Fountainhead Property Trust has announced a distribution growth of 16.6% per Participatory Interest (PI) for its financial year to 31 August 2014. This compares to the 11 month period to 31 August 2013 and 6.85% on an annualised basis, delivering on its market guidance of 6.25 to 7.25%.
The Trust achieved its stated prospects notwithstanding once-off legal and advisory costs of R5.3 million incurred in the second half of its financial year, relating to Redefine Properties’ offer to acquire the remaining 34% of Fountainhead it doesn’t own. While the offer was approved by a substantial majority of Fountainhead unitholders (71.3%) it fell just short of the required 75% level. Excluding this extraordinary expense, Fountainhead’s distribution growth for the financial year would have exceeded guidance at 7.7% per PI. Fountainhead’s net asset value (NAV) increased by 7.2% per PI.
Fountainhead CEO, Len van Niekerk, points to the fund’s significant strategic advances as drivers of its solid performance for the year.
Van Niekerk says, “We are pleased to report a solid set of results in this tough operating environment. We advised the market of our strategy to reduce risk and improve the quality and sustainability of our earnings, and we have made meaningful progress on these objectives.”
Fountainhead, a JSE-listed REIT (Real Estate Investment Trust), has a diversified portfolio of properties. At year-end it held 64 properties valued at R12.2 billion, with 75% of its properties by value being well-established metropolitan shopping centres. Its top 10 properties are valued at R9.1 billion and account for around 75% of the total value.
During the year, Fountainhead enhanced its portfolio by reinvesting in its core assets, establishing a disposal programme for smaller non-core assets that comprise less than 5% of its total portfolio, and acquiring larger, quality properties.
During the year, Fountainhead commenced construction on a number of core assets, including a R318 million upgrade and expansion of Centurion Mall, and an additional 4 500m2 of lettable area with significantly improved access at Kenilworth Centre. Fountainhead is also investing R65 million to convert an office park in Bedfordview into a private educational facility on a long-term lease.
“These projects enhance the status of our assets, extend their lifecycles and protect their market positions,” notes van Niekerk. “In addition, our recent acquisitions and disposals have been yield enhancing while improving the overall quality of our portfolio.”
Fountainhead made four tactical acquisitions for a total consideration of R778 million at a combined 8.5% yield. This includes the R571 million Robor industrial facility in Elandsfontein, which has a 10-year triple net lease.
The Trust also identified 27 properties for its disposal programme and, in its current financial year, has concluded, or is in the process of concluding, agreements of sale on 19 of the properties for a total value of R219 million at a combined yield of 9.87%.
“We’ve made considerable progress on our disposal programme and should conclude the majority of these disposals during the year,” says van Niekerk. “The disposals represent a major step forward in Fountainhead’s strategy to focus on larger core assets.”
Its Southgate and Westgate disposals transferred shortly after year end and together with disposals agreed or in advanced negotiation represent a total value of R1.2 billion at a combined yield of 7.8%.
Vacancies, excluding strategic vacancies earmarked for development, and taking into account letting activity post year-end, increased slightly from 7.1% to 7.5%. Most of the increase can be ascribed to a few larger office and industrial vacancies, which all have plans in place to relet.
In addition to improving the consumer retail experience through expanding the use of technology in its malls, energy-efficiency has come under the spotlight at Fountainhead. Energy assessments have been completed at almost all retail centres and work has commenced to implement a number of energy saving projects. “The cost of utilities has increased significantly for tenants. Our energy-efficiency initiatives assist tenants to manage costs and, in doing so, support our sustainability and positive returns for our PI holders,” explains van Niekerk.
Fountainhead also restructured its funding, successfully reducing exposure to interest rate increases, lowering bank margins and increasing flexibility while containing its cost of debt in an environment of rising interest rates. At year-end, 49% of Fountainhead’s debt was fixed at an average rate of 8.1% for an average period of 4.2 years. The fixed position increases to 76% fixed after taking forward starting swaps into account and up to 95% after taking a loan repayment and application of net proceeds from disposals and acquisitions into consideration.
Fountainhead expects growth in distributions of 5% to 6% from its current portfolio for the 12 months to 31 August 2015. “We will continue to implement our strategy to acquire larger properties, improve our core assets through developments and dispose of smaller, riskier properties,” says van Niekerk.