INTEGRATED ANNUAL REPORT

Transcription

1 INTEGRATED ANNUAL REPORT 2017

2 ABOUT OUR REPORT FAIRVEST PROPERTY HOLDINGS LIMITED and its subsidiaries 1 JULY JUNE 2017 INTEGRATED AND FINANCIAL REPORTING BOUNDARY FORWARD LOOKING STATEMENTS Certain statements in this report may constitute forwardlooking statements which represent our judgements and future expectations which by their nature, involve risk and uncertainty as they relate to future events and circumstances that may be beyond our control and which could cause actual results to differ materially from our expectations. The directors therefore advise readers to use caution regarding interpreting any forward-looking statements in this report. To view our historic integrated annual reports please visit our website at SCOPE AND BOUNDARY The scope of the 2017 integrated report incorporates the performance and operations relating to Fairvest and its subsidiaries. The information contained in this report has been selected based our external operating context, stakeholder engagements and internally identified risks and opportunities. It provides a broad overview of the present and future direction and prospects that are most important to Fairvest s value creation. There has been no restatement of information provided in earlier reports. FRAMEWORKS Read more about our investments in subsidiaries in the consolidated annual financial statements on page 48. The reporting principles applied in our integrated and financial report were guided by IFRS, the King Report on Corporate Governance for South Africa 2009 (King III), and the International Integrated Reporting Council s (IIRC) International <IR> Framework. It also conforms to the statutory and reporting requirements of the South African Companies Act, 71 of 2008 and the JSE Listings Requirements. ASSURANCE AND BOARD RESPONSIBILITY STATEMENT The Fairvest board and its sub-committees have reviewed the report and have satisfied themselves of the materiality, accuracy and balance of disclosures in this report. No external assurance was sought for aspects of our reporting other than from our independent auditors, BDO South Africa Incorporated, for our annual financial statements and related financial information. Jacques du Toit Chairman The board acknowledges its responsibility to ensure the integrity of the integrated report. The directors confirm that they have collectively assessed the content of the integrated annual report and believe it addresses the material issues and is a fair representation of the integrated performance and strategy of the company. We, as the board, therefore approve the 2017 integrated annual report for publication. Darren Wilder Chief executive officer

3 CONTENTS ABOUT US 4 WHO WE ARE 6 HOW WE ADD VALUE 10 OUR TIMELINE 12 OUR BUSINESS MODEL 14 OUR PORTFOLIO OVERVIEW 16 FEATURED PROPERTIES 18 OUR STRATEGIC FOCUS AREAS 20 OUR CAPITALS BUSINESS REVIEW 24 CHAIRMAN S REPORT 26 CHIEF EXECUTIVE OFFICER S REPORT 28 CHIEF FINANCIAL OFFICER S REVIEW ACCOUNTABILITY RISK MANAGEMENT 36 STAKEHOLDER ENGAGEMENT 38 CORPORATE STRUCTURE 39 CORPORATE GOVERNANCE REPORT 40 BOARD OF DIRECTORS 46 CONSOLIDATED ANNUAL 48 FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 102 The following icons are applied throughout the report to improve usability and show the integration between the relevant elements of the report FINANCIAL CAPITAL INTELLECTUAL CAPITAL MANUFACTURED CAPITAL HUMAN CAPITAL SOCIAL AND RELATIONSHIP CAPITAL NATURAL CAPITAL WEBSITE PAGE REFERENCES 1

4 ABOUT US Who we are 4 How we add value 6 Our timeline 10 Our business model 12 Our portfolio overview 14 Featured properties 16 Our strategic focus areas 18 Our capitals 20

5 ABOUT US

6 WHO WE ARE Fairvest Property Holdings Limited ( Fairvest ) is a South African Real Estate Investment Trust ( REIT ) with a unique focus on retail assets weighted toward nonmetropolitan and rural shopping centres, as well as convenience and community shopping centres servicing the lower LSM market, in high-growth nodes, close to commuter networks. Our portfolio comprises of 41 properties in South Africa, with a total gross lettable area of m² valued at R2.204 billion. VISION We strive to be a dynamic REIT listed on the JSE, investing in quality retail assets with sustainable income streams and thereby maximising stakeholder value. We are committed to enhancing our built environment by collaborating with the communities we operate in and we strive to be the landlord of choice, treating our tenants with respect and understanding. We seek out mutuallybeneficial, strategic partnerships to gain critical mass and reduce operating costs by sharing excellent resources and the latest technology. We also aim to create a work environment that is conducive to innovative thinking, efficiency and growth. MISSION We have an experienced and driven team, who brings fresh thinking to our deal making, always geared to maximising profits and enhancing our built environment and in so doing, generating superior sustainable returns for our stakeholders. RELATIONSHIPS We build relationships by being honest in our dealings, respectful in our engagements and collaborative in our approach. 4

