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Provisional summarised audited financial statements for the year ended 31 December 2018
Transcend Residential Property Fund Limited
(Incorporated in the Republic of South Africa)
Registration Number 2016/277183/06
JSE share code TPF ISIN: ZAE000227765
(Approved as a REIT by the JSE) ('Transcend' or 'the Company')
Provisional summarised audited financial statements for the year
ended 31 December 2018
Highlights
Distribution per share (cents) 64.68 (1% growth)
Total units 4,691
Investment property value R2.59 billion
Net Asset Value (per share Rand value) R9.57
Growth in portfolio size (% Rand value) 53%
Basis of preparation
The summary financial statements have been prepared in accordance
with the requirements of the JSE Limited ('JSE') Listings
Requirements for provisional reports, and the requirements of
the Companies Act of South Africa, No 71 of 2008, as amended,
applicable to summary financial statements. The JSE Listings
Requirements require provisional reports to be prepared in
accordance with the framework concepts and the measurement and
recognition requirements of International Financial Reporting
Standards ('IFRS'), the SAICA Financial Reporting Guides as issued
by the Accounting Practices Committee and Financial Pronouncements
as issued by the Financial Reporting Standards Council, and to also,
as a minimum, contain the information required by IAS 34 Interim
Financial Reporting. The accounting policies applied in the preparation
of the financial statements from which the summary financial statements
were derived are in terms of IFRS and are, except for the adoption of
the IFRSs as set out in Note 1. Basis of measurement, consistent with
those applied to the financial statements for the year ended 31 December
2017, as published on 9 March 2018.
The provisional summarised report is extracted from the audited
information but is not itself audited. The financial statements were
audited by KPMG Inc. who expressed an unmodified opinion thereon.
Shareholders are advised that in order to obtain a full understanding of
the nature of the auditor's engagement, they should obtain a copy of the
auditor's report together with the accompanying audited financial statements,
both of which are available for inspection at the company's registered
office. The directors of Transcend take full responsibility for the
preparation of this report and that the selected financial information
has been correctly extracted from the underlying financial statements.
Myles Kritzinger CA(SA), Transcend's Chief Financial Officer, was
responsible for supervising the preparation of the financial
statements that this provisional report summarises, as well as the
preparation of these summary financial statements.
Commentary
Main business and operations
Transcend is a Real Estate Investment Trust ('REIT') and owns a property
portfolio of 22 directly-owned properties valued at R2.72 billion located
primarily in Gauteng, the Western Cape and Mpumalanga – a discontinued
operation – in South Africa. The primary business of Transcend is the
acquisition and operation of income-generating residential properties,
with a focus on housing opportunities that are affordable, lifestyle
enhancing and well located in high growth urban areas. In line with its
strategy, Transcend acquired 9 properties during 2018, comprising 2,219
units. One of these properties, Vanguard Village, consisting of 60 units
registered and transferred in the name of Transcend during August 2018. The
remaining 2,159 units, located across 8 properties, are effective date
transactions with related parties. The respective sales agreements for
these units became unconditional on 30 November 2018, making the effective
date of the sales 1 December 2018 ('effective date'). The risks and rewards
of ownership transferred to Transcend on the effective date, however,
the registration and transfer of these units are expected to only take
place during the first half of 2019. Transcend is also in the process of
disposing of a non-performing property, Acacia Place, located in Mpumalanga.
This property has been classified as an asset held-for-sale and discontinued
operation. A sales agreement has been signed for Acacia Place and occupational
rent is payable to Transcend until transfer is effected, which is expected
to be concluded in the first half of 2019.
Equity raised
During the financial year, Transcend issued a total of 64.59 million of
Transcend ordinary shares and raised R415.92 million of share capital. The
equity raised was utilised to finance Transcend's investment activities for the
acquisition of new properties during 2018.
* On 4 October 2018, the Company issued 7.3 million Transcend ordinary
shares at a price of R6.29 per share under the Company's general
authority to issue shares for cash.
* On 14 December 2018, the Company issued 57.29 million Transcend
ordinary shares at a price of R6.46 per share in terms of the private
placement. The shares were issued at a 15.35% premium to the 30-day volume
weighted average price ('VWAP') up to and including Monday, 10 December 2018.
Debt raised
Transcend recognised new interest-bearing borrowings during 2018 for
the acquisition of Vanguard Village. This amounted to R26.99 million
through a new facility with The Standard Bank of South Africa Limited
('Standard Bank') and an additional R7 million on an existing Standard
Bank facility. Borrowings to the value of R786.72 million with Standard
Bank and Nedbank Limited ('Nedbank') were secured to fund the acquisition
of the 8 properties still due to transfer to the Company. Upon registration
and transfer of the properties to Transcend, these facilities will
be drawn upon and recognised in the statement of financial position
as interest-bearing borrowings. At 31 December 2018 Transcend had loans
with related parties of R828.84 million which are classified as current
and payable on transfer of the respective properties. The R786.72 million
secured bank debt and excess cash will be used to settle these loans.
A shareholder loan of R143.46 million from Emira Property Fund Limited
('Emira') was secured during the year. This loan was also used to
finance Transcend's investment in the 8 new properties.
Results
Transcend has outperformed its guidance of flat growth for the year ending
31 December 2018. On 6 March 2019, the board of directors of the Company
(the 'Board') declared a final distribution of 34.58 cents per share for
the six months ended 31 December 2018. This brings the full year distribution
to 64.68 cents per share (2017: 64.04 cents per share), which is 1%
greater than the forecast flat dividend per share of 64.04 cents per
share published in the SENS announcement on 24 August 2018. The slight
increase in distribution growth relates to a portfolio-wide improvement
in occupancies for the second half of 2018; recovery of water and
certain utilities at Parklands, located in the Western Cape; as well
as securing occupational rent and increased operating income under an
agreement for the sale of Acacia Place.
