property - sharedata · 2006. 8. 30. · and mr price weekend. rentworks – fully let prime...
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PROPERTYANNUAL REPORT 2005
PROPERTY FUND
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(A property fund created under the Emira Property Scheme, registered in terms of the Collective Investment Schemes Control Act)Share code: EMI ISIN: ZAE000050712 (“Emira”)
Cover (from left to right):
● 267 West – Currently fully let, this multi-tenanted 9,800 m2 office building overlooks Centurion Lake and is ideally
located near the proposed location for Centurion’s Gautrain station.
● Sanlam Gables – Primarily occupied by Securicor until 2014, this property measures 2 851 m2 and has excellent exposure
to Schoeman Street in Hatfield, Pretoria.
● Umgeni Road A – 98/102 Intersite – A building situated in the the popular light industrial node of Umgeni Business
Park, occupied by a single tenant.
CONTENTS
Executive summary 5 Manager’s report 7 Directorate 23 Corporate governance 24
Financial statements 27 Segmental analysis 47 Administration 58
Corporate structureEmira Property Fund (“the fund”) is a property unit trust in terms of the Collective Investment Schemes Control Act, No. 45 of 2002. The fund is managed by Strategic Real Estate Managers (Pty) Ltd (“STREM”), which is approved by the Registrar of Collective Investment Schemes to manage the Fund.
In terms of the Collective Investment Schemes Control Act, No. 45 of 2002 (“CISC Act”) the fund is obliged to distribute all income earned to its participatory interest holders. As a result of its distribution obligations, no income tax or capital gains tax is payable by the Fund.
PROPERTY FUND
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1PAGE
HIGHLIGHTS HIGHLIGHTSDistributions per PI
67,55cannualised growth of
+15,9%Net asset value per PI
624can increase of
+18,6%12-month total return
268cor
51,5%
Investment strategy, objectives and prospectsThe Fund’s principal objective is to grow earnings from a quality based property portfolio. Growth will be sought by making strategic investments where yields are enhancing in the medium to long term. Management will further maintain the quality of the portfolio by disposals of assets, which no longer meet the strategic objectives of the Fund.
The strategic objectives of the fund are to:
● Optimise net income and growth in distributions;
● Apply gearing to the portfolio to the extent that it enhances returns, limited to 30% as provided for in the Collective Investment Schemes Control Act;
● Increase market capitalisation, liquidity and spread of investors through selective acquisitions and capital raising;
● Selectively recycle assets;
● Broaden the Fund’s geographic exposure to KwaZulu-Natal, the Western and Eastern Cape;
● Increase exposure to the retail sector;
● Dispose of non-performing or potentially under-performing properties; and
● Reduce vacancies and smooth the lease expiry profile of the portfolio.
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PORTFOLIOEm
ira P
rope
rty
Fund
Ann
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05
2PAGE
PORTFOLIO
Deloittes –
Fully occupied by Deloitte
South Africa this 4 000 m2
office building is located
within walking distance of
Brooklyn Mall.
East Coast Radio House –
Multi tenanted modern
commercial property
totalling 5 700 m2,
accommodating retail and
office tenants. Major
tenants include East Coast
Radio and Strauss Daly Inc.
1059 Schoeman Street –
Primarily occupied by SABC
until 2012, the property is
located on a prominent
corner in Hatfield, Pretoria
and measures 6 048 m2.
Faerie Glen –
A newly developed single
tenanted office building,
located in a secure park
measuring 3 710 m2, facing
Atterbury Road, east of
Pretoria.
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3PAGE
Gift Acres –
A newly developed
convenience shopping
centre, located diagonally
across from Lynnridge Mall,
anchored by Woolworths
and Mr Price Weekend.
Rentworks –
Fully let prime office space
with excellent exposure on
the corner of Grosvenor
and Cumberland Avenues,
Bryanston.
Boskruin Shopping Centre –
A 6 752 m2 convenience
shopping centre in Boskruin
on the busy President
Fouché Avenue, anchored
by Woolworths Foods and
Clicks.
Lynnridge Mall –
Situated in the thriving,
upmarket residential area
of Lynnwood Ridge east of
Pretoria, anchor tenants
include Pick ’n Pay, Mr Price
and ABSA Bank.
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Emira
Pro
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2005
4PAGE
Mitek South Africa –
This single tenanted
property is located in
Midrand and offers excess
bulk for expansion for the
current tenant. Mitek – a
subsidiary of Berkshire
Hathaway – has a lease
until 2012.
Aeroport - Fulcrum –
Triple Net, single tenanted
warehouse and office
building in Spartan,
measuring 3,805 m2 with
good yard space and
additional land for
expansion.
Oracle House –
Located in Midrand with
excellent exposure to the
N1 highway between
Johannesburg and Pretoria,
this property is fully
occupied by Oracle
Corporation SA.
Westway –
A fully let 2 283 m2 office
complex situated in the
popular Westway Office
Park in Westville.
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5PAGE
SUMMARYfor the year ended 30 June 2005 Results for the Results for the seven months year ended ended % 30 June 2005 30 June 2004 Change
Financial highlights
Distributions per participatory interest (cents) 67,55 34,01 15,9*
Headline earnings per participatory interest (cents) 74,37 33,28 30,4*
Average vacancy factor (%) 6,0 6,1 0,2
Portfolio valuation analysis
Market value (R’000) 2 259 774 1 901 027 18,9
Net asset value per participatory interest (cents) 624 526 18,6
Listed market price (cents) 720 520 38,5
Premium/(discount) to net asset value (%) 15,4 (1,1) —
Capital and funding resources
Maintenance fund investment (R’000) —# 24 104 —
Debt funding facility available (R’000) 220 400 272 500 —
Salient features
Participatory interests in issue 286 828 772 285 293 684 0,5
Market capitalisation (R’000) 2 065 167 1 483 527 39,2
Long-term borrowings (R’000) 364 141 310 978 17,1
Long-term borrowings to total assets (%) 15,8 16 —
Property acquisitions (Rm) 90,5 181,0 (50,0)
Number of properties 84 84 —
*Annualised
#Whereas at June 2004 the maintenance fund was held separately, earning interest at short-term rates, it has now been used to reduce our access facility.
EXECUTIVE SUMMARY
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Emira
Pro
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2005
6PAGE
SUMMARY PORTFOLIO SUMMARYat 30 June 2005�������������������������
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REPORTfor the year ended 30 June 2005 MANAGER’S REPORT
7PAGE
“The financial year to June 2005 was an extremely successful one for Emira.”
The directors of STREM are pleased to present their report
on Emira’s performance for the year ended 30 June 2005,
which represents the fund’s first full financial year of
operation.
Overview of performance
1. Summary of the fund’s performance
The financial year to June 2005 was an extremely
successful one for Emira, with healthy growth in
distributions and total returns being delivered to
unitholders, the portfolio being bedded down post-
listing, numerous enhancing acquisitions being made
and the fund’s debt profile being restructured.
● Distributions for the year amounted to 67,55
cents per PI. If this is compared to an annualised
distribution for the seven months to 30 June
2004 (34,01 cents for the seven months, or 58,3
cents on an annualised basis) this represents
exceptional growth of 15,9%;
● Emira’s PI price rose from 520 cents in June 2004
to 720 cents as at 30 June 2005, a rise of 38,5%
and the fund’s market capitalisation rose from
R1,48 billion to R2,07 billion over the same
period. Together with the distributions of 67,55
cents, PI holders therefore received a total return
of 51,5% over the past twelve months;
● Net asset value grew from 526 cents to 624
cents, representing growth of 18,6%;
● The fund concluded a number of attractive
acquisitions during the year: two buildings
totalling R22 million were transferred into Emira
during the period at yields of in excess of 12,5%
pre-gearing, one building of R25 million has been
transferred subsequent to year-end at a yield in
excess of 11% and three other properties totalling
R150 million are awaiting transfer, all having been
purchased at yields of approximately 12%;
● Two buildings were sold during the period, while a
further three are awaiting transfer. The majority of
these properties represented non-core investments
for Emira, while one of them, which was not on
the disposal list, was sold at a significant premium
to book value, with the funds being reinvested at
a more attractive yield;
● During the year Emira entered into certain swap
arrangements, which resulted in the fund’s debt
being restructured. Whereas at 30 June 2004
Emira’s had approximately half of its debt at
floating rates, by 30 June 2005 the fixed
component had increased to approximately 80%,
with staggered maturity dates ranging from
October 2007 to November 2011. This has
significantly reduced the interest rate risk to PI
holders;
● Vacancies declined from 6,1% in June 2004 to
6,0% in June 2005.