7 ABOUT US WE STRIVE FOR EXCELLENCE THROUGH LIVING OUR VALUES SOCIAL CONTRIBUTION Wherever we are, we enhance our built environment and provide tangible benefits to the communities in which we operate. KNOWLEDGE Know your game is our mantra researching and understanding our market and clients enables us to deliver a quality service. INNOVATION We have a creative, solutionsorientated, proactive approach in all our dealings. PROFITABILITY We strive to maximise profits by being operationally efficient and financially disciplined. TEAM DRIVEN Our well-qualified team is passionate, committed to service excellence with a strong focus on honesty, accountability and responsibility. 5

8 HOW WE ADD VALUE TOP PERFORMING SA REIT FOR THE 12 MONTHS ENDING 30 JUNE % total annual return ABOVE SECTOR AVERAGE GROWTH in net property income 9.3% HIGH ESCALATIONS ON RENEWALS 7.5% weighted average positive reversion on renewals MAJORITY OF HIGH-GRADE, NATIONAL TENANTS 75.3% A-grade tenants CONSERVATIVE GEARING AND HIGH FIXED DEBT COMPONENT 22.4% LTV of which 87.1% is fixed QUALITY ASSETS IN HIGH GROWTH NODES 9.9% historic yield 6

9 ABOUT US CONSISTENT GROWTH IN DISTRIBUTION 10.04% exceeding guidance WEIGHTED AVERAGE LEASE EXPIRY ( WALE ) IN EXCESS OF THREE YEARS 3.2 YEARS UNIQUE FOCUS ON MORE RESILIENT, LOWER LSM CONSUMER MARKET 2.4% arrears as a percentage of revenue ENERGY CONSCIOUS THREE active solar energy sites VACANCIES CONTAINED 4.7% of GLA CONSISTENT HIGH TENANT RETENTION 72.8% of tenants up for renewal retained 7

10 HOW WE ADD VALUE CONTINUED PROVEN TRACK RECORD GROWTH INDICATORS m 2 R2.20bn R1.72bn R million R1.54bn GLA m Valuation Net asset value Market capitalisation GLA (rhs) IMPROVED ASSET QUALITY (R/m 2 ) R11 345/m % VACANCIES AND ARREARS (%) 8% m 2 6% 4% 2% 4.7% 2.4% % Average value per m 2 Average size Vacancies Arrears 8

11 DISTRIBUTION HISTORY (cents per share) ABOUT US GROWTH IN DISTRIBUTABLE INCOME IN EXCESS OF 10% for four years in a row DISTRIBUTION GROWTH OF 9% 10% expected for % % % % Interim Final Total 9

12 OUR TIMELINE Property portfolio worth R1.362 billion 2015 Acquired Richmond, Cosmos and Jan Niemand Property portfolio worth R1.109 billion 2014 Acquired Vukile portfolio Acquired Isolenu and SA Corporate portfolios, Sebokeng Plaza and Nyanga Junction Property portfolio worth R775 million 2013 Property portfolio worth R104 million

13 Property portfolio worth R2.204 billion 2017 ABOUT US Acquired Mqanduli Boxer, Tabankulu Boxer and Macassar Shoprite. Acquired Middestad Centre, Sibilo, Mega Park, Parow Valley Spar and Elliotdale Boxer Property portfolio worth R1.925 billion 2016 Successfully implemented MDA as our new integrated property management and information system. Successfully implemented solar energy initiative at The Ridge, Kim Park and Sibilo. Successfully completed the redevelopment of Parow Valley Spar and commenced the expansion of Macassar Shoprite through our strategic partnerships. Parow Valley Spar 3 479m² 11