In August 2018, management revised its forecast distribution to one
of flat growth for the year due to the deteriorating economic climate
experienced during the first half of 2018. This downswing resulted from
pressures on tenant affordability, rental escalations and property
vacancies; and a drop-off in the overall performance of the market.
Despite these pressures, Transcend was able to grow its distribution
from 2018 due to the defensive nature of the residential asset class
and by owning well-located properties in high demand areas.
Acacia Place, a property located in Duvha, Witbank, eMalahleni, was
identified by management as a non-performing property. This was as a
result of large vacancies from the non-renewal of bulk leases and the
depressed market in Witbank. Management took a decision to sell this
property to Instratin Properties Proprietary Limited ('Instratin').
The property has an anticipated transfer date of 30 April 2019 until
which time an occupational rent is payable to Transcend by Instratin.
Profit and total comprehensive income for the year amounts to
R197.07 million (2017: R67.97 million), of which R188.4 million
(2017: R63.11 million) is from continuing operations. The increase
from continuing operations is mainly due to a net gain on fair value
adjustments to investment property of R160.63 million (2017:
R35.54 million), and an unrealised gain on revaluation of interest rate
swaps of R2.16 million (2017: loss of R3.03 million). The headline
earnings attributable to equity holders is R36.53 million (2017:
R38.73 million). Total assets as at 31 December 2018 amounted to
R2.87 billion (2017: R1.27 billion), with the increase attributable to
the property acquisitions as detailed in 'Property portfolio'. The total
liabilities as at 31 December 2018 amounted to R1.61 billion (2017:
R581 million).
Property portfolio
Acquisitions
In line with its strategy, Transcend acquired 9 properties during 2018,
comprising 2,219 units.
Geographically, the properties are located in the following provinces:
Gauteng 77%
Western Cape 17%
Mpumalanga* 6%
The above allocation is based on Gross lettable area ('GLA')
* Mpumalanga relates to a single property, Acacia Place. This
property is in the process of being sold and has been disclosed
as an asset held-for-sale. Consequently, Mpumalanga has also
been presented as a discontinued operation.
An agreement for the acquisition of a further property,
Silverleaf, consisting of 76 units has been entered into
between Transcend and the seller, De Facto Investments 264
Proprietary Limited. This agreement was entered into on
28 March 2018 for a purchase consideration of R44.5 million.
The transfer of this property was expected prior to 31 December
2018, however, due to delays in the finalisation of town-planning
amendments, the transfer has not yet taken place.
Vacancies and arrears
Based on existing leases as at 31 December 2018, the total
portfolio's vacancy rate was 7.7%. Excluding Acacia Place, the
vacancy rate for the remaining 21 properties is 5.4%. It is
expected that the vacancies of the stabilised portfolio will
remain within the 3% to 7.5% range.
Facilities
As at 31 December, the following interest-bearing borrowings with
Standard Bank were in place:
* Facility A, Tranche 1: R278.13 million – Interest only loan with
a variable rate at 3-month JIBAR plus 1.85% with a maturity date of
31 January 2020;
* Facility A, Tranche 2: R278.36 million – Interest only loan with
a variable rate at 3-month JIBAR plus 2.35% with a maturity date of
31 January 2022;
* Facility C: R26.86 million – Interest only loan with a variable rate
at JIBAR plus 2.15% with a maturity date of August 2021; and
* Final facility B: R7.1 million – Interest only loan at prime less
1% with a maturity date of 23 August 2021.
The administrative fee of R1.11 million on the raising of the
Standard Bank facilities A, B and C, was capitalised and is
amortised over the average term of the respective loans.
The Standard Bank facilities are secured by investment properties
owned by Transcend with a fair value of R1.27 billion. This
includes Acacia Place, an investment property that was transferred
to non-current assets held-for-sale. This property is valued at its
sales price less cost to sell, at an amount of R127.5 million. After
the sale and transfer of Acacia Place, the security will be adjusted
accordingly for the remaining properties.
All other properties that act as funding security are included as
investment properties.
Interest is payable quarterly in arrears on these facilities.
Transcend currently has interest rate swaps on the A facilities.
The 3-year tranche is 50% hedged by an interest rate swap at a
fixed rate of 7.59% which expired in January 2019, and the 5-year
tranche is 50% hedged by an interest rate swap at a fixed rate of
7.62% which terminates in January 2020. In January 2019 Transcend
entered into a new 50% interest rate swap on the Facility A 3-year
tranche at a fixed rate of 7.26% and a maturity date of 31 January
2019 to replace the existing swap over this tranche. During February
2019, Transcend also extended the 50% interest rate swap on the
Facility A 5-year tranche to 31 January 2022 so to align to the
maturity date of the principal debt. The revised rate of this 3-year
swap is fixed at 7.56%. These are both non-adjusting subsequent events.
At 31 December 2018, 50% of the company's interest rate exposure on
the A facilities only was hedged. This was through its swaps with 25%
(50% of the 50%) of the risk being hedged out by way of a one-year
swap and 25% (50% of the 50%) being hedged out by way of a 3-year
swap.
It is the Board's policy to economically hedge at least 50% of the
company's exposure to interest rate risk. During the year a new interest-
bearing facility was secured for the acquisition of Vanguard Village.
This facility has a balance of R26.86 million at 31 December 2018
and has not been hedged.