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REPORTfor the year ended 30 June 2005Em
ira P
rope
rty
Fund
Ann
ual R
epor
t 20
05
8PAGE
MANAGER’S REPORT (continued)
2. Overview of the property market
2.1 Listed property sector
2.1.1 Total returns to June 2005
Listed property handsomely outperformed other
asset classes over the past year. In the twelve-
months to June 2005 PUTs and PLSs delivered pre-
tax total returns of 54,2% and 56,1% respectively,
well ahead of the All Share index at 42,8%. Long
bonds lagged considerably, showing a total return of
only 15,8%.
The three-month and six-month performance from
the listed property sector was equally impressive, as
seen in the table below.
TOTAL RETURNS (PRE-TAX)
Period
All Share
FINDI 30
PLSs
PUTs
R 153
3 months 7,1% 5,3% 11,6% 10,9% 3,7%
6 months 13,2% 5,8% 18,3% 13,9% 3,4%
12 months 42,8% 42,8% 56,1% 54,2% 15,8%
Source: Inet-Bridge
With this healthy performance over the past year,
the sector continues to boast an impressive
performance over one, three and five years. Using
after-tax numbers, the following table illustrates
why the sector is currently in vogue with investors.
COMPOUND ANNUAL TOTAL RETURNS (POST-TAX)
PeriodAll
ShareFINDI
30 PLSs PUTs R 153
1 Year 42,8% 42,8% 53,4% 51,7% 13,4%
3 Years 12,5% 15,5% 29,7% 29,8% 11,0%
5 Years 14,7% 7,6% 21,2% 20,5% 11,0%
Source: Inet-Bridge
*Assuming 29% corporate tax rate applied to the income portion of the total return.
Compound annual total after-tax returns over the
past five years from the PUT and PLS sectors were
20,5% and 21,2% respectively. This was well ahead
of the All Share index at 14,7% and long bonds at
11,0%.
Such impressive total returns illustrate why we
believe that property forms an important part of
any balanced portfolio and is also a useful substitute
for bonds for investors looking for a (growing)
income yield.
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9PAGE
2.1.2 Listed property fund results
As anticipated, growth in dividends from the listed
sector accelerated over the past twelve months.
Whereas market commentators had anticipated
growth in dividends of 4,5% to 5%, we believe
actual growth came in even higher than this, as
long-term interest rates continued to decline and
property fundamentals remained healthy.
Assuming that the economic environment remains
stable going forward, we believe that distribution
growth from the listed property sector will be between
5% and 10% in the next twelve months.
2.1.3 The listed property and bond yield
differential
With the improving listed property sector dividend
growth mentioned above, the yield differential
between listed property and the R153 long bond
(listed property yield less the yield on R153 long
bond) has remained relatively narrow over the past
year, currently well below the 1% level.
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Source: Inet-Bridge
Rather than investing in long bonds, at say 8%, investors
have been attracted to listed property stocks at yields
around 9%, with in the region of 5% growth in distributions.
Should the growth in distributions continue over the short
to medium term, we believe that this differential could
remain at current levels or even narrow further.
2.1.4 Summary
The listed property sector has performed
exceptionally well in recent years:
● Total returns have been in excess of the rest of
the asset classes;
● Healthy dividend growth is finally returning to
the sector;
● The sector is trading at a healthy premium to net
asset value of in excess of 30%;
● The market capitalisation of South African listed
property stocks has grown to close to R40 billion
from R7 billion ten years ago;
● The number of listed PUTs and PLSs has grown to
in excess of twenty-five counters.
Assuming the economic environment remains stable,
we believe that the sector should be able to show
solid returns for the foreseeable future.
2.2 Physical property market
In line with what has been experienced in the listed
property market, the physical property market has
also been extremely buoyant over the past twelve
months.
Nowhere is this more apparent than in the SAPOA/
IPD South Africa Property Index results for calendar
year 2004. The total return from the IPD Universe in
2004 was 22,6%. This was significantly higher than
the annualised return over the past ten years of
13,2%. It was also higher than the five-year average
of 13,6%.
“Assuming the economic environment remains stable, we believe that the listed property sector should be able to show solid returns for the foreseeable future.”
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REPORTfor the year ended 30 June 2005Em
ira P
rope
rty
Fund
Ann
ual R
epor
t 20
05
10PAGE
MANAGER’S REPORT (continued)
Whereas a year ago the most competitive markets
were the national retail market and the Cape Town
market in general, this has now extended to all types
of commercial property. Properties of an average
standard are now being offered to Emira for purchase
at yields of below 10%, which we believe is
demanding.
The significant rise in capital values and resultant
decline in yields has meant that many property
owners have resorted to either developing for their
own account or refurbishing existing assets.
2.3 Rentals and vacancies
2.3.1 Rentals
2.3.1.1 Office market
The IPD universe of direct property shows that total
returns from offices (both decentralised and CBD)
showed a vast improvement in 2004. The chart
below shows the weighted average total returns
from the entire office sector since 1995. Total
returns from the office sector jumped from 9,2% in
2003 to 17,7% in 2004. This improved performance
was not only the result of declining cap rates but
also firming rentals.
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Empirical evidence from Emira’s portfolio supports
the view that fundamentals in the office market in
South Africa have improved over the past year,
although the extent of this improvement differed
from region to region. The Pretoria, Durban and Cape
Town markets were extremely strong with rentals
generally in the region of 10% to 20% higher year-
on-year, driven by declining vacancies in these areas.
In contrast, however, the Johannesburg market has
lagged (flat).
This evidence is supported by Rode’s March 2005
report, which shows that Sandton office rentals
were flat to lower over a twelve-month period,
compared to nodes such as Faerie Glen in Pretoria,
Westway and La Lucia in Durban and Claremont in
Cape Town, which showed good growth.
2.3.1.2 Retail market
The retail market has experienced a few years of
unprecedented growth thanks to buoyant consumer
spending, which has in turn resulted in higher
turnover rentals for landlords. Average real growth in
private consumption expenditure (PCE) has been
6,1% since the beginning of 2004, compared to a
ten-year average of 3,8%.
The beneficial impact of this run in PCE in the past
two years has further cemented retail’s position as
the best performer in recent years according to the
IPD. The table below shows that retail categories
occupy three of the five best performing market
segments over the past five years.
Source: IPD
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11PAGE
Average annual total return by market segment
5 Years
Gauteng regional shopping centres 16,8%
Industrial rest of SA 16,3%
Other retail shopping centres 15,4%
Other regional shopping centres 15,2%
Other* 14.2%
Other shopping centres 13,7%
Offices – Decentralised 11,5%
Industrial – Gauteng 11,1%
Offices – Gauteng CBD 8,8%
Offices – Provincial 6,9%
Offices – Other Metro CBD 5,9%
Source: IPD * Other is made up of a range of property types, but is dominated by
hotels.
2.3.1.3 Industrial market
The second half of calendar year 2004 saw industrial vacancies decline significantly and the demand for industrial land increase. This squeeze in the industrial market has resulted in rentals in this market firming as illustrated below.
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According to Rode, nominal rentals for 1 000 m2 of
industrial space on the Witwatersrand rose by 19%
in the twelve months to March 2005. In real terms
this represents a rise of 14%. Although the rise is
impressive in both real and nominal terms, real
rentals remain well below those pertaining ten
years ago.
