Tower 'is too small for a single specialist focus'

Business Day TV (BDTV): The Tower Property Fund has grown its interim dividend by 27% to 42c a share and says it's on track to achieve a full year payout of 86.6c. Joining me now on the line is Mark Edwards‚ CEO of Tower Property.

Mark Edwards‚ CEO of Tower.

Image credit: Tower Property Fund

Mark ... its obviously been a good first half and one of the reasons you were able to increase the dividend to the extent that you have is as a result of an increase in distributable earnings. What drove that 59% growth?

Mark Edwards (ME): It's mainly as a result of cost savings ... we've been quite aggressive with our greening programmes and reduction of costs in our various properties‚ particularly in the bigger ones and we've driven down our occupancy cost percentage to 13.7% net of the recovery‚ so that's been a major driver.

BDTV: Has that helped your tenants‚ particularly in some of your retail properties‚ and are you seeing better renewals when it comes to renewal of lease time as a result of some the greening initiatives that you've put in place?

ME: Yes‚ we're actually in discussions with some of our major tenants at our big shopping centre at the moment‚ and that's certainly on the agenda‚ the fact that we've undertaken these initiatives which (are) reducing their total cost of occupancy‚ which is very important. Electricity prices are going crazy and reducing the tenants' cost of occupancy makes you more competitive. So it certainly is being reflected‚ but it's also a must-have at the moment with (the) power crisis and all that's going on there ... you need to try and provide for your tenants as best you can.

BDTV: It's not just a matter of bringing down the costs‚ it's actually getting off-grid‚ as we've seen in the last couple of days‚ and the load-shedding has been rather disruptive. What are you doing in that regard?

ME: We've done our first solar initiative which is being rolled out at Cape Quarter ... it's a very big property with a relatively small roof‚ so the solar only accounts for 5% of the building's energy demands‚ but we're seeing that the payback period between our financial feasibility and actually pulling the trigger on the project‚ which was in December last year‚ has dramatically reduced because Eskom tariffs are increasing and the prediction of them is for them to continue to increase. So whilst we won't be off the grid we will at least be able to provide for as much of our own power as we can. The same story is going to be rolled out to properties which potentially can supply all their power needs‚ which is obviously the kind of Holy Grail.

BDTV: If you just look at some of the activity that took place over the first half‚ you say that you bought two properties worth about R122m ... they were both in the office sphere which is a very tough sphere to be in. Maybe you can talk about why you are buying up office properties and whether you're happy to have quite a mix within the Tower Fund portfolio that there isn't any one pure focus on any one sector?

ME: Yes ... we're too small to have one particular specialist focus‚ so diversification ... (is) good for our risk profile. In terms of office‚ I agree with you ... the office sector‚ particularly B-grade is struggling. Those two properties we purchased‚ one was part of the Medscheme head office in Johannesburg on a triple-net lease. So it's a very strong tenant. And the other small ... office was the final section of a building which we already own. We've announced quite a few deals of late ... three of which have been retail properties and one very well-located office property in Claremont‚ in Cape Town. So our objective is to take our retail to 50% of the portfolio ... it's currently at 40%‚ and to look at office properties in well-located nodes like Claremont in Cape Town and others ... Rosebank particularly ... we have a property there which we really like. So we're going to recycle out of our smaller B-grade offices which we took to listing two years ago.

BDTV: Just going back to the issue of renewals or reversions‚ what's happening there‚ how much of your property is coming up for renewal ... what kind of escalation rates are you looking at?

ME: It's quite interesting‚ we've had very good rental growth on particularly our office properties. The Cape Quarter was over rented when we bought it and we planned to reduce the rentals over time‚ which we've done‚ so we've had some negative rental reversions on that property which being the biggest property in the fund then brings down your total reversion rate. But we've undertaken some 6‚000m² of leasing in the last two months. Our vacancies picked up in the period to 10%‚ which we weren't happy with. They're back down at 7% now with our new acquisitions coming on. So it's a continued focus to try and reduce operating costs‚ make your buildings more attractive and desirable and retain your current tenants‚ which is what we keep focusing on.

BDTV: Yes ... going back to Cape Quarter‚ I've just heard anecdotal evidence that even though it's in such a fantastic spot in Cape Town there is very high turnover of tenants there ... is it because the rents were‚ as you say‚ too high when you came in and bought the property?

ME: Yes. Certainly it's a unique centre‚ it's not your traditional shopping centre‚ it's mixed ... office‚ and a little bit of residential and retail. You're quite right. The rentals were quite high when we purchased it. It was launched in 2009 during the financial crisis and struggled. We've had a great run of it of late. We've put some national tenants in‚ which have done very well. We're in discussions with a very large tenant at the moment‚ but from our point of view‚ it's performed excellently since we've owned it. We're looking to take advantage of some residential bulk which we have there‚ it's located on the Fan Walk in Cape Town and there's massive residential demand so it certainly is a property of which we're very confident‚ going forward.

BDTV: Okay‚ then vacancies ... so they're a bit at the high end of the norm at 10%. You expect those to come down to 8% as you assume the new properties into the portfolio. Do you have any longer-term targets?

ME: Yes‚ we'd like to be at 5% by the middle of the year. We'll be at 7% once those new properties transfer. The vacancies maybe picked up mainly as a result of one particular property ... we had two tenants absconding from their leases which forces you to go the legal route to try and recover the debt and that's just a nasty process and maybe talks to the economy on the ground rather than the JSE continuing to shoot the lights out. But going forward‚ our vacancies should come down and yes‚ our target for mid-year is around 5%.