At 31 December 2018 the total interest rate hedge for the external bank
borrowing exposure to interest rate risk is 44%. This ratio will be
adjusted by management on the transfer of the 8 investment properties
acquired from International Housing Solutions Res 1 (RF) Proprietary
Limited ('IHS Res 1') and Sunnyshore Trade and Invest 105 Proprietary
Limited ('Sunnyshore') and the utilisation of the secured borrowings
with Standard Bank and Nedbank.
R'000 R'000
2018 2017
Facility A, Tranche 1: Interest only loan with a
variable rate at 3-month JIBAR plus 1.85% with a
maturity date of 31 January 2020. Properties with
a fair value of R1.23 billion are provided as
security over the bond. 278 131 278 143
Facility A, Tranche 2: Interest only loan with a
variable rate at 3-month JIBAR plus 2.35% with a
maturity date of 31 January 2022. Properties with
a fair value of R1.23 billion are provided as
security over the bond. 278 363 278 375
Facility C: Interest only loan with a variable
rate at JIBAR plus 2.15% with a maturity date of
August 2021. A property with a carrying value of
R36.2 m is provided as security over the bond. 26 857 -
Final facility B: Interest only loan at prime
less 1% with a maturity date of 23 August 2021.
This facility is secured by a bond over the same
properties utilised as security for Facility A. 7 057 -
Carrying value of administrative fee on raising
of new loan facility capitalised. (1 108) (1 194)
Subtotal 589 300 555 324
Less: Short-term portion of interest-bearing
borrowings. (52 924) (52 431)
Total 536 376 502 893
Gearing
Transcend's loan-to-value ('LTV') ratio is 47% (2017: 41.8%), which
represents an increase from the prior year, mainly due to the property
acquisitions during the year. This falls outside the targeted long-term
range of 30% to 40%, however, management plans to reduce this LTV ratio
to the targeted range within the medium-term by raising equity for new
acquisitions and using proceeds from the sale of Acacia Place to pay
down on existing debt.
Summary of financial performance
December 2018 December 2017
Dividend per share (cents) 64.68 64.04
Shares in issue (number ‘000) 130 895 66 306
Net asset value per share (Rand) 9.57 10.39
Loan-to-value ratio (%) (*) 47.0% 41.8%
Net property expense ratio (%) (**) 29.0% 29.8%
Gross property expense ratio (%) (**) 34.9% 34.6%
Net total expense ratio (%) (**) 43.4% 36.5%
Gross total expense ratio (%) (**) 48.1% 40.9%
(*) The LTV ratio is calculated by dividing property backed interest-
bearing borrowings (excluding the subordinated shareholder loan)
less cash, by the total value of investment property and assets
held-for-sale (Acacia Place).
(**) For the calculation of net ratios, utility recoveries are excluded
from rental revenue, whilst gross ratios include utility recoveries in
rental revenue.
Statement of financial position
Audited as Audited as
at 31 at 31
December December
2018 2017
Assets R'000 R'000
Non-current assets 2 591 069 1 219 394
Investment properties 2 588 000 1 218 640
Plant and equipment 3 069 754
Current assets 148 146 50 489
Trade and other receivables 6 525 4 441
Cash and cash equivalents 141 621 46 048
Assets held-for-sale 127 500 -
Total assets 2 866 715 1 269 883
Equity and liabilities
Equity 1 252 701 688 829
Stated capital 1 020 934 632 276
Retained earnings 231 767 56 553
Non-current liabilities 678 041 505 763
Interest-bearing borrowings 536 376 502 893
Loan from shareholder 140 986 -
Derivative liabilities 679 2 870
Current liabilities 934 576 75 291
Loans from related parties 828 835 -
Interest-bearing borrowings 52 924 52 431
Trade and other payables 51 827 22 636
Loan from shareholder 795 -
Derivative liabilities 195 158
Taxation - 66
Liabilities directly associated with asset
held-for-sale 1 397 -
Total equity and liabilities 2 866 715 1 269 883
Statement of profit or loss and other comprehensive income
Audited for the year ended 31 December 2018
Audited as Audited as
at 31 at 31
December December
2018 2017
Continuing operations R'000 R'000
Rental income from investment properties 148 346 129 143
Recoveries of operating costs from tenants 13 452 9 558
Revenue 161 798 138 701
Property operating expenses (53 907) (45 612)
Impairment losses (2 506) (2 392)
Net operating income 105 385 90 697
Other operating expenses (21 375) (8 660)
Operating profit 84 010 82 037
Gain on fair value adjustment of investment
property 160 627 35 540
Unrealised gain/(loss) on revaluation of
interest rate swaps 2 155 (3 028)
Net finance charges (58 390) (51 382)
Finance income 3 098 1 590
Finance costs (61 488) (52 972)
Profit before taxation 188 402 63 167
Taxation - (57)
Profit and total comprehensive income for the
period 188 402 63 110
Profit/(loss) from discontinued operation net
of tax 8 666 4 863
Total comprehensive income for the period 197 068 67 973
Basic and diluted earnings per share (cents) -
continuing operations 265.70 95.20
Statement of cash flows
Audited as Audited as
at 31 at 31
December December
2018 2017
R'000 R'000
Cash generated by operating activities 111 358 94 655
Finance income received 3 130 1 591
Finance costs paid (53 672) (44 012)
Net cash generated from operating activities 60 816 52 234
Investment properties acquired (505 206) -
Property and equipment acquired (2 759) (856)
Net cash utilised in investing activities (507 965) (856)
Proceeds from share issue 410 915 -
Interest-bearing borrowings drawn down 33 476 (887)
Shareholder loan raised 140 986 -
Dividends paid (42 655) (27 944)
Net cash generated from/(utilised in) financing
activities 542 722 (28 831)
Net increase in cash and cash equivalents 95 573 22 547
Cash and cash equivalents at the beginning of
the year 46 048 23 501
Cash and cash equivalents at the end of the
year 141 621 46 048
Cash and cash equivalents consist of:
Tenant deposits 25 487 13 829
Cash on hand 116 134 32 219
141 621 46 048
Statement of changes in equity
Stated Retained Total
capital earnings equity
R'000 R'000 R'000
Balance at 31 December 2017 632 276 56 553 688 829
Total comprehensive income for the
year - - -
Profit for the year - 197 068 197 068
Total comprehensive income for the
year - 197 068 197 068
Transactions with owners
Dividends - (42 655) (42 655)
Issue of share capital 409 459 - 409 459
Transfer of antecedent dividend (20 801) 20 801 -
Balance at 31 December 2018 1 020 934 231 767 1 252 701
Note: Stated capital includes acquisition and transaction
fees of R8.94 million that were capitalised against equity.