2.3.2 SAPOA office vacancies
SAPOA office vacancies continued to show a
declining trend over the past year, declining from
13,7% in June 2004 to 11,4% in June 2005. At the
same time, the level of office development has
remained at relatively low levels despite rising
fractionally in the first half of 2005.
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“National office vacancies continued to show a declining trend over the past year.”
Source: Rode
Source: SAPOA
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REPORTfor the year ended 30 June 2005Em
ira P
rope
rty
Fund
Ann
ual R
epor
t 20
05
12PAGE
MANAGER’S REPORT (continued)
The nodes to have contributed to this decline in
vacancies include:
● The Johannesburg CBD, which saw a reduction in
vacancies of 46 868 m2 (2,7%);
● Randburg, where vacancies declined by 34 846 m2
(6,6%);
● Parktown, which saw a reduction in vacancies of
19 545 m2 (5,9%) and;
● Claremont, where vacancies declined by
17 846 m2 (16,1%).
3. Emira’s performance and property portfolio
3.1 Emira’s price performance and tradability
In the twelve months since 30 June 2004 Emira’s
price has risen from 520 cents to 720 cents, or
38,5%. This compares to the PUT index’s rise of
45,5% over the same period, implying an
underperformance of 7%.
Liquidity has been good, with 99,6 million PI’s
trading during the same period. This equates to
34,7% of the PI’s in issue.
3.2 Emira’s portfolio
The property portfolio comprises good quality
properties, selected for their abilities to deliver
sustainable growth in income and diversify risk.
3.3 Sectoral exposure
By income, 50,1% of the portfolio is comprised of
office space, mainly located in Gauteng. A further
34,5% of income is from retail properties and the
remaining 15,4% is from industrial space. A more
detailed breakdown of the portfolio by value and
income can be found on page 48.
Using the IPD portfolio as a benchmark to determine
a suitable market weighting for commercial property
in South Africa, Emira is underweight retail properties.
For this reason, management believes that there is
scope for selectively increasing the fund’s exposure
to the retail sector.
3.3.1 Offices
The forty commercial properties in the fund comprise
49% of the fund’s investment properties by value.
Two acquisitions were made in the financial year,
namely Nimas House and Derby Downs both located
in Durban. This increased the fund’s exposure in
KwaZulu-Natal from 10% in 2004 to 11%.
3.3.2 Retail
Emira’s exposure to the retail sector as at the end of
the financial period stood at 36% by value with the
average size of the fund’s retail properties being
approximately R60 million.
3.3.3 Industrial
The industrial component is the smallest within the
fund, totalling 15% by value. The average size of the
fund’s industrial properties is just over R10 million.
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13PAGE
3.4 Vacancies and letting
Over the past year vacancies have shifted down
slightly, moving from 6,1% in June 2004 to 6,0%
(33 624 m2) in June 2005.
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Within the overall figure the largest improvement
has come from the industrial sector, which declined
from 7,7% in June 2004 to 4,7% by June 2005.
Retail vacancies also declined from 2,8% to 1,5%.
The underperforming sector was the office portfolio,
which saw a rise in vacancies from 6,9% to 9,7%.
It is important to note that although the vacancy
rate was 6,0% at June 2005, Emira has sold Grinaker
Electronics (deposits have already been received),
which accounted for 1 851 m2 of the total vacancies
in the fund. Furthermore, at Epping Warehouse
(WGA) a new lease has been concluded whereby all
of the vacant space (4 307 m2) will be occupied by
August 2005. Taking the aforesaid in account,
vacancies in the fund would decline to 4,9%.
3.4.1 Offices
Office vacancies rose from 6,9% to 9,7% over the
past year, representing an increase in vacancies of
6 559 m2. Major vacancies at year-end were:
● Epsom Downs Office Park – 4 230 m2;
● Woodmead Office Park – 3 938 m2;
● Grinaker Electronics – 1 851 m2.
Management is investigating the alternatives to
reduce the vacancies at both Epsom Downs and
Woodmead, which could include refurbishment of
these assets, while Grinaker Electronics is in the
process of being disposed of.
3.4.2 Retail
Retail vacancies declined from 2,8% to 1,5% over
the past year, representing a decline in vacancies of
1 696 m2. Major vacancies at year-end were:
● Lynnridge Mall – 603 m2;
● Epsom Downs – 388 m2;
● Randridge Mall – 351 m2.
3.4.3 Industrial
Industrial vacancies declined from 7,7% to 4,7%
over the past year, representing a decline in vacancies
of 5 745 m2. Major vacancies at year-end were:
● Epping Warehouse (WGA) – 4 307 m2;
● Cambridge Park – 1 457 m2;
● Admiral House – 1 233 m2.
As stated above, the vacant space at Epping
Warehouse (WGA) has been taken up effective
August 2005.
“Retail and industrial vacancies declined significantly over the past year.”
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REPORTfor the year ended 30 June 2005Em
ira P
rope
rty
Fund
Ann
ual R
epor
t 20
05
14PAGE
MANAGER’S REPORT (continued)
3.5 Lease expiry profile
As can be seen in the table below, approximately 64% of the fund’s leases expire in the next three years. This is
representative of the fact that leases in the office and industrial portfolios are typically between three and five years.
FY06 FY07 FY08 FY09 FY10 FY11
Offices 11,8% 13,2% 7,4% 2,4% 1,0% 1,8%
Retail 3,9% 4,9% 3,0% 6,8% 3,8% 4,5%
Industrial 8,3% 6,3% 5,1% 3,4% 3,0% 3,6%
Total 24,0% 24,4% 15,5% 12,6% 7,8% 9,9%
3.6 Acquisitions
Properties worth close to R200 million were either transferred or were in the process of being transferred during the
financial year. The new investments will contribute to enhancing the quality and performance of the fund in the future
and will also further diversify the geographical spread of the portfolio.
The two properties that were actually transferred are both located in Durban, increasing the KwaZulu-Natal exposure
from 10% in 2004 to 11%. These acquisitions were funded through a combination of debt and the placing of PIs.
Property details are as follows:
Purchase Forward
New GLA price yield Effective
purchases Sector Location (m2) (Rm) (%) date Tenants
Nimas House Office Westway Office National Independent
Park, Westville 1 372 9,8 12,6 11 Oct 2004 Medical Aid Society
Derby Downs Office Derby Downs Office
Park, Westville 2 205 12,5 12,7 28 Feb 2005 Lafarge, Ivory Systems
Total 3 577 22,3 12,7
In addition to the above, the property known as 100 Armstrong in La Lucia Ridge, Durban was transferred during July
2005 at a purchase price of R25 million yielding 11,1%.
Purchase Forward
New GLA price yield Effective
purchases Sector Location (m2) (Rm) (%) date Tenants
100 Office Armstrong Drive, Imperial Bank, SAP,
Armstrong La Lucia 2 880 25,0 11,1 11 July 2005 RMB Asset Management
Total 2 880 25,0 11,1
Currently, we are awaiting transfer of the following properties into Emira:
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15PAGE
Purchase Forward
price yield
Property Sector Location (Rm) (%) Tenants
Gift Acres Retail Lynnwood Ridge, Woolworths, Mr Price Group,
Pretoria East 78,68 11,8 First National Bank
122 Pybus Road Office Sandton CBD, 15,75 11,1
Lincolnwood Office Park Office Woodmead, Sandton 55,75 12,2 SA Rail Commuter Corporation
Total 150,18 11,9
Note that although Emira is still awaiting the transfer of Gift Acres, the development consideration has been paid
according to the agreement with RMB Properties and income from the centre has been accruing to the fund since
opening in May 2005.
3.7 Disposals
In accordance with the strategy of the fund, certain properties that are underperforming or pose excessive risk to the
fund are earmarked and disposed of. In addition, should an offer be received reflecting a value substantially in excess
of the book value and management believes that this money can be reinvested at a more attractive yield, the fund will
consider disposing of an asset.
With this strategy in mind, Emira disposed of Electron Place in Isando – a mixed office/industrial building with limited,
specialised use – and Waterford Place – an office building in Century City at a yield of below 9% and in excess of
replacement cost – during the period.
