected first year yield of 10.5%

ACUCAP OFFICE PORTFOLIO
On 12 March 2010 Acucap announced the acquisition of portion of the Tyger Hills Office Park in Cape Town. The whole park has a GLA of 28,626m2, and Acucap acquired phases 3, 5 and 6 of the park, measuring 15,569m2. Sycom has aquired 11,100m2 of the park. Absa owns the remaining 1958m2. The purchase consideration was R276.8m, at a yield of 8.94%.

The Mutual Terraces building in Pinelands and the Saddle Drive building in Woodmead were classified as non-core assets and earmarked for disposal. Progress in these two instances is detailed below:

Mutual Terraces, Pinelands
A sectional title register has been opened to facilitate disposal of this building as a sectional title scheme. A lease cancellation agreement was negotiated with the tenant, a division of Old Mutual, which has vacated the building and relocated to Old Mutual’s head office in Pinelands.

Saddle Drive, Woodmead
A new lease was entered into with On Digital Media for 3,984m2 of office space. The building was sold during the year under review, with transfer expected to take place during the first half of the 2011 financial year.
Significant leasing activities during the year under review were as follows:

Bremerton Office Park, Port Elizabeth
A new 10 year lease was concluded with Nedbank Limited over the entire building, which measures 3,643m2.

Golf Park, Mowbray
This office park comprises 16,293m2 of GLA. Leases over 1,675m2 expired and were successfully renewed.

ACUCAP INDUSTRIAL PORTFOLIO
Acucap’s industrial interests are represented by N1 Business Park in Midrand and Montague Park in Cape Town. Whilst they currently represent a small proportion of the fund’s portfolio, the parks will comprise a more meaningful proportion of Acucap’s investment properties once the build-out of the respective developments is complete.

N1 Business Park
Whilst there is pressure on the industrial sector as a whole, tenant demand has remained firm for space in this premium industrial park. The latest signing is  for a 3,224m2 facility on terms that will provide an initial yield of 10.42%. This transaction takes the total lease area at N1 Business Park to 29,712m2 out of a total anticipated build out of approximately 115,000m2.

Montague Park
Infrastructural works have commenced. The initial phase of this process is anticipated to be complete by September 2010 and the secondary phase (including external road upgrades) by January 2012. Eskom has confirmed that the site's full power requirements will be available from July 2010 and in light of this, negotiations with numerous industrial tenants have commenced. The site has a package of zoning rights, including retail, and negotiations are on-going with regard to a proposed retail development on the Koeberg / Plattekloof corner of the site. It is anticipated that this matter will be finalised shortly.

4. HELDERBERG VILLAGE

Acucap had budgeted to sell 9 units in the current financial year, and by year end a total of 11 units had been sold. Net revenue from Helderberg sales was R19m, compared to R42m in the prior year. There are 6 units left to sell, all of which are budgeted to be sold in the 2011 financial year.

5.  BORROWINGS

The company has total borrowings of R2.3 billion as tabulated below (excluding BEE funding). Interest rates are hedged on 70% of total borrowings, at a weighted average rate of 10.7% and a weighted average maturity of 7.1 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  May and June 2011 respectively. Acucap’s gearing ratio at 31 March 2010 was 37%.

6. PROPERTY PORTFOLIO VALUATION

Acucap has adopted a formal valuation policy which requires adherence to certain standards and practices. The purpose of adopting this policy is to ensure that the fund’s valuers inspect every property close to the valuation date, that they reconcile tenancies on site to rent rolls, that they audit no less than two thirds of all leases in detail, and that they gain an understanding of how retail centres are trading by looking at tenant revenue figures.

Independent peer review valuations are carried out on properties representing no less than 15% by value and 10% by number of assets in Acucap’s overall portfolio.