* An antecedent dividend was reclassified from stated capital to retained
earnings for 64.59 million shares issued during 2018. On 4 October 2018,
7.3 million shares were issued under the Company's general authority.
A further 57.29 million shares were issued on 14 December 2018 at an
ex-dividend price of R6.29 per share (cum-dividend price of R6.46 per
share).
Notes
1. Basis of measurement
The financial statements have been prepared on the historical cost basis,
except for investment properties and derivatives that are measured at
fair value, as explained in the accounting policies that follow. The
presentation currency in the financial statements is South African Rand
('Rand') and all amounts have been rounded to the nearest thousand (R'000).
In the current year, the Company has adopted all new and revised IFRS that
are relevant to its operations and effective for reporting periods
beginning on or after 1 January 2018. At the date of authorisation of
these financial statements for the year ended 31 December 2018, the
following IFRSs requirements were adopted:
IFRS 9 Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement.
The standard contains requirements in the following areas:
* Classification and measurement: Financial assets are classified by
reference to the business model within which they are held and their
contractual cash flow characteristics. IFRS 9 introduces a fair value
through other comprehensive income category for certain debt instruments.
Financial liabilities are classified in a similar manner as under IAS 39.
However, there are differences in the requirements applying to measurement
of an entity's own credit risk;
* Impairment: IFRS 9 introduces an expected credit loss model for the
measurement of the impairment of financial assets, so it is no longer
necessary for a credit event to have occurred before a credit loss is
recognised;
* Hedge accounting: IFRS 9 introduces a new hedge accounting model that
is designed to be more closely aligned with how entities undertake risk
management activities when hedging financial and non-financial risk
exposures; and
* Derecognition: The requirements for the derecognition of financial assets
and liabilities are carried forward from IAS 39.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 provides a single, principles based five-step model to be applied
to all contracts with customers. The five steps in the model are as
follows:
* Identify the contract with the customer;
* Identify the performance obligations in the contract;
* Determine the transaction price;
* Allocate the transaction price to the performance obligations in the
contracts; and
* Recognise revenue when (or as) the entity satisfies a performance
obligation.
Guidance is provided on topics such as the point in which revenue is
recognised, accounting for variable considerations, costs of fulfilling
and obtaining a contract and various related matters. New disclosures about
revenue are also introduced.
Transfers of Investment Property (Amendments to IAS 40)
The amendments to IAS 40 Investment Property:
* Amends paragraph 57 to state that an entity shall transfer a property
to, or from, investment property when, and only when, there is evidence
of a change in use. A change of use occurs if a property meets, or ceases
to meet, the definition of investment property. A change in management's
intentions for the use of a property by itself does not constitute
evidence of a change in use; and
* The list of examples of evidence of a change in use in the standard
is now presented as a non-exhaustive list of examples instead of the
previous exhaustive list.
Definition of a Business (Amendments to IFRS 3)
In October 2018, the IASB issued amendments to IFRS 3 Business Combinations
which are effective for years beginning on or after 1 January 2020. These
amendments may be early adopted. Transcend has elected to early adopt these
amendments as at 31 October 2018.
The definition of a business has been updated in this amendment. Per the
amendment, in order to assess whether a transaction is the acquisition of
a business, an entity first assesses whether substantially all of the fair
value of the gross assets acquired are concentrated in a single asset or
group of similar assets. If the fair value is concentrated in this way,
then the transaction is not the acquisition of a business.
The Company has not entered into any business combinations during the year
as the fair value of the assets acquired is substantially all concentrated
into a single asset or group of similar assets. Therefore, the acquisition
of the properties during the year is considered to be an acquisition of a
group of assets and not an acquisition of a business.
Application of the above standards did not require any prior year
adjustments.
2. Reconciliation of profit for the year to headline earnings
Audited as Audited as
at 31 at 31
December December
2018 2017
R'000 R'000
Reconciliation of basic earnings to headline
earnings
Profit for the year attributable to Transcend
shareholders 197 068 67 973
Change in fair value of investment properties (160 543) (29 240)
Headline earnings attributable to Transcend
shareholders 36 525 38 733
Profit/(loss) from discontinued operation
net of tax 8 666 4 863
Actual number of shares in issue 130 895 66 306
Weighted average number of shares in issue 70 911 66 306
Basic and diluted earnings per share (cents) 277.91 102.51
Basic and diluted earnings per share (cents) -
continuing operations 265.70 95.20
Headline and diluted headline earnings per share
(cents) 51.51 58.42
Net asset value per share (Rand) 9.57 10.39
3. Sectoral split
Based on: GLA Book value
Residential 100% 100%
4. Lease expiry profile
Based on: GLA Rental revenue
Vacancy 8,0% 7,7%
Monthly 79,6% 80,2%
30 June 2019 12,4% 12,1%
31 December 2019 0,0% 0,0%
100,0% 100,0%
5. Related parties and related party transactions
Transcend is 45.1% owned by the South African Workforce Housing Fund SA
(PVE), a South African en commandite partnership duly represented by its
general partner, the South African Workforce Housing Fund SA GP (RF) Pty
Ltd (the 'Partnership'). The Partnership is comprised of three partners
being the South African Workforce Housing Fund (Cayman) I Ltd, South
African Workforce Housing Fund (Cayman) II Ltd and South African
Workforce Housing Fund (SA) II. The relationship between the
Partnership and International Housing Solutions (RF) (Pty) Ltd
('IHS (RF) (Pty) Ltd') is governed by a signed investment advisory
agreement.