Valuation at Sale
GLA June 2004 price Yield Effective
Buildings sold Sector Location (m2) (Rm) (Rm) (%) date
Waterford Place Office Century City 3 800 24,1 35,0 8,9 7 Jun 2005
Electron Place Industrial Isando 9 221 5,2 6,9 2,6 2 Dec 2004
Total 13 021 29,3 41,9
“Properties worth close to R200 million were either transferred or were in the process of being transferred during the financial year.”
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MANAGER’S REPORT (continued)
Motorola was transferred out of Emira subsequent to year-end.
Valuation at Sale
GLA June 2004 price Yield Effective
Buildings sold Sector Location (m2) (Rm) (Rm) (%) date
Motorola Office Midrand 719 2,4 3,0 11,1 11 Aug 2005
Total 719 2,4 3,0
Agreements for the disposal of Mafikeng Game and Grinaker Electronics, neither of which meets the fund’s investment
criteria, have also been signed and the fund is waiting for the fulfilment of certain suspensive conditions.
Valuation at
GLA June 2004 Price Yield
Awaiting transfer Sector Location (m2) (Rm) (Rm) (%)
Mafikeng Game Retail Mafikeng 5 218 20,1 20,7 15,9
Grinaker Electronics Office Samrand 3 261 3,8 7,0 1,6
Total 8 479 23,9 27,7
3.8 Valuations
The fund elected to have independent valuations of its entire portfolio at least every three years. To achieve this, the
fund has decided to have approximately one-third of the portfolio valued by independent valuers each year.
Four external companies were selected to undertake the valuations of 26 properties as at 30 June 2005, namely:
Mills Fitchet, Old Mutual Properties, The Property Partnership and Motseng Marriott.
The valuation movements on these 26 properties were as follows:
RMB Properties Independent
valuations valuations
June 2004 June 2005 Difference Difference
(R’000) (R’000) (%) (R’000)
Office 320 751 391 675 22,1 70 924
Retail 204 445 253 000 23,7 48 555
Industrial 111 541 130 960 17,4 19 419
636 737 775 635 21,8 138 898
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17PAGE
Valuations of the remaining 56 properties were undertaken as at 30 June 2005 by qualified valuers employed by
RMB Properties (Pty) Ltd.
RMB Properties RMB Properties
valuations valuations
June 2004 June 2005 Difference Difference
(R’000) (R’000) (%) (R’000)
Office 612 064 719 971 17,6 107 907
Retail 441 473 557 277 26,2 115 804
Industrial 179 465 206 658 15,2 27 193
1 233 002 1 483 906 20,3 250 904
As a result of the firming in capitalisation rates, advantageous renewals in a number of properties and rising rentals in
a number of areas, property values improved in all three sectors since June 2004.
Total portfolio movement
June 2004 June 2005 Difference Difference
(R’000) (R’000) (%) (R’000)
Office 956 891 1 111 646 16,2 154 755
Retail 645 918 810 277 25,4 164 359
Industrial 296 206 337 618 14,0 41 412
General* 2 012 233 (88,4) (1 779)
Portfolio value 1 901 027 2 259 774 18,9 358 747
Adjustment to fair value as per IAS17/IAS40 — (32 669) — (32 669)
As reported 1 901 027 2 227 105 17,2 326 078
* General comprised of capitalised listing costs at the end of June 2004 and were subsequently reallocated to properties. June 2005 amount relates to costs incurred on Gift Acres and Unilever properties.
The office sector improved by 16,2% (R155 million), retail by 25,4% (R164 million) and the industrial properties
improved by 14,0% (R41 million). Overall the fund increased in value by 18,9% or R359 million since June 2004.
4. Net asset value of the fund
The valuation of R2 260 million has given rise to a change in fair value in the income statement totalling R280,8
million. The net asset value of the fund at 30 June 2005 was 624 cents per participatory interest. The fund’s listed price
at the same date was 720 cents per participatory interest, which reflects a 15,4 % premium to net asset value.
“As a result of firming cap rates, advantageous renewals and rising rentals, property values improved in all three sectors.”
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MANAGER’S REPORT (continued)
5. Gearing
5.1 Current debt profile
As at June 2005 Emira had a total debt facility available of R585 million, of which R522 million had been utilised, split
into five tranches.
The breakdown is as follows:
Rate Term Amount % of debt
1 Debt – Floating Prime – 2% N/A 107,4 20,6%
2 Debt – Fixed 9,35% September 2005 100,0 19,2%
3 Debt – Fixed 9,76% November 2006 126,1 24,2%
4 Debt – Fixed 10,21% November 2008 100,0 19,2%
5 Debt – Fixed 11,26% October 2009 88,5 17,0%
TOTAL 9,76%* 522,0 100%
*Weighted average cost of debt assuming prime at 10,5%
Emira has entered into additional interest rate swaps to further extend the maturities of the nearest-dated facilities
2 and 3 above:
Old New New
Term Amount Rate amount New term rate
Sep 2005 100,0 9,35% 100,0 8 Sep 2005 – 10 Sep 2007 9,24%
Nov 2006 126,1 9,76% 63,0 30 Nov 2006 – 30 Nov 2011 10,76%
63,1 30 Nov 2006 – 30 Nov 2011 10,41%
The net effect of these swaps is that Emira’s current debt profile can be illustrated below.
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In summary: the majority (79%) of the fund’s debt had been fixed for periods of between 28-months and in excess of
six years, with the remaining portion (21%) at rates linked to prime. Favourable interest rates on certain of these
tranches give the fund an effective weighted average cost of debt of 9,76%, which is amongst the lowest in the sector.
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19PAGE
5.2 Future debt requirements
After an abnormally long delay in their transfer due
to the signing of a lease at Lincolnwood by the
major tenant, management expects that the
registration of Lincolnwood and Pybus Road into
Emira’s name is imminent. The suspensive conditions
for the transfer have been met and Competition
Commission approval has been received. The total
cost of these two properties is R71,5 million, which
could be funded out of the remaining debt facility of
R63 million, and proceeds from the disposal of
properties mentioned above.
The fund’s debt facility is expected to be raised as a
result of the increased valuations at June 2005.
Using the total assets as at June 2005 of R2,30 billion,
Emira’s potential debt facility could increase to
R690 million from the current R585 million. This
additional facility plus the cash realised from the
sale of the properties mentioned above will be
utilised to fund acquisitions, as well as refurbishments
of and extensions to the existing portfolio.
6. Prospects
Rand Merchant Bank economists believe that the
outlook for the economy for the remainder of 2005
and into 2006 is positive. Real GDP growth is
expected to be 4,1% in 2005, softening slightly to
3,8% in 2006. Inflation as measured by CPIX is
expected to remain within the target of 3% to 6%
set by the Reserve Bank, with the result that prime
interest rates should remain stable.
Against the economic outlook above, market
conditions in the retail and industrial property
sectors are expected to remain buoyant with
vacancies being maintained at current low levels.
There is continued demand for space from retailers,
while healthy economic growth is benefiting the
industrial sector. Vacancies in the office market
should continue their downward trend if the
economy continues to grow at levels in excess of 3%
and the supply of new office space from developers
remains moderate.
In the absence of any major shocks to the South
African economy the listed property sector is
expected to continue to show solid returns over the
next twelve months. Certain commentators believe
that growth from the listed sector could average
between 6% and 7%. We believe that Emira should
deliver market related growth in distributions in the
coming year.
7. Management of the fund
7.1 STREM and sub-contract of asset management
STREM has been approved by the Registrar of
Collective Investment Schemes to manage the
Emira Property Scheme. STREM has entered into an
asset management agreement with RMB Properties
to administer the affairs of the scheme.
STREM will receive an amount equal to 0,5% of the
total market capitalisation of the fund, calculated
monthly on the average daily closing price of the
fund as recorded by the JSE Limited, plus the total
long-term borrowings.
Fees paid for the period amounted to R10,59 million
(2004: R5,24 million).
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MANAGER’S REPORT (continued)
7.2 Changes to the STREM board
● Louisa Forrester resigned as an executive director
of STREM effective August 2004.