Applying this policy, the Acucap portfolio was independently valued at 31 March 2010 by the fund’s appointed valuers, Quadrant Properties in Gauteng and KwaZulu-Natal, Magnus Penny in the Western Cape and Majola & Boyd in the Eastern Cape. Independent peer review valuations were carried out by DJB Hoffman, Nat. Dip. Property Valuation MIV (SA), on properties representing 19% by value and 12% by number of assets in Acucap’s overall portfolio. In all cases, his valuations concurred with those of the fund’s independent valuers. A complete property valuation schedule is set out on pages 94 to 96. 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 below.

67% of tenant turnover is attributable to food and apparel, and these two segments contribute 52% 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 2010 are shown in the chart below. For the year, the graph shows a resurgent homeware sector, with health & beauty still performing well. Mass discounters had a disappointing year, but the last quarter showed a strong improvement. The same trend came through for apparel and food services. Food majors, comprising the supermarket segment, had a flat year from a growth perspective, partly because of a relatively high base in 2009, and partly due to significantly lower food price inflation.

Acucap also monitors each tenant’s rent to turnover ratio on a monthly basis for any signs of distress, typically indicated by rent to turnover ratios exceeding segmental industry norms. The graph below shows these ratios for each of the seven major segments in Acucap’s retail portfolio. There were no material changes in rent to turnover ratios.

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.

Acucap successfully renegotiated over 90% of expiring leases during the year, with 8.6% of expiries moving into temporary retail vacancies resulting from redevelopment activities. Retail leases were renewed at a weighted average net rental that was 9.8% higher than the expiring rental. Office leases were renewed with a 12% positive 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.

9. FORWARD LEASE EXPIRES

Over the next financial year, leases for 54,235m2 will expire, representing 12.5% of the portfolio GLA. Details of the expiry rentals are shown below, together with estimated renewal rentals. For offices, there is an expected positive reversion of 5.7%, and for retail, a positive reversion of 9.6%.?

Over the longerterm, the fund continues to show a good, long-dated lease expiry profile. Expiries in the office portfolio are between 3% and 8% 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.

10. MAJOR TENNANTS BY AREA AND INCOME

Acucap’s twenty largest tenants account for 51.5% of its rental income, with retail tenants contributing 41.7% and office tenants 9.8%, 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 ticked up from 2.9% at the end of March 2009 to 4.3% a year later, most of the increase is attributable to at the planned redevelopments of Howard Centre, Bayside Centre, and East Rand Value Mall. Included is 1.65% for  vacancies that have arisen from tenants being relocated and from temporary vacancies created to allow for redevelopment activities. Excluding these effects, the vacancy is 2.65% by income.  The table below shows the vacancy attributable to each segment of the Acucap portfolio.

Costs remain well controlled, with the net cost to income ratio at 11.1%. The company continues to benefit from in-house administration, which gives improved control at a property level, and the advantages of having a smaller number of good quality properties in its portfolio have become more obvious during the more difficult economic conditions of the last 2 years. 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 further cost benefits have arisen from the economies of scale achieved in managing both the Acucap and Sycom portfolios.

 The company’s greatest concern in terms of costs relates to administered prices such as electricity and rates. Although mostly recoverable from tenants, the unpredictable rise in these expenses will place pressure on cost of occupation for Acucap’s tenants, and this could negatively impact growth in net rental income.

 
13.    UNIT HOLDER SUMMARY

A summary of Acucap’s unit holder profile is set out below. Annual trade in Acucap’s linked units was 25.26% 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 unit holders.

14.    PROSPECTS

The growth of the South African economy is expected to be subdued, with many tenants still facing difficult trading conditions. Retail turnovers have shown a pleasing recovery, but rental growth is likely to remain under pressure as administered costs borne by tenants continue to increase at rates well in excess of the general rate of inflation. Distributions from Acucap’s investment in Sycom will be influenced by the demand for office space in Sycom’s portfolio, where relatively high office vacancies persist, and Sycom’s performance may also be hampered by a possible recapitalisation of its investment in SESCF.

Nonetheless, with a small number of good quality assets, a management team with considerable depth and an efficient cost structure, Acucap is well placed to continue delivering real distribution growth over the long-term.

The above information has not been reported on by Acucap’s auditors.