IHS RF (Pty) Ltd has a shareholding of 11.5%.
Transcend is externally managed by IHS Asset Management (Pty) Ltd
('IHS AM'), a private company registered and incorporated in accordance
with the laws of South Africa and a wholly-owned subsidiary of IHS (RF)
(Pty) Ltd. An asset management agreement was entered into by Transcend
and IHS AM and became effective 1 October 2016. In turn, IHS AM outsources
certain functions to IHS (RF) (Pty) Ltd in terms of a service level
agreement. IHS AM charged Transcend asset management fees of R5.75 million
(2017: R4.47 million) during the year in accordance with the asset
management agreement.
The property management function of the Company is outsourced on market
related terms to IHS Property Management (Pty) Ltd ('IHS PM'), a private
company registered and incorporated in accordance with the laws of South
Africa. A property management agreement was entered into by Transcend and
IHS PM on 16 October 2016. IHS PM charged Transcend property management
fees of R12.4 million (2017: R11.12 million) during the year in accordance
with the property management agreement.
34.9% of the shares are held by Emira. In addition to its shareholding,
Emira also has a shareholder’s loan of R141.78 million with Transcend at
31 December 2018. This loan is subordinated against all other interest-bearing
borrowings. Interest is payable to Emira quarterly at an effective rate of
JIBAR plus 3.5%.
The loans from related parties are in respect of outstanding balances owing
to IHS Res 1 and Sunnyshore for the acquisition of 2,159 units. The purchase
considerations are funded partially through equity and debt on transfer of
the properties.
IHS Res 1
From 1 December 2018, interest is payable to IHS Res 1 on the balance owing
at an effective rate of 9.4%, with interest payable monthly in arrears on
the balance of the loan outstanding. The first payment of interest was due
in January 2019 and the total interest accrued at 31 December 2018 is
classified as current. The loan is unsecured as at 31 December 2018, however,
will be secured through new debt of R740 million upon the issue of guarantees
by Standard Bank and Nedbank prior to the properties transferring to Transcend.
Investment properties recognised in respect of these units hold a fair value
of R1.39 billion at 31 December 2018.
Sunnyshore
From 1 December 2018, interest is payable to Sunnyshore on the balance owing
at an effective rate of 5.6%, with interest payable monthly in arrears on the
outstanding balance. The first payment of interest is due in January 2019 and
the total interest of R216,382 accrued at 31 December 2018 is classified as
current. As at 31 December 2018, funding is secured by the way of a guarantee
issued by Standard Bank. Investment properties recognised in respect of these
units hold a fair value of R61.4 million at 31 December 2018.
On transfer of the 2,159 units to Transcend, the existing bonds over the
properties will be cancelled and new bonds will be registered to the value of
R786.72 million. New 3-year, 5-year and overdraft facilities in respect of
these units have been secured through Standard Bank and Nedbank. These
facilities amount to R786.72 million and will be secured by the target
investment properties with a value of R1.45 billion.
Transcend does not have any subsidiaries.
6. Summarised segmental analysis
Transcend has four reportable segments based on the entity's strategic
business segments. For each strategic business segment, the entity's
executive directors review internal management reports on a monthly basis.
All segments are located in South Africa and are based on specific regions
in which the properties are located.
Asset held-for-sale and discontinued operation: Transcend has concluded a
sale agreement to dispose of one of the reportable segments (Mpumalanga:
Investment property - Acacia Place), and the transfer of this property is
expected to be concluded in the first half of 2019. This property, and
operating segment, has therefore been presented as a discontinued operation
at 31 December 2018.