● Ron van der Bos resigned as CEO and executive
director of STREM effective July 2004.
● Bryan Jackson resigned as a non-executive director
of STREM effective January 2005.
The board wishes to thank all three for their
contribution to the fund’s success.
● James Templeton was appointed as CEO and
executive director effective July 2004.
7.3 Property management
Property management of the fund has been
outsourced to RMB Properties (Pty) Limited, a
subsidiary company of FirstRand. Property
management and commissions paid for the period
were R22,7 million (2004: R9,76 million).
8. Directorate
Details of the directors are set out on page 23 of this
report. According to the articles of association of
STREM, the executive and non-executive directors
shall retire at the following annual general meeting
of STREM and will be eligible for re-election.
9. Secretary of the fund
The secretary is Claire Middlemiss who was appointed
on 15 September 2003. Her business and postal
addresses, which are also the fund’s registered and
business addresses, are set out on page 58.
10. Auditors
PricewaterhouseCoopers Inc. has been appointed as
the fund’s auditors.
11. Directors of STREM interests in
participatory interests
The directors’ holdings in the participatory interests
of the fund as at 30 June 2005 were as follows:
Beneficial
Direct Indirect
Director 2005 2005
Executive directors:
Warren Schultze 301 000
James Templeton 89 800
Non-executive Directors:
No non-beneficial participatory interests were held
by any of the directors.
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12. PI Holders’ profile and JSE information at 30 June 2005
Participatory Number of % of % of
Non-public interests holders capital holders
Directors
(of Management Company) 89 800 1 0,0 0,2
Directors’ associates 301 000 2 0,1 0,4
TOTALS 390 800 3 0,1 0,6
Participatory Number of % of % of
Non-public interests holders capital holders
Insurance companies 142 636 252 12 49,7 2,2
Investment trusts 4 349 148 66 1,5 12,2
Pension funds 25 824 041 48 9,0 8,9
Unit trusts 83 505 461 31 29,1 5,7
Other 30 123 070 380 10,5 70,4
TOTALS 286 437 972 537 99,9 99,4
286 828 772 540 100 100,0
Range analysis as at 24 June 2005 % of % of
Range Holders holders Number of PI capital
1 – 5 000 194 35,9 435 588 0,1
5 001 – 10 000 63 11,7 480 773 0,2
10 001 – 100 000 169 31,3 5 822 935 2,0
100 001 – 500 000 70 13,0 17 992 768 6,3
500 001 – 1 000 000 17 3,1 11 994 492 4,2
Over 1 000 000 27 5,0 250 102 216 87,2
540 100 286 828 772 100,0
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MANAGER’S REPORT (continued)
The following holders of PI’s hold, directly or
indirectly, at 24 June 2005, in excess of 5% of the
ordinary issued capital
Participatory % of issued
Holder interests capital
Momentum Life Assurers Limited 130 823 444 45,6
List of managers managing more than 5% of the
ordinary issued capital
Number of % of issued
Manager funds capital
RMB Asset Managers 77 62,1
Stanlib 17 12,4
Marriott Asset Management 7 12,3
13. Major interest holder
Momentum is the majority interest holder in Emira
with 45,6% of the participatory interests in issue.
14. Special resolutions
A full list of the special resolutions passed by the
fund during the year will be made available to
participatory interest holders on request.
15. Subsequent events to the balance sheet
date
Subsequent to year-end the building known as 100
Armstrong, which was purchased for R25 million
earlier in the year was transferred to Emira. Moreover,
Motorola has been transferred out of the portfolio,
for which Emira has received a cash lump sum. For
further details refer to the sections on acquisitions
and disposals.
16. Directors’ remuneration
The directors of STREM are remunerated from the
management fee payable by the fund.
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DIRECTORATE DIRECTORATEDirectors of the management company, Strategic Real Estate Managers (Pty) Ltd (STREM)
The full names, ages, qualifications, occupations and profiles of the directors of STREM are as follows:
1. Benedict James van der Ross (57) (Non-executive Chairman)
Qualifications: Dip Law Occupation: Company director
Mr van der Ross was admitted to the Cape Bar as attorney in 1970 and practiced law in his own capacity until 1988. He has served as director of various companies including Executive Director for the Urban Foundation and Independent Development Trust.
He was appointed Commissioner to the First Independent Electoral Commission by the State President on the advice of the Transitional Executive Council and subsequently served as Deputy Chief Executive Officer of the Independent Development Trust.
He currently serves on the boards of FirstRand, Naspers, Momentum Group, and is the chairman of RMB Asset Management.
2. Warren Kirkwood Schultze (45) (Executive director)
Qualifications: BCom, BAcc, CA(SA) Occupation: Chief Executive Officer of RMB
Properties
Prior to joining RMB Properties, Mr Schultze served his articles with Arthur Young and was later appointed as financial director for two property financing and property trading companies and during this time he gained extensive experience in property asset management, property financing and property trading activities.
He was appointed as Chief Operating Officer of RMB Properties in 2000 and Chief Executive Officer in 2004.
3. James William Andrew Templeton (32) (Chief Executive Officer)
Qualifications: BCom (Hons), CFA Occupation: Chief Executive Officer of
Strategic Real Estate Managers (Pty) Ltd
Mr Templeton joined RMB Properties in April 2004 as Business Development Executive. Previously he was employed at Barnard Jacobs Mellet Securities as an Equities Analyst for seven years.
He was the top-ranked analyst in the Real Estate sector according to the Financial Mail in 2002 and 2003 and was appointed CEO of STREM in July 2004.
4. Liliane Barnard (41) (Independent non-executive director)
Qualifications: BCom Occupation: Consultant
Ms Barnard has 17 years experience in the asset management industry. She headed the asset management of Old Mutual Properties (Pty) Ltd and had 11 years experience in managing listed property portfolios for Old Mutual Asset Managers (Pty) Ltd. She now acts as consultant and independent advisor to the listed property industry and its investors.
She is also an independent non-executive director of Redefine Income Fund.
5. Mattys Stefanus Benjamin Neser (49) (Independent non-executive director)
Qualifications: BSc (Building Management), MBA Occupation: Director
Mr Neser has been involved with the Abcon group of companies since 1981 and has acted as Chief Executive Officer for the various companies in the group since the early 1990’s. He is active in the residential and commercial property field as well as in the juice, mushroom, flower and service station industries.
6. Leon Basson (36) (Non-executive director)
Qualifications: BCom (Hons), CTA, CA(SA) Occupation: Chief Financial Officer of
Momentum Retail Insurance
Mr Basson has been with Momentum since January 1995. He served his articles at Price Waterhouse from 1991 to 1993 and subsequently worked for Price Waterhouse until the end of 1994.
7. Bryan Terence Jackson (59) (Non-executive director)
Qualifications: BCom, LLB Occupation: Non-executive director of RMB
Properties
Mr Jackson was the Managing Director of RMB Properties (Pty) Ltd from 1992 and Chief Executive Officer from 2002, and retired in 2004. He has extensive experience in all facets of property development, management and investment. He has been a partner in property development companies and has been involved in excess of 100 retail and commercial property developments.
Mr Jackson resigned from the STREM board effective 3 January 2005.
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GOVERNANCEThe directors of STREM acknowledge the importance of
the principles of good corporate governance and support
the Code of Corporate Practices and Conduct contained in
the King II report. They recognise their responsibility to
conduct the affairs of Emira with integrity, openness and
accountability in accordance with generally accepted
corporate practices.
Although Emira is listed on the JSE Limited (“JSE”) and
therefore subject to the code, it is not a legal entity and is
regulated in terms of the Collective Investments Schemes
Control Act of 2002 (“CISC Act”). Certain requirements of
the code are therefore not directly applicable to the Fund.
However, the Managers have adopted the principles of the
code, being fairness, accountability, responsibility and
transparency.