14 OUR BUSINESS MODEL FINANCIAL CAPITAL We use a combination of debt and capital to fund acquisitions and growth. HUMAN CAPITAL Our employees drive the performance for our stakeholders. INTELLECTUAL CAPITAL Our corporate culture ensures a hands-on strategic approach to managing our unique portfolio. SOCIAL AND RELATIONSHIP CAPITAL We engage in strategic partnerships to grow our asset base and engage with communities in which our properties are situated. MANUFACTURED CAPITAL We acquire yield accretive properties, upgrade existing properties with the aim to unlock rental growth opportunities, convert unlettable space and attract quality tenants. VALUE IN PROCESS OF VALUE CREATION OUR PORTFOLIO FOCUS - Retail Properties - Lower LSM Market - Non-Metropolitan and Rural Areas - Shopping Centres and Convenience Stores - High-Growth Nodes and Commuter Areas PORTFOLIO MANAGEMENT We invest in quality retail assets with sustainable income streams and oversee the management of this portfolio to maximise value for each of our key stakeholders. NATURAL CAPITAL We use natural resources such as solar energy and recycled rain water to reduce our environmental footprint and cost of occupancy. 12

15 OUR PRIMARY OUTPUTS A quality portfolio of 41 retail-focused properties with m 2 of lettable area and valued at R2 204 billion. ABOUT US OUTCOME OF WEALTH CREATION Rental income Recoveries INCOME Investment income Property expenses Corporate expenses EXPENDITURE ASSET MANAGEMENT - Acquire new properties to increase the value of our portfolio of retail focused properties. - Develop new properties and refurbish existing ones to improve the quality of our portfolio. - Lease premises to tenants that service the lower LSM market. NEW STAR ASSET MANAGEMENT - Sell properties to create capital for new investments that increase the value of our portfolio. PROPERTY MANAGEMENT Manage the day-to-day operations and maintenance of each of the properties. VALUE OUT Finance costs Distribution BENEFICIARIES OF WEALTH CREATION Employees Funders Government Suppliers Shareholders DISTRIBUTION JHI Properties Broll Property Group Axis Property Fund Moolman Group Mainstream Group 13

16 OUR PORTFOLIO OVERVIEW GAUTENG Revenue R44.8 million Value R296.2 million GLA m² LIMPOPO Revenue R20.1 million Value R129.7 million GLA m² NORTHERN CAPE Revenue R37.4 million Value R197.4 million GLA m² MPUMALANGA Revenue R11.6 million Value R61.6 million GLA 4 690m² KWAZULU-NATAL Revenue R70.7 million Value R597.3 million GLA m² EASTERN CAPE Revenue R21.2 million Value R142.4 million GLA m² WESTERN CAPE Revenue R66.9 million Value R472.7 million GLA m² FREE STATE Revenue R47.7 million Value R307.1 million GLA m² 14

17 ABOUT US Number of properties Valuation R' million Average value per property R' million Gross lettable area ("GLA") m² Average value per GLA R/m² Retail % Office % Vacancy m² Vacancy as percentage of GLA % Arrears (% of revenue) % Weighted average rental escalation % Retail Office % % Weighted average rental R/m² Retail R/m² Office R/m² Weighted average lease term months TENANT PROFILE* (%) 75 A tenants B tenants C tenants SECTORAL SPLIT* (%) Retail Office * by GLA KwaZulu-Natal Northern Cape REVENUE SPREAD (%) VALUATION SPREAD (%) GLA SPREAD (%) Western Cape Free State Gauteng Eastern Cape Limpopo Mpumalanga 15

18 FEATURED PROPERTIES TOKAI JUNCTION WESTVILLE JUNCTION RETAIL Location: Tokai, Western Cape GLA: m 2 RETAIL Location: Westville, KwaZulu-Natal GLA: m 2 Property valuation: R Property valuation: R Occupancy: 100% Occupancy: 95.1% Major tenants: Pick n Pay, Toys R Us, Absa Bank Major tenants: Pick n Pay, Waltons, Total Garage MALA PLAZA RETAIL Location: Malamulele, Limpopo GLA: m 2 Property valuation: R Occupancy: 100% Major tenants: Pick n Pay, PEP, First National Bank 16

19 ABOUT US SEBOKENG PLAZA MEGA PARK RETAIL Location: Sebokeng, Gauteng GLA: m 2 RETAIL Location: Bloemfontein, Free State GLA: m 2 Property valuation: R Property valuation: R Occupancy: 100% Occupancy: 99% Major tenants: Shoprite, Fairprice, Ackermans Major tenants: Fielli, Tile Africa, Crown National SIBILO SHOPPING CENTRE RETAIL Location: Postmansburg, Northern Cape GLA: m 2 Property valuation: R Occupancy: 99% Major tenants: Shoprite, Total Sports, Beares 17