Audited as at 31 December 2018
Statement of profit or loss and other comprehensive income
R'000 Mpumalanga Western Cape
Rental income from investment properties 12 212 20 152
Recoveries of operating costs from tenants 2 390 1 558
Revenue 14 602 21 710
Property operating expenses (4 893) (8 493)
Impairment losses (911) (1 012)
Net operating income 8 798 12 205
Other operating expenses (80) (1 135)
Operating profit 8 718 11 070
Unrealised gain/(loss) on revaluation of
interest rate swaps - -
Gain/(loss) on fair value adjustment of
investment property (84) 37 674
Net finance charges 32 40
Finance costs - -
Finance income 32 40
Profit before taxation 8 666 48 784
Taxation - -
Profit and total comprehensive income for
the year 8 666 48 784
Statement of financial position
Investment properties - 470 900
Assets held-for-sale 127 500 -
Other assets 4 103 2 804
Interest-bearing borrowings - -
R'000 Gauteng Reconciliation Total
Rental income from investment
properties 128 194 - 160 558
Recoveries of operating costs from
tenants 11 894 - 15 842
Revenue 140 088 - 176 400
Property operating expenses (45 413) - (58 799)
Impairment losses (1 494) - (3 417)
Net operating income 93 181 - 114 184
Other operating expenses (685) (19 557) (21 457)
Operating profit 92 496 (19 557) 92 727
Unrealised gain/(loss) on
revaluation of interest rate swaps - 2 155 2 155
Gain/(loss) on fair value adjustment
of investment property 122 953 - 160 543
Net finance charges 222 (58 652) (58 358)
Finance costs - (61 488) (61 488)
Finance income 222 2 836 3 130
Profit before taxation 215 671 (76 054) 197 067
Taxation - - -
Profit and total comprehensive
income for the year 215 671 (76 054) 197 067
Statement of financial position
Investment properties 2 117 100 - 2 588 000
Assets held-for-sale - - 127 500
Other assets 9 411 134 897 151 215
Interest-bearing borrowings - 589 300 589 300
Audited as at 31 December 2017
Statement of profit or loss and other comprehensive income
Western
R'000 Mpumalanga Cape
Rental income from investment properties 15 641 17 126
Recoveries of operating costs from tenants 2 878 1 074
Revenue 18 519 18 200
Property operating expenses (7 205) (6 590)
Impairment losses (88) (792)
Net operating income 11 226 10 818
Other operating expenses (45) (575)
Operating profit 11 181 10 243
Unrealised gain/(loss) on revaluation of
interest rate swaps - -
Gain/(loss) on fair value adjustment of
investment property (6 300) 8 700
Net finance charges (18) 4
Finance costs (19) -
Finance income 1 4
Profit before taxation 4 863 18 947
Taxation - -
Profit and total comprehensive income for
the year 4 863 18 947
Statement of financial position
Investment properties 127 500 134 300
Assets held-for-sale - -
Other assets 3 185 2 271
Interest-bearing borrowings - -
R'000 Gauteng Reconciliation Total
Rental income from investment
properties 112 017 - 144 784
Recoveries of operating costs from
tenants 8 484 - 12 436
Revenue 120 501 - 157 220
Property operating expenses (39 022) - (52 817)
Impairment losses (1 600) (2 840)
Net operating income 79 879 - 104 403
Other operating expenses (433) (7 652) (8 705)
Operating profit 79 446 (7 652) 95 698
Unrealised gain/(loss) on
revaluation of interest rate swaps - (3 028) (3 028)
Gain/(loss) on fair value adjustment
of investment property 26 840 - 29 240
Net finance charges (9) (51 377) (51 400)
Finance costs (10) (52 962) (52 991)
Finance income 1 1 585 1 591
Profit before taxation 106 277 (62 057) 70 510
Taxation - (57) (57)
Profit and total comprehensive
income for the year 106 277 (62 114) 70 453
Statement of financial position
Investment properties 956 840 - 1 218 640
Assets held-for-sale - - -
Other assets 11 564 34 223 51 243
Interest-bearing borrowings - 555 324 555 324
7. Reconciliation of profit for the year to distributable earnings
Audited as Audited as
at 31 at 31
December December
2018 2017
R'000 R'000
Profit for the year attributable to Transcend
shareholders 197 068 67 973
Unrealised loss/(gain) on interest rate swaps (2 155) 3 028
Change in fair value of investment properties (160 543) (29 240)
Acquisition and transaction costs expensed 9 493 -
Surplus working capital available for
distribution** 3 956 703
Antecedent dividend available for distribution* 17 403 -
Distributable income for the year*** 65 222 42 464
Distribution per share (cents) 64.68 64.04
Interim 30.10 29.81
Final 34.58 34.23
* Antecedent dividend reclassified from stated capital to retained earnings
for 64.59 million shares issued during 2018.
** Surplus working capital available for distribution relates to taxable
temporary differences.
***The adjustments made to profit to derive the amount available for
distribution to shareholders have not been audited.
8. Financial instrument and investment property fair value disclosures
Financial asset classification
The Company classifies financial assets into the following categories:
* Financial assets subsequently measured at amortised cost; and
* Financial assets subsequently measured at fair value through profit or
loss.
The classification depends on the entity's business model for managing the
financial assets and the contractual terms of the cash flows. The Company
intends to hold the financial assets being trade and other receivables to
collect contractual cash flows (interest and or payment of principal).
The Company reclassifies debt instruments when, and only when, its business
model for managing those assets changes. In the current year there was no
change in the business model for managing the recognised financial assets.
Transcend has classified trade and other receivables and cash and cash
equivalents as financial assets measured at amortised cost. As at
31 December 2018 Transcend does not have any financial assets which are
measured at fair value through profit or loss.
Financial liability classification
The Company classifies financial liabilities into the following categories:
* Financial liabilities subsequently measured at amortised cost; and
* Financial liabilities subsequently measured at fair value through profit
or loss.
Transcend has classified its shareholder loan, interest-bearing borrowings,
loans from related parties and trade and other payables as financial
liabilities subsequently measure at amortised cost. Derivative liabilities
are classified as financial liabilities measured at fair value through
profit or loss.
Fair value hierarchy for financial instruments and investment property
When measuring the fair value of an asset or liability, the Company uses
observable market data as far as possible. Fair values are categorised into
different levels in a fair value hierarchy based on inputs used in the valuation
techniques as follows:
* Level 1: quoted prices (unadjusted) in active markets for identical assets
or liabilities.
* Level 2: inputs other than quoted prices included in level 1 that are
observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices).
* Level 3: inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
Figures in R'000s Fair value Level 1 Level 2 Level 3
31 December 2018
Assets
Investment properties 2 588 000 - - 2 588 000
Non-current assets held-for-
sale 127 500 127 500
2 715 500 - - 2 715 500
Liabilities
Derivative liabilities (874) - (874) -
(874) - (874) -
There have been no transfers between level 1, level 2 and level 3 during
the year under review.
The carrying amounts of loans and receivables, and financial liabilities
reasonably approximate their fair value.
Details of valuation techniques
Investment properties
Investment properties are valued using a level 3 model.