The Fund has complied with the code to the following extent:
The board of directors
Structure
As at 30 June 2005 the board consisted of six members:
Director
Date
appointed
Date
resigned
No of board
meetings
Meetings
attended
Executive directors
J W A Templeton (CEO)* July 2004 4 4
W K Schultze* September 2003 4 4
Non-executive directors
B J van der Ross (Chairman)* September 2003 4 4
L Barnard September 2003 4 4
L Basson** September 2003 4 3
M S B Neser* September 2003 4 4
B T Jackson September 2003 January 2005 4 1
*Audit committee
** Audit committee chairman
CORPORATE GOVERNANCE
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The capacity of the directors may be categorised as
follows:
Executive directors
Messrs J W A Templeton and W K Schultze are employed
by RMB Properties (Pty) Limited, and remunerated out of
the service charge payable by the Fund to STREM.
Non-executive directors
Mr L Basson represents Momentum Group Limited at
board level, which is a significant participatory interest
holder. Mr B J van der Ross is a director of FirstRand
Limited and Momentum Group Limited.
Independent non-executive directors
Mr M S B Neser and Ms L Barnard are not significant
holders of Emira participatory interests, as defined in the
code.
The roles of Chairman and Chief Executive Officer are
completely separated. The directors have a wide range of
skills, all with property experience in common.
The board schedules to meet at least four times per year.
In addition, seven asset performance committee meetings
were held during the year and were attended by the
executive members of the board.
All directors have unrestricted access to the advice and
services of the fund’s secretary and to the fund’s records,
information, documents and property. Non-executive
directors also have unfettered access to management at
any time.
The board will ensure that it has the expertise,
independence and diversity it needs to function
independently. Independence of the board from the
management team will be maintained by:
● maintaining a non-executive chairperson;
● maintaining a balance of executive and non-executive
directors;
● the remuneration of the non-executive directors being
unrelated to the financial performance of Emira; and
● all directors being entitled to seek independent
professional advice concerning the affairs of Emira at
the fund’s expense.
The board sets the strategic objectives of the fund and
determines the investment and performance criteria as
well as being responsible for the proper management,
control compliance and ethical behaviour of the business
under its direction.
Committees
Audit committee
The audit committee comprises five members of which
the chairman is non-executive. The committee meets at
least three times per year with the fund’s external
auditors and executive management as well as the
executives responsible for finance, the compliance officer
and internal auditors.
The primary objectives of the committee are to provide
the board with additional independent and objective
assurance regarding the efficacy and reliability of the
financial information used by the directors, to assist them
in the discharge of their duties. The audit committee is
required to provide reasonable assurance to the board
that adequate and appropriate financial and operating
controls are in place; that significant business, financial
and other risks have been identified and are being suitably
managed; and that satisfactory standards of governance,
reporting and compliance are in operation. The committee
also monitors proposed changes in accounting policies,
and discusses and advises the board on the accounting
implications of major transactions.
The board is responsible for the group’s system of internal
and operational control. The executive directors will be
charged with the responsibility of ensuring that assets are
protected, systems operate effectively and all valid
transactions are recorded properly. Comprehensive reviews
and testing of the effectiveness of the internal control
systems in operation will be performed by internal
auditors, who report to the audit committee. The internal
audit function will co-ordinate with other internal and
external providers of assurance to ensure proper coverage
of financial, operational and compliance controls.
The committee has the co-operation of all directors,
management and staff and is satisfied that controls and
systems within the fund have been adhered to and, where
necessary, improved during the period under review.
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GOVERNANCERemuneration committee
Due to the minimal staff employed by the manager, it is
not deemed necessary for the board to establish a
remuneration committee.
Investment committee
An investment committee comprises two executive
directors, and four senior staff employed by RMB Properties
(Pty) Limited. with the appropriate skills and experience.
The committee meets on an ad-hoc basis during the
period under review to assess acquisitions and disposals,
and makes recommendations to the board.
Managing and financial control
During the year independent internal auditors performed
a management and financial control review. No significant
weaknesses were identified and the overall conclusion was
that the:
● directors had maintained an adequate system of
internal controls and accounting records;
● the fund’s assets are safeguarded and appropriately
insured;
● the fund should remain a going concern for the
foreseeable future; and
● management understood the fund’s policy and
employed the appropriate strategy.
Risk management
The STREM management philosophy on risk recognises
that managing risk is an integral part of generating
sustainable unit holder value and enhancing stakeholder
interest. It also recognises that an appropriate balance
should be struck between entrepreneurial endeavour and
sound business practice.
The management of STREM operate a risk management
framework, which is based on COSO’s Enterprise Risk
Management Framework. The underlying premise of
enterprise risk management is that every entity exists to
provide value for its stakeholders. All entities face
uncertainty, and the challenge for management is to
determine how much uncertainty to accept as it strives to
grow stakeholder value.
Value is maximised when management sets strategy and
objectives to strike an optimal balance between growth
and return goals and related risks, and efficiently and
effectively deploys resources in pursuit of the entity’s
objectives.
Enterprise Risk Management in STREM encompasses:
● Aligning risk appetite and strategy which considers the
risk appetite in evaluating strategic alternatives, setting
related objectives, and developing mechanisms to
manage related risks.
● Enhancing risk response decisions by selecting
alternative risk response, which includes risk avoidance,
reduction, sharing or acceptance.
● Reducing operational surprises and losses by gaining
enhanced capabilities to identify potential events and
establish responses.
● Identifying and managing multiple cross-enterprise
risks.
● Seizing opportunities by identifying a full range of
potential events.
● Improving deployment of capital by obtaining robust
risk information to allow management to effectively
assess overall capital needs and enhance capital
allocation.
These capabilities inherent in enterprise risk management
help management achieve the fund’s performance and
profitability targets and prevent loss of resources.
Enterprise risk management helps to ensure effective
reporting and compliance with laws and regulations, and
helps avoid damage to the fund’s reputation and
associated consequences.
Directors’ dealings
The board has adopted policies prohibiting dealings by
directors and certain other managers in periods
immediately preceding the announcement of its interim
and year-end financial results and at any other time
deemed necessary by the board or as required in terms of
the JSE regulations.
CORPORATE GOVERNANCE (continued)
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STATEMENTS
27PAGE
for the year ended 30 June 2005
ANNUAL FINANCIAL STATEMENTS
CONTENTS
Statement of directors’ responsibilities 28
Approval of annual financial statements 28
Report of the independent auditors 29
Report of the trustee 29
Income statement 30
Balance sheet 31
Cash flow statements 32
Statement of changes in equity 33
Notes to the annual financial statements 34
Properties listing 49
Notice to participatory interest holders 54
Administration 58
Form of proxy 59
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FINANCIAL STATEMENT OF DIRECTORS’ RESPONSIBILITIESEm
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28PAGE
The directors of STREM are responsible for the preparation, integrity, and fair presentation of the financial statements of the
fund. The financial statements presented on pages 30 to 54 have been prepared in accordance with Statements of Generally
Accepted Accounting Practice (“GAAP”) in South Africa, and include amounts based on judgments and estimates made by
management.
The directors consider that in preparing the financial statements they have used the most appropriate accounting policies,
consistently applied and supported by reasonable and prudent judgments and estimates, and that all Statements of GAAP that
they consider to be applicable have been followed.
The directors are satisfied that the information contained in the financial statements fairly presents the results of operations
for the period and the financial position of the fund at year-end. The directors also prepared the other information included in
the report and are responsible for both its accuracy and its consistency with the financial statements.
The directors have responsibility for ensuring that accounting records are kept. The accounting records should disclose with
reasonable accuracy the financial position of the fund to enable the directors to ensure that the financial statements comply
with the relevant legislation.
The fund operated in a well-established control environment, which is well documented and regularly reviewed. This
incorporates risk management and internal control procedures, which are designed to provide reasonable, but not absolute,
assurance that assets are safeguarded and the risks facing the business, are being controlled.
The going-concern basis has been adopted in preparing the financial statements. The directors have no reason to believe that
the fund will not be a going concern in the foreseeable future, based on forecasts and available cash resources. These financial
statements support the viability of the fund.
The fund’s external auditors, PricewaterhouseCoopers Incorporated, audited the financial statements, and their report is
presented on page 29.
