Financial resources

NAVPS growth of 3.2% for the year, was below expectations

Melt Hamman

Chief Financial Officer

INTRODUCTION

For the financial year under review, we have delivered unsatisfactory growth in adjusted NAVPS of only 3.2%. This is well below the 15.3% growth of the previous financial year. This set of results had a dilutionary effect on our three-year CAGR based on adjusted NAVPS which reduced from last year's 17.0% to this year's 12.0%.

FINANCIAL PERFORMANCE FOR THE YEAR

Dividing the year in two, for the first six months, we had a negative adjusted NAVPS growth of 2.5%; the second six months delivered a positive growth of 5.8%.

A summary of the total comprehensive income for the year generated with specific reference to the four key value drivers is set out below. The "other" assets, locally and foreign, relates to the assets that are not allocated to a specific value driver.

TOTAL COMPREHENSIVE INCOME

Our total comprehensive income for the year ended 30 June 2017 reduced materially by R815.8 million or 63.4% mainly due to the strengthening of the Rand, reduced other income and lower fair value adjustments as well as the once-off realisation of the MAS agterskot of R479.8 million included in the previous year. The Rand has strengthened by 11.4% and 9.0% against the USD and Euro respectively, which had a material impact on the Rand value of our total foreign assets of R4.3 billion as at 30 June 2017 (2016: R5.8 billion). The comprehensive income generated for the first six months of the 2017 year was only R3.5 million underlining the weak financial performance in the first half of the financial year.

Find below a summary of our statement of comprehensive income:

Net operating income, which includes straight-line lease income adjustments, increased by 17.9% to R1.3 billion (2016: R1.1 billion). A year-on-year comparison of the net rental income is less meaningful, due to the completion of four buildings during the current year (compared to the completion of eight buildings during 2016) as well as the inclusion of the Mall of Africa's operational results for only two months in the previous financial year.

Due to a stronger Rand and once-off disposal profits which were included in the 2016 year, other income reduced from R448.6 million in 2016 to R60.5 million in 2017. The material decrease is due to the inclusion, during 2016, of R211.6 million unrealised foreign exchange gains and a R145.0 million profit on the disposal of the interest in Bagaprop Limited and Mall of Mauritius.

For 2017, operating and other expenses consist of operating expenses of R159.6 million (2016: R139.5 million) and other expenses of R426.1 million (2016: R207.8 million). The material increase in other expenses is mainly attributable to:

• an impairment of R116.6 million of our investment in Stenham European Shopping Centre Fund Limited ("Stenham");
• an impairment of R82.8 million of our investment in AttAfrica (2016: R58.3 million);
• an impairment of R20.6 million of our 25.0% investment in Gruppo Investment Nigeria Limited ("Gruppo") (the owner of Ikeja City Mall) (2016: R22.0 million); and
• unrealised foreign exchange losses of R162.7 million.

Net income from associates for the current year includes income of:

• R190.0 million from MAS (2016: loss of R81.6 million);
• R20.7 million from Atterbury Cyprus Limited ("Atterbury Cyprus") (2016: R126.1 million); and
• R10.9 million from Atterbury Serbia BV ("Atterbury Serbia") (2016: R3.4 million).

Investment income for 2017 reduced by 19.6% to R189.5 million (2016: R235.8 million) from the previous year. Included in investment income is:

• interest income of R189.0 million (2016: R182.9 million). Interest income from international investments, via loan accounts, amounted to R134.3 million (2016: R146.5 million); and
• dividend income of R0.5 million (2016: R52.8 million).

The receipt of the MAS dividend of R105.3 million (2016: R101.2 million) is excluded, as this dividend is applied to reduce the value of the investment in associate. See page 69 for more information.

The increase in finance costs of 17.6% to R987.4 million (2016: R840.0 million) compared with the prior year is attributable to the completion of four buildings during 2017 (2016: eight buildings) as well as the completion of Mall of Africa in April 2016. Finance costs post-completion of a building are expensed and no longer capitalised to the specific development.

SUMMARY OF OUR FINANCIAL POSITION

We have grouped the total assets between investments properties, investments and other assets in the following summary:

* Includes non-current assets held for sale.
˜ Includes equity and net loans advanced.