The properties were valued as at 31 December 2018 by capitalising the net
contractual income derived from the properties for a period of one year in
advance by an applicable capitalisation rate as determined by the independent
valuer. The calculation of the market value of all properties in Transcend
has been based on the income capitalisation method. This is the fundamental
basis on which income producing properties are traded in the South African
market. This is also due to there being strong supporting evidence of open
market rental rates and capitalisation rates which are evidenced by sales
in the market.
All of the Company's investment properties, except for Protea Glen, were
valued at 31 December 2018 by an external registered valuer. The valuations
were reviewed by the executive directors and asset managers and presented to
the Investment Committee for recommendation and approval by the Board on
on 6 March 2019. Protea Glen was independently valued at 1 August 2018, and
the value at that date approximated its actual value at 31 December 2018.
For all investment properties, their current use equates to the highest and
best use.
Key assumptions used to determine the value of the properties:
Expected net operating income:
The average rental income ranges from R4 060 to R10 273 (2017: R4 259 to R6 530)
per unit. Generally, the rentals are market related compared to similar
buildings in comparable areas.
Capitalisation rate:
The capitalisation rate ranges from 8% to 10% (2017: 8.25% to 9.5%). The
capitalisation rate applied was derived using an appropriate risk-free
rate and adding on a property related risk and illiquidity risk related to
property, as well as further amounts related to each property's construction,
size, age, rental, use and other property specific risks. Testing this
for reasonableness was achieved by comparing the resultant value per
opportunity and effective yield rate against current project sales
information, and comparative sales of similar properties in similar
locations.
Vacancy factor:
In order to apply a conservative approach, 3% to 15% (2017: 2.5% to 13.25%)
of the gross income was deducted as a provision for rental that may not be
collected as a consequence of vacancy, tenant failure or tenant refitting
during the course of the coming year. The current vacancies are market
related, with the exception of Acacia Place, which has a vacancy of
38% at 31 December 2018 due to a bulk lease which was terminated. This
property is in the process of being sold.
Derivative liabilities - Valuation process
Transcend has entered into a number of interest rate swap agreements to
mitigate the impact of fluctuating interest rates on the financial
performance of the Company. Throughout the year, 50% of the floating
interest rate borrowings has been economically hedged to fixed interest
rates. At year end, 44% of floating interest rate borrowings are hedged.
Management will adjust this ratio back to policy required norms upon
transfer of the 2,159 units acquired from IHS Res 1 and Sunnyshore.
Interest rate swaps
Transcend uses interest rate swaps to protect the Company against adverse
movements in interest rates. These interest rate swaps are measured at
fair value through profit or loss, are classified as derivative financial
liabilities at fair value through profit of loss and are categorised in
terms of the Company's fair value hierarchy as level 2.
The fair value is calculated as the present value of the estimated future
cash flows. Estimates of the future floating-rate cash flows are based on
quoted swap rates, future prices and interbank borrowing rates. Estimated
cash flows are discounted using a yield curve constructed from similar
sources, which reflects the relevant benchmark interbank rate used by
market participants for this purpose when pricing interest rate swaps.
The fair value estimate is subject to a credit risk adjustment that
reflects the credit risk of the company and of the counterparty. This is
calculated based on credit spreads derived from current credit default
swap or bond prices.
As at 31 December 2018, the derivative financial liabilities relating to
interest rate swaps were fair valued, resulting in a decrease of R2.16
million in the liability and a corresponding fair value movement of
R2.16 million (2017: R3.03 million) in profit or loss.
9. Outlook
The economic climate of 2018 saw higher taxes and increased fuel costs
which placed added pressure on tenant affordability and consumer costs.
This had a resultant impact on market performance, and more specifically
on the residential property sector. In light of the upcoming elections and
the current Eskom constraints, South Africa appears as though it will
experience moderate growth in 2019. Management supports this view and
therefore expects Transcend's performance to be slightly better
than its performance over the past 12 months provided there are no
material changes to the existing portfolio. This, coupled with
rental escalations, the effects of gearing and pro-active cost management,
should result in an increase in distribution for the 2019 year.
This forecast assumes that current market and trading conditions prevail
for the portfolio. This forecast has not been reviewed or reported on by
the independent external auditors. Transcend's use of distribution per
share as a relevant measure of financial performance remains unchanged
from the Listing Prospectus issued on its listing in 2016.
10. Subsequent events
In line with IAS 10 Events After the Reporting Date, the declaration of
the final dividend of 34.58 cents per share, as disclosed in Note 12
Payment of final dividend, occurred after the end of the reporting period,
resulting in a non-adjusting event that is not recognised in the financial
statements.
The directors are not aware of any events or circumstances arising since
the end of the financial year that would significantly affect the operations
of the Company or the results of those operations.
11. Liquidity
As at 31 December 2018, the Company had a positive net asset value of
R1.25 billion (2017: R0.69 billion). Its current liabilities exceeded its
current assets by R786.43 million (2017: R24.8 million). The cause of current
liabilities exceeding current assets is due to loans from related parties and a
portion of long-term borrowings becoming due and payable in the next 12 months.
Loans from related parties amount to R828.84 million and these were incurred in the
acquisition of various properties which became effective on 1 December 2018.
Transcend has secured R786.72 million of external interest-bearing borrowings
with Standard Bank and Nedbank which is available and will be drawn on upon
transfer of the units to Transcend. The balance of loans payable will be repaid
with excess cash. Interest payments on long-term borrowings are due quarterly,
and the Company has satisfied itself that it will have sufficient cash to settle
these liabilities as they become due and payable each quarter. The Company has
performed a cashflow forecast for the next 12 months, and the directors are
satisfied that the Company will be liquid and solvent after the declaration
of the dividend.