B J van der Ross J W A Templeton
Chairman Chief Executive Officer
The annual financial statements of the fund, incorporating statutorily required information in respect of the fund, for the year
ended 30 June 2005 set out on pages 30 to 54 were approved by the board of directors of STREM on 22 August 2005 and are
signed on its behalf by:
B J van der Ross J W A Templeton
Chairman Chief Executive Officer
APPROVAL OF ANNUAL FINANCIAL STATEMENTS
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STATEMENTS
29PAGE
TO THE PARTICIPATORY INTEREST HOLDERS OF EMIRA PROPERTY FUND
We have audited the financial statements set out on pages 30 to 54 for the year ended 30 June 2005. These financial
statements are the responsibility of STREM’s directors. Our responsibility is to express an opinion on these financial statements
based on our audit.
Scope
We conducted our audit in accordance with Statements of South African Auditing Standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement.
An audit includes:
● examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements;
● assessing the accounting principles used and significant estimates made by management; and
● evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Audit opinion
In our opinion, the financial statements fairly present, in all material respects, the financial position of Emira Property Fund and
of its operations and cash flows for the year ended 30 June 2005 in accordance with South African Statements of Generally
Accepted Accounting Practice and in the manner required by the Collective Investment Schemes Control Act, No. 45 of 2002.
PricewaterhouseCoopers Inc.
Registered Accountants and Auditors Johannesburg
Chartered Accountants (SA) 22 August 2005
In terms of Section 70(I)(f) of the Collective Investment Schemes Control Act, No. 45 of 2002
TO THE PARTICIPATORY INTEREST HOLDERS OF THE EMIRA PROPERTY FUND
During the period as set out above during which the Collective Investment Schemes Control Act, No. 45 of 2002 has been in
effect the Trust has been administered in accordance with
i. The limitations imposed on the investment and borrowing powers of the Manager by the Act; and
ii. The provisions of the Act and the deed.
ABSA Bank Ltd Johannesburg
Trustee 19 August 2005
for the year ended 30 June 2005
REPORT OF THE TRUSTEE
REPORT OF THE INDEPENDENT AUDITORS
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FINANCIALEm
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INCOME STATEMENTfor the year ended 30 June 2005
2005 2004
Notes R’000 R’000
REVENUE 2 407 088 179 669
Property expenses (121 309) (60 843)
Administration and management expenses (22 740) (10 940)
Depreciation (6 464) (3 004)
Net income from property rental operations 3 256 575 104 882
Fair value adjustments 248 141 86 906
Change in fair value of investment properties 280 810 86 906
Change in fair value of investment properties as a
result of future rental escalations (32 669) —
Profit on disposal of investment property 11 179 —
Maintenance fund expenses (1 827) (1 330)
Listing costs (104) (345)
Operating profit 513 964 190 113
Financing costs 4 (45 662) (20 669)
Interest received 4 3 554 8 046
Net profit for the period 471 856 177 490
Earnings per participatory interest (cents) 165,1 65,22
Headline earnings per participatory interest (cents) 5 74,37 33,28
Distribution per participatory interest (cents) 5 67,55 34,01
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STATEMENTS
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BALANCE SHEETas at 30 June 2005
2005 2004
Notes R’000 R’000
ASSETS
Non-current assets
Investment properties 6 2 227 105 1 901 027
Allowance for future rental escalations 32 669 —
2 259 774 1 901 027
Current assets
Trade and other receivables 7 31 757 4 269
Maintenance fund 8 — 24 104
Cash 9 9 252 4 027
41 009 32 400
Total assets 2 300 783 1 933 427
EQUITY AND LIABILITIES
Participatory interests 10 1 425 094 1 416 344
Reserves 11 363 512 85 403
Equity capital and reserves 1 788 606 1 501 747
Non-current liabilities
Borrowings 12 364 141 310 978
Current liabilities
Short-term portion of borrowings 12 1 867 1 867
Trade and other payables 13 34 257 39 121
Derivative liabilities 14 11 757
Distributions payable to participatory interest holders 100 155 79 714
148 036 120 702
Total equity and liabilities 2 300 783 1 933 427
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CASH FLOW STATEMENTfor the year ended 30 June 2005
2005 2004
Notes R’000 R’000
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations 15.1 196 087 141 063
Interest received 3 554 8 046
Interest paid (33 905) (20 669)
Distributions to participatory interest holders 15.2 (173 306) (12 373)
(7 570) 116 067
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of investment properties (104 693) (1 779 893)
Acquisition of furniture and fittings (8 984) (37 232)
Proceeds on sale of investment properties 40 455 —
Decrease/(increase) in maintenance fund 24 104 (24 104)
(49 118) (1 841 229)
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of participatory interests 8 750 1 426 468
Cash utilised for listing expenses — (10 124)
Increase in borrowings 53 163 310 978
Increase in short-term portion of borrowings — 1 867
61 913 1 729 189
Net increase in cash and cash equivalents 5 225 4 027
Cash at the beginning of the period 4 027 —
Cash at the end of the period 9 252 4 027
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STATEMENTS
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STATEMENT OF CHANGES IN EQUITYfor the year ended 30 June 2005
Partici- Non-
patory distributable Retained
interest reserve earnings Total
R’000 R’000 R’000 R’000
2004
Issue of participatory interest 1 426 468 — — 1 426 468
Listing costs (10 124) — — (10 124)
Net profit for the period — — 177 490 177 490
Distribution to PI holders — — (92 087) (92 087)
Maintenance fund expenses — (1 330) 1 330 —
Fair value adjustment — 86 906 (86 906) —
Balance at 30 June 2004 1 416 344 85 576 (173) 1 501 747
2005
Balance at 1 July 2004 1 416 344 85 576 (173) 1 501 747
Issue of participatory interest 8 750 — — 8 750
Net profit for the year — — 471 856 471 856
Distribution to PI holders — — (193 747) (193 747)
Transfer of allowance for future
rental escalations to non-
distributable reserve — 32 669 (32 669) —
Fair value adjustments — 248 141 (248 141) —
Profit on sale of investment property — 11 179 (11 179) —
Unrealised loss on interest rate swaps — (11 757) 11 757 —
Maintenance fund expenses — (1 827) 1 827 —
Balance at 30 June 2005 1 425 094 363 981 (469) 1 788 606
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NOTES TO THE FINANCIAL STATEMENTSfor the year ended 30 June 2005
1. ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these financial statements are set out below:
Basis of presentation
The preparation of financial statements in conformity with Statements of Generally Accepted Accounting Practice
requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period based on management’s best knowledge of current events and actions.
Actual results may ultimately differ from these estimates. The financial statements have been prepared in accordance
with South African Statements of Generally Accepted Accounting Practice using the historical cost convention as modified
by the revaluation of investment property.
1.1 Investment properties
1.1.1 Freehold properties
Investment properties held for the purpose of earning rental income and for capital appreciation.
Investment properties are treated as long-term investments and are initially recognised at cost and subsequently carried
at fair value. The fair value of an asset is the amount for which that asset could be exchanged between knowledgeable
willing parties in an arm’s length transaction. Properties are valued annually by accredited valuers at fair value.
Independent valuations are obtained on a rotational basis so as to ensure that external independent valuation
professionals have valued each property every three years.
Any gains or losses arising from changes in fair value are included in the net income or loss for the year. The net gains or
losses are transferred to a non-distributable reserve and are not available for distribution, as set out in the trust deed of
the fund.
Gains or losses arising from the disposal of investment properties, being the difference between the net disposal proceeds
and the carrying value, are brought to account in the determination of the net income/loss for the year. The net gains or
losses are transferred to a capital reserve and are not available for distribution in accordance with the fund’s trust deed.
1.1.2 Leasehold properties
Leasehold properties comprise buildings erected on land secured by means of long-term land leases. These leases are
classified as operating leases and have varying expiry dates from 15 to 45 years.
1.2 Furniture and fittings
Furniture and fittings are stated at historical cost less accumulated depreciation. Cost comprises the purchase price as
well as all costs incurred in order to bring the asset to working condition.