Investment properties

During the 2017 financial year, investment properties have increased on a net basis by R719.5 million (2016: R3.4 billion) or 3.7% (2016: 21.0%) due to capex spend on developments under construction plus fair value adjustments less properties sold. The investment properties consist of the following:

	June 2017 R million		June 2016 R'000
Completed buildings
Office and mixed-use	5 714.3		5 324.5
Retail	9 896.4		9 390.3
Light industrial	870.1		984.6
Hotel	407.2		384.8
Waterfall develepment
Development rights, infrastructure and services	1 819.1		2 289.8
Developments under construction	1 599.0		1 212.7
Vacant land	5.0		5.0
Total investment properties	20 311.1		19 591.7

Compared to the prior year, fair value adjustments on investment properties decreased by 38.1% to R664.5 million (2016: R1.1 billion) and is made up as follows:

The completion of the Mall of Africa during 2016 is the main reason for the year-on-year reduction of fair value adjustment relating to developments under construction. The existing developments under construction are set out in manufactured resources on page 72.

Property valuations are based on external valuations performed by Jones Lang LaSalle Proprietary Limited, Sterling Valuation Specialists and Mills Fitchet Magnus Penny & Wolffs. The Directors have made adjustments for straight-lining and cost to complete.

The valuation in respect of Waterfall's development rights is based on an external valuation performed on a freehold, fully serviced basis. The valuation is then adjusted downward to take into account, inter alia, the costs required to complete the servicing of the development rights and the estimated future rental obligations attached to the development rights.

During the 2017 financial year we have disposed of 15 000 m² of our retail development rights on Land Parcel 3, Waterfall, to a separate joint venture company with Sanlam Properties, titled Waterfall JVCO 15 Proprietary Limited ("JV15"). JV15 also acquired the remaining retail development rights on the same land parcel from a Mia affiliate company. Sanlam Properties and Attacq each hold 50.0% in JV15 which is funded by the two shareholders with our investment therein being R34.0 million as at 30 June 2017.

In addition, we have disposed of our development rights in respect of Land Parcel 24 to a new joint venture company, Waterfall JVCO 115 Proprietary Limited ("JV115"). In respect of the shareholding in JV115, we hold 20.0% and Sanlam Properties 80.0%. We have an option to increase our shareholding in JV115 to 50.0%. JV115 acquired additional light industrial development rights from a Mia affiliate company for R371.6 million. JV115 is funded by shareholders' loans with our 30 June 2017 investment at R103.7 million.

The weighted average capitalisation rate for the total portfolio and the different investment property segments is as follows:

Changes in the capitalisation rate attributable to changes in market conditions have significant impact on property valuations. For example, a 50 basis points weakening in the capitalisation rate will decrease the value of investment properties by R640.5 million (2016: R603.3 million); a 50 basis points improvement in the capitalisation rate will increase the value of investment properties by R746.2 million (2016: R690.6 million). We have experienced a 25 basis point weakening in the capitalisation rates for the Brooklyn Mall and Newtown Junction retail properties.

Investments

Year on year, investments reduced by 18.1% from R6.2 billion to R5.1 billion with the decrease primarily due to the reduced loans relating to our foreign investments. The table below discloses the investments split between equity investment and loan exposure as well as a split between foreign and local investments:

The graph below discloses the R5.1 billion (2016: R6.2 billion) investments on a more granular level:

Our investment in MAS is our second value driver and the reader is referred to page 68 for more detail.

Our fourth value driver refers to our investment in the seven shopping centres in the rest of Africa which includes the following:

As a result of the unfavourable trading and economic conditions, impairments totalling R103.5 million (2016: R80.3 million) have been recognised in the current year. We are currently not receiving distributions from AttAfrica, due to the unfavourable trading and macro-economic conditions as well as the capital structure of our AttAfrica investment. See page 76 for more information.

The loan advanced of R243.1 million (2016: R86.0 million) relates to funding provided to our co-owners of the PwC Tower and Annex development, which is currently under construction at Waterfall. The terms and conditions of this loan is similar to the funding received from the existing debt financier.

The 19.9% interest in Stenham, the owner of the Nova Eventis regional shopping centre in Leipzig, Germany is recognised at R197.7 million (2016: R380.8 million). Following a protracted disposal process, Stenham concluded a conditional agreement to dispose of the intermediary holding company which owns Nova Eventis. Consequently, included in the results for this financial year is a pre-tax negative fair value adjustment of R116.6 million relating to Stenham.

