The transaction, was expected to be approved by shareholders of RDC at an Emergency General Meeting (EGM), but as a result of the impact of the COVID-19 pandemic and the restrictions placed on public gatherings, the company will not hold the EGM in person, according to an announcement by the board of directors.
As a result, the EGM of the unitholders of RDC Properties will be held by electronic participation at Plot 5624, Lejara Road, Broadhurst Industrial Sites, Gaborone Botswana at 11am, on Friday 13 August 2021 for considering and, if deemed fit, passing the resolution to acquire the South African business, among other things.
RDC says at the EGM, shareholders are expected to specially resolve that the company acquire up to 337,224,093 shares of Tower Property Fund for a price of R4.00 per share for an aggregate amount of up to R1,320,176,372 (approximately P1 003 334 042).
TOWER’S OPERATIONAL STRATERGY
Tower is an internally managed real estate investment trust (REIT) which owns
a diversified portfolio of 41 convenience retail, office and industrial properties valued at R4.5 billion, located in South Africa and Croatia. The South African portfolio is located in the country’s major metropoles with 46 percent by value in the Western Cape, 42 percent in Gauteng and 12 percent in KwaZulu Natal.
Tower entered Croatia strategically at a time when the country was emerging from the global financial crisis and property prices fell to an all time low. Tower’s investment has seen capital and income appreciation from the region. The four Croatian properties represent 34 percent of the fund’s total value. Tower currently has a sectoral spread by value of 47 percent office, 44 percent convenience retail, and 7 percent industrial.
Tower’s long-term objective remains the delivery of attractive, growing total returns by investing in properties in strong nodes with growth potential. It is also aimed at investing in active property asset management of its existing portfolio, with a particular focus on unlocking available profits. It is also focused on prudent balance sheet management in order to manage risk and create capacity to unlock value. Tower also believes in accepting variances in income where these can be shown to add sustainable value and selling non-core and ex-growth properties to realise capital for re-investment, and cost containment, with a focus on “greening” initiatives.
However, given an unprecedented and tumultuous year that, at least in a South African context, has exacerbated an already extremely challenging economic environment, Tower’s focus has been to do all things necessary to ensure that the company and its tenants weather the current worldwide crisis caused by the COVID-19 pandemic, including navigating the second wave being experienced, the completion of the redevelopment of the Old Cape Quarter, and the reduction of risk, including by the sale of non-core properties in South Africa in order to reduce debt. However, analysts believe that RDC’s investment into Tower will increase the company profitability, given that Tower already has a good financial performance track record.
TOWER’S FINANCIAL PERFORMANCE
In its recent annual results for the year ending 31 May 2020, the board felt it prudent to distribute only 75 percent of Tower’s distributable income. The balance of funds will be used within the business and to ensure sufficient working capital is maintained during this difficult period. The board is of the view that, given uncertainty around tenant performance due to the second wave of COVID-19, it is prudent to defer the interim dividend to financial year end.
During the reporting period, property performance has been negatively affected, as expected, in the first half of the year. Vacancies have increased to 15.2 percent, Tower’s highest ever figure. The vacancies, however, are concentrated mainly in the Cape Quarter with the departure of Deloitte, the anchor office tenant of the property. Coupled with rising vacancies, base rentals have reduced.
Revenue decreased by 17 percent to R170.8 million, compared to the corresponding period, as a result of the sale of properties, COVID-19 concessions given and increased vacancies. This was partially offset by the weakening of the Rand. Net property income decreased by 22 percent from the corresponding period to R150.5 million. On a like-for-like basis, property net income in SA was 20.3 percent down for the period, with the Croatian net income being 3.2 percent down in Euros. The like-for-like Croatian net property income is down due to the VMD headlease which expired on 31 July 2020. The net property income from VMD is down Euro25,551 per month as a result thereof (Euro10,699 reduction in rental income and Euro14,882 additional property management fees).
The impact on distributable income is partially offset by the monthly interest saving of Euro6,477 resulting from refinancing the bank loan of VMD. Like-for-like property income excludes the straight-line lease accrual, currency fluctuations, acquisitions and disposals of property and once-off rates and electricity credits received. The increase in net property operating expenses from R13.4 million to R20.3 million is predominantly as a result of increased bad debts written off in the period under review (R3 million more than the corresponding period) and new property management fees paid for VMD and Yazaki (after the expiry of the VMD head lease). We have retained the services of VMD Group to manage these two properties in Croatia.
Other items that impacted negatively on Tower’s distributable income for the period included increased interest on debt incurred to fund capital expenditure, debt cancellation fees on certain refinanced facilities (which we have not amortised over the period of the new facility), the sale of assets at yields higher than the cost of debt and the increased interest expense as a result of the refinancing of Euro31.5 million debt with Rand debt on 16 July 2020, reducing the company’s exposure to currency risk – a long stated goal.
As a result of these factors, Tower’s income available for distribution for the period is 20.6 cents per share (a 38 percent reduction on the prior year). This reduces to 19.4 cents per share after taking into account tax payable if one assumes a pay-out ratio of 75 percent of distributable income for the year. However, as detailed above, given the uncertain times and the need to maintain liquidity, the board has decided to defer the interim dividend until year end.
RDC RAISES FUNDS
At the RDC EGM, shareholders are also expected to specially resolve that the company borrow an amount of up to R400 million from a financial institution in South Africa on the basis that the capital of such a loan be repaid over a period of four years and on the basis that such capital advanced bear interest at the rate of Johannesburg Interbank Average Rate (JIBAR) + 3.5 percent, with scheduled repayments of interest and capital amortising to a 50 percent residual, and on the other salient terms set out in the circular. The funds are expected to be channelled towards the Tower acquisition, although the company did not explicitly say so.
Further at the EGM, shareholders are expected to ordinarily resolve that the borrowing powers of the directors be extended by the increase of the percentage of value of fixed assets of the company, which limits the borrowing powers of directors, from 40 percent of such value to 55 percent of such value.