20 OUR STRATEGIC FOCUS AREAS ENGAGE IN STRATEGIC PARTNERSHIPS INVEST IN OUR PEOPLE GAIN ACCESS TO CAPITAL OUR STRATEGIC FOCUS ENHANCE PROPERTY PERFORMANCE CONCLUDE YIELD-ACCRETIVE ACQUISITIONS TO ACHIEVE OUR LONG-TERM VISION, WE WILL FOCUS ON THE FOLLOWING STRATEGIC MATTERS IN 2018: ENHANCE PROPERTY PERFORMANCE How we measure up Vacancies (%) Arrears as a percentage of revenue (%) Tenant retention (%) Weighted average contractual escalation (%) At the pinnacle of our financial performance is the realisation of sector beating growth in distribution, which we have set for the company at between 9% and 10%. This objective is alligned with our internal asset management and external property management key performance indicators. At an operational and property level, the key performance indicators take congnisance of the various aspects of our business which if properly managed, contribute to the achievement of our strategic objectives. Strategically we focus on two key operational aspects the leasing of space and effective collection of rental. The main driver of our financial performance is the performance of our properties. As a key driver to the business, the asset management strategy per property ensures that the objectives we set at a property level are achieved. Our asset managers continuously aim to enhance their understanding of the communities in which our centres operate giving each property an identity from which to base their strategy. This may include long term strategic objectives such as: improving the quality of our existing portfolio through a range of small and largescale refurbishment, expansion and redevelopment opportunities focus on contractual rental escalations and improve tenant mix. 18

21 ABOUT US INVEST IN OUR PEOPLE How we measure up A dynamic and innovative working environment for 11 employees* * Including dedicated New Star Asset Management team, excluding Fairvest nonexecutive directors Fairvest continues to focus on the development of our people as a core focus of our strategy. This includes training and development of individual skills and development of core competencies. With the introduction of a Training and Development Programme focussed towards our strategy, we have created a platform from which we can introduce new learnings to the team and enhance their ability to operate more effectively within their environment. The ongoing addition of new skills and competencies enables each person to operate in a more resourceful state, which improves the environment in which they work and has a positive impact on their ability to perform their specific function in the business. As a team, it is essential that we identify and chart a growth trajectory for each of our team members. Understanding the specific attributes required for each role is a starting point from which we can determine the right areas of focus to ensure that each of the team members realises their full potential. CONCLUDE YIELD-ACCRETIVE ACQUISITIONS How we measure up Average annualised property yield (%) Average value per property (R m) We continue to distinguish ourselves through performance rather than size. Fairvest is a specialised retail focused fund, acquiring assets servicing the lower LSM market located in non-metropolitan areas, as well as rural, convenience and community shopping centres located in high-growth nodes, close to commuter networks. The assets we target are by their very nature, smaller, more unique and geographically dispersed. We remain convinced that our strategic investment focus offers investors attractive returns and distinctive diversified opportunities. ENGAGE IN STRATEGIC PARTNERSHIPS How we measure up Strategically partnered with three experienced property investors and developers As per our communicated strategy, we remain focussed on the initiation of strategic relationships for both brown and green field projects, thereby developing relationships with experienced developers and private landlords in order to bring new assets to the listed sector. Key to securing these opportunities to date has been the structuring of these transactions whereby Fairvest have assumed an equity funding role to our strategic partners. GAIN ACCESS TO CAPITAL How we measure up New equity raised (R m) We aim to broaden our shareholder base and to promote the investment case in order to increase demand and liquidity for our shares. We focus on delivering a clear and consistent message to a growing investor audience as well as the media, and have implemented a comprehensive investor relations programme to assist with this objective. Loan to value ratio (%)

22 OUR CAPITALS Our strategic focus areas guide our decision-making and enable us to manage and optimise the trade-offs between our capitals that arise as a consequence of doing business. INTELLECTUAL CAPITAL Our corporate culture ensures a hands-on strategic approach to managing our unique portfolio We maintain a strong team of property experts equipped with individual property and leasing strategies and enhanced