12. Payment of final dividend
The Board has approved and notice is hereby given of a final dividend of
34.58 cents per share for the six months ended 31 December 2018. This brings
the full year distribution to 64.68 cents per share (2017: 64.04 cents per
share) for the year ended 31 December 2018.
In accordance with Transcend's status as a REIT, shareholders are advised
that the dividend meets the requirements of a 'qualifying distribution' for
the purposes of section 25BB of the Income Tax Act, No. 58 of 1962 ('Income
Tax Act). The dividend on the shares will be deemed to be a dividend, for
South African tax purposes, in terms of section 25BB of the Income Tax Act.
The dividend received by or accrued to South African tax residents must be
included in the gross income of such shareholders and will not be exempt
from income tax (in terms of the exclusion to the general dividend
exemption, contained in paragraph (aa) of section 10(1)(k)(i) of the
Income Tax Act) because it is a dividend distributed by a REIT. This
dividend is, however, exempt from dividend withholding tax in the hands
of South African tax resident shareholders, provided that the South African
resident shareholders provide the following forms to their Central Securities
Depository Participant ('CSDP') or broker, as the case may be, in respect of
uncertificated shares, or the Company, in respect of certificated shares:
a) a declaration that the dividend is exempt from dividends tax; and
b) a written undertaking to inform the CSDP, broker or the Company, as the
case may be, should the circumstances affecting the exemption change or
the beneficial owner cease to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African
Revenue Service. Shareholders are advised to contact their CSDP, broker or
the Company, as the case may be, to arrange for the abovementioned
documents to be submitted prior to payment of the dividend, if such
documents have not already been submitted.
Dividends received by non-resident shareholders will not be taxable as
income and instead will be treated as an ordinary dividend which is
exempt from income tax in terms of the general dividend exemption in
section 10(1)(k)(i) of the Income Tax Act, (unless the rate is reduced
in terms of any applicable agreement for the avoidance of double
taxation ('DTA') between South Africa and the country of residence of
the shareholder). Assuming dividend withholding tax will be withheld
at a rate of 20%, the net dividend amount due to non-resident
shareholders is 27.66400 cents per share. A reduced dividend
withholding rate in terms of the applicable DTA may only be relied
on if the non-resident shareholder has provided the following forms
to their CSDP or broker, as the case may be, in respect of
uncertificated shares, or the Company, in respect of certificated
shares:
a) a declaration that the dividend is subject to a reduced rate as
a result of the application of a DTA; and
b) a written undertaking to inform their CSDP, broker or the Company,
as the case may be, should the circumstances affecting the reduced
rate change or the beneficial owner cease to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African
Revenue Service. Non-resident shareholders are advised to contact their
CSDP, broker or the Company, as the case may be, to arrange for the
abovementioned documents to be submitted prior to payment of the dividend
if such documents have not already been submitted, if applicable.
As at the date of this announcement, the Company had a total of 130 894 793
shares in issue. The Company's tax reference number is 9015377253.
The dividend is payable to Transcend shareholders in accordance with the
timetable set out below:
Last date to trade cum dividend Tuesday, 26 March 2019
Shares trade ex dividend Wednesday, 27 March 2019
Record date Friday, 29 March 2019
Payment date Monday, 01 April 2019
Share certificates may not be dematerialised or rematerialised between
Wednesday, 27 March 2019 and Friday, 29 March 2019, both days inclusive.
In respect of dematerialised shareholders, the dividend will be transferred
to CSDP accounts/broker accounts on Monday, 1 April 2019. Certificated
shareholders' dividend payments will be deposited on or about
Monday, 1 April 2019.
By order of the board
Solly Mboweni Myles Kritzinger
Chief Executive Officer Chief Financial Officer
Johannesburg
6 March 2019
Registered office: 54 Peter Place, Block C, Peter Place Office Park,
Bryanston, 2191
Transfer secretaries: Link Market Services South Africa Proprietary
Limited, 13th Floor, 19 Ameshoff Street, Braamfontein, 2001,
PO Box 4844, Johannesburg, 2000
Designated Advisor: Questco Corporate Advisory Proprietary Limited
Company secretary: Karen Waldeck-Kruger
Directors: Robert Reinhardt Emslie* (Chairperson); Robert Nicolaas Wesselo
(former Chief Executive Officer)**(1); David Peter Lange(4) (former Chief
Financial Officer); Myles Kritzinger(5) (Chief Financial Officer); Solly
Mboweni (Chief Executive Officer)(2); Cathal Padraig Conaty**(6); Faith
Nondumiso Khanyile*; Michael Simpson Aitken*; Michael Louis Falcone**;
Vanessa Perfect (Chief Operating Officer)(3); Geoff Jennet**(7);
Michelle Dickens*(8)
* Independent non-executive director
** Non-executive director
(1) Rob Wesselo has stepped down as Chief Executive Officer but will
remain on the Board as a non-executive director effective 14 December
2018.
(2) Solly Mboweni, previously the Chief Operating Officer, replaces Rob
Wesselo as the Company’s Chief Executive Officer effective 14 December
2018.
(3) Vanessa Perfect replaces Solly Mboweni as the Company’s Chief
Operating Officer effective 14 December 2018.
(4) David Peter Lange resigned as Chief Financial Officer and executive
director of the Company effective 8 March 2018.
(5) Myles Kritzinger was appointed as Chief Financial Officer and
executive director of the Company effective 9 March 2018.
(6) Cathal Conaty resigned as a non-executive director effective
14 December 2018.
(7) Geoff Jennet was appointed as a non-executive director effective
14 December 2018.
(8) Michelle Dickens was appointed as an independent non-executive
director effective 14 December 2018.
8 March 2019
Date: 08/03/2019 01:58:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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