Subsequent to year end, merger clearance from the European Commission and shareholder approval have been obtained; the disposal was implemented and more than 95.0% of the expected proceeds of R197.7 million have been received with the balance to follow in October 2017 and July 2018 respectively.

The Atterbury loan includes a loan relating to the acquisition of their 20.0% undivided share in the Mall of Africa. The amount due by Atterbury in respect of 18.8% of the Mall of Africa was settled on completion of the Mall of Africa, with the balance of 1.2% to be settled based on the 30 June 2017 fair market value of the Mall of Africa, determined by an external independent valuer. This loan, with an outstanding balance of R65.5 million (2016: R62.6 million) at 30 June 2017, has been settled post-year end.

During the 2017 financial year, we invested a total of R118.4 million into Artisan Development Partners Limited ("ADP") for investments into three UK-based development opportunities located in Kent, England and Edinburgh as well as Glasgow in Scotland. ADP’s investment focus is on acquiring properties and land for rezoning and development. Our total investment value at year end was R134.0 million (2016: R40.6 million). No further investments will be made into ADP taking into account our strategic focus on MAS as our primary European investment vehicle.

The Sanlam JV's loan of R141.0 million relates to the shareholder funding of the two joint ventures with Sanlam Properties as a co-shareholder.

During the financial year we have established a joint venture (EA Waterfall Logistics JV Proprietary Limited (“EAJV”)) with Equites in respect of a portfolio of eight industrial properties at Waterfall. We hold a 20.0% interest in EAJV which had an investment value of R91.4 million at 30 June 2017.

We have reduced our exposure in foreign assets by disposing of our interest in Atterbury Serbia and Atterbury Cyprus for an aggregate consideration of Euro93.0 million, realising cash of R1.4 billion.

The following are included in other investments:

Other assets

The most material assets included in other assets of R1.9 billion (2016: R1.8 billion) are:

Total interest-bearing borrowings

Total interest-bearing borrowings net of cash decreased by 8.0%, compared to 30 June 2016 (2016: 30.2% increase compared to 2015) mainly due to a portion of the proceeds (R582.6 million) from the sale of the foreign investments being used to reduce debt. Subsequent to year end, the balance of the proceeds amounting to R737.4 million was applied to reduce debt.

Gearing, calculated as total interest-bearing debt less cash on hand as a percentage of total assets, improved from 39.9% at 30 June 2016 to 37.1% at 30 June 2017. In order to mitigate interest rate risk, as at 30 June 2017, approximately R10.9 billion (2016: R11.0 billion) or 90.8% (2016: 79.5%) of total committed facilities of R12.0 billion (2016: R13.8 billion) were hedged by way of fixed interest rate loans and interest rate swaps. The weighted average cost of funding remained flat over the last 12 months at 9.2% (2016: 9.2%).

Approximately 24.7% or R2.6 billion of the Group’s interest-bearing debt is due for repayment over the next 12 months including R330.5 million relating to non-current assets held for sale. An amount of R378.9 million of the R2.6 billion was settled after year end. Funding of R1.6 billion, which is included in the short-term portion, relates to 50.0% of the total senior debt provided to the Attacq Retail Fund Proprietary Limited and Lynnwood Bridge Office Park Proprietary Limited portfolios during May 2015. The maturity date of this funding is May 2018 and in this regard attractive refinance proposals from existing lenders as well as new lenders, looking to establish funding relationships, have been received. The funding team has finalised the allocations in this regard.

PROSPECTS

We are targeting a maiden distribution payment of 73.0 cents per share for the year ended 30 June 2018 with a 20.0% growth per annum in distributions for the three financial years following 2018. The guidance is based on assumptions which include forecast rental income based on contractual terms and anticipated market-related renewals, MAS achieving its distribution targets, the expected roll-out of current and budgeted development portfolio, the required positioning to become a REIT and no unforeseen circumstances such as major corporate tenant failures. The guidance has not been reviewed or reported on by our auditors.

Our focus for the 2018 financial year is the REIT conversion, the disposal of underperforming assets, reducing debt even further in order to improve our ICR and to manage our expenses and cash resources diligently.

APPRECIATION

I am genuinely grateful to our team which has shown continued commitment during a financial year with disappointing results. I am looking forward to the 2018 financial year taking us closer to operating in a REIT environment.

Melt Hamman

Chief Financial Officer

29 September 2017