Depreciation is calculated on the straight-line method.
Repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Furniture and fittings are linked to specific properties. Consequently, any gains or losses on disposal are not separately
accounted for.
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1. ACCOUNTING POLICIES (continued)
1.3 Allowance for future rental escalations
Allowance for future rental escalations represents the difference between the actual cash rentals received to date and the
rental income recognised on a straight-line basis over the period of the lease contracts.
1.4 Trade receivables
Trade receivables are carried at original invoice amounts less provision made for impairment of these receivables. A
provision for impairment of trade receivables is established when there is objective evidence that the fund will not be
able to collect all amounts due according to the original term of the receivables. The amount of the provision is the
difference between the carrying amount and the recoverable amount, being the present value of the expected cash flows,
discounted at the market rate of interest for similar borrowers.
1.5 Maintenance fund
The maintenance fund is accounted for at cost and comprises a diversified portfolio of money market instruments with
maturities of less than one year, for the replacement of retired fixed assets and for refurbishments required from time to
time. The expenses financed from the fund are transferred to a non-distributable reserve and do not form part of the
distributions to participatory interest holders.
1.6 Cash and cash equivalents
Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the cash flow statement, cash and
cash equivalents comprise cash on hand, deposits held at call with banks, and bank overdrafts. Bank overdrafts are
included within borrowings in current liabilities on the balance sheet.
1.7 Borrowings
Borrowings are recognised initially at the fair value of proceeds received, net of transaction costs incurred, when the fund
becomes party to the contractual provisions. Borrowings are subsequently stated at amortised cost using the effective
interest rate method; any difference between proceeds (net of amortised costs) and the redemption value is recognised
in the income statement over the period of the borrowings as interest.
Financial liabilities are removed from the balance sheet when the obligation specified in the contract is discharged,
cancelled, or expires.
1.8 Derivative instruments
The fund uses derivative financial instruments to hedge its exposure to interest rate risks arising from financing and
investment activities. The fund does not hold or issue derivative financial instruments for trading purposes. However,
derivatives that do not qualify for hedge accounting are accounted for as trading instruments.
Derivative financial instruments are recognised initially at cost. Subsequent to initial recognition, derivative financial
instruments are stated at fair value. The gain or loss on re-measurement to fair value is recognised immediately to profit
or loss. The fair value of interest rate swaps is the estimated amount that the group would receive or pay to terminate
the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the
swap counterparties.
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1. ACCOUNTING POLICIES (continued)
1.9 Trade payables
Trade payables are carried at the fair value of the consideration to be paid in future for goods or services that have been
received or supplied and invoiced or formally agreed with the supplier.
1.10 Revenue and expense recognition
1.10.1 Revenue
Comprises rental income and operating cost recoveries from tenants, but excludes value-added tax. Rental income is
accounted for on a straight-line basis over the period of the lease contracts.
1.10.2 Interest and other investment income
Interest income is recognised on a time proportion basis, taking into account the principal amount outstanding to the
effective rate over the period to maturity when it is determined that such income will accrue to the fund.
1.10.3 Operating leases
Leases under which the lessor effectively retains the risks and benefits of ownership are classified as operating leases.
Obligations incurred under operating leases are charged to the income statement in equal instalments over the period
of the lease.
1.10.4 Management fees
Management fees payable to STREM are equal to 0,5% of the total market capitalisation of the fund, calculated monthly
on the average daily closing price of the fund as recorded by the JSE Limited, plus the total long-term borrowings.
1.10.5 Property management fees
Property management fees payable to RMB Properties are calculated based on the rental collections using the market-
related rates applicable to the type and occupancy of buildings.
1.11 Distributions to participatory interest holders
Distributions to participatory interest holders are recognised in the period in which income is earned. The accrued income
arising as a result of the difference between actual cash rental received and the amortised amount on a straight-line basis
over the periods of the lease contracts is not distributable until realised.
1.12 Segment reporting
Business segments provide services that are subject to risks and returns that are different from those of other business
segments. Geographical segments provide services within a particular economic environment that is subject to risks and
returns that are different from those components operating in other economic environments.
NOTES TO THE FINANCIAL STATEMENTS (continued)for the year ended 30 June 2005
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1. ACCOUNTING POLICIES (continued)
1.13 Financial risk management
Financial risk factors
The fund’s activities expose it to a variety of financial risks, including the effects of changes in the debt and equity market
prices and interest rates. The fund’s overall risk management programme focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the financial performance of the fund.
Interest rate risk management
The fund’s policy is to maintain a significant portion of borrowings in fixed rate instruments. At year-end, 79% of total
borrowing facilities were at fixed rates.
Credit risk management
The fund has no significant concentration of credit risk due to a large number of widespread tenants.
The fund has policies in place to ensure that lease agreements concluded are with tenants with an appropriate credit
history. The fund has policies that limit the amount of credit exposure to any one financial institution, and cash
transactions are limited to high credit quality financial institutions. The debts are monitored on a continuous basis in
order to maintain a low default rate on trade receivables.
Liquidity risk management
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of
funding through an adequate amount of secured credit facilities and the ability to close out market positions. Due to the
dynamic nature of the fund, management aims at maintaining flexibility in funding by keeping secured credit lines
available.
1.14 Taxation
No taxation is accounted for in the fund as all distributable income is distributed to participatory interest holders and
taxable in their hands. As a result no deferred taxation has been raised.
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2005 2004
R’000 R’000
2. REVENUE
Revenue from:
Operating lease rental income on investment properties 260 356 128 820
Operating lease rental income on leasehold properties 13 686 4 484
Allowance for lease rental income (accrued on straight-line basis) 32 669 —
Recoveries of operating costs from tenants 100 377 46 365
407 088 179 669
3. NET INCOME FROM PROPERTY RENTAL OPERATIONS
Net income from property rental operations is arrived at after taking
into account the following items:
Expenses
Auditors’ remuneration
Audit fee 439 453
Expenses 16 28
Depreciation of fixed assets
Furniture and fittings 6 464 3 004
Management fee
Asset management 10 590 5 240
Property management 12 150 5 699
Operating lease payments – leasehold properties 1 603 823
4. INTEREST
Financing costs
Interest paid on long-terms loans (33 562) (20 435)
Unrealised loss on interest rate hedge (11 757) —
Amortised borrowing costs (296) (173)
Interest paid other (47) (61)
Total financing costs (45 662) (20 669)
Interest received
Interest received on cash balances 1 987 7 325
Interest received on maintenance fund investment 1 567 721
Total interest received 3 554 8 046
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2005 2004
R’000 R’000
5. EARNINGS PER PARTICIPATORY INTEREST
Reconciliation between earnings and headline earnings:
Net profit for the year 471 856 177 490
Adjusted for:
Profit on sale of investment property (11 179)
Change in fair value of investment properties (280 810) (86 906)
Change in fair value of investment properties as a result of future
rental escalations 32 669 —
Headline earnings 212 536 90 584
Headline earnings per participatory interest 74,37 33,28
The calculation of headline earnings per participatory interest is based
on net profit for the year of R471,8 million (2004: R177,5 million), adjusted
for the profit on disposal and change in fair value of investment properties
divided by the weighted average number of participatory interests in issue
during the year of 285 805 380 (2004: 272 133 684).
Reconciliation of headline earnings to distribution per
participatory interest:
Headline earnings 212 536 90 584
Adjusted for:
Allowance for future rental escalations (32 669) —
Unrealised loss on interest swaps 11 757 —
Maintenance fund expenses 1 827 1 330
Amortised borrowing costs 296 173
Distribution payable to participatory interest holders 193 747 92 087
Distribution per participatory interest 67,55 34,01
The calculation of distribution per participatory interest is based on
headline earnings adjusted for non-distributable items, divided by the
number of participatory interests in issue at the end of the period of
286 828 772 (2004: 285 293 684).
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FINANCIALfor the year ended 30 June 2005 NOTES TO THE FINANCIAL STATEMENTS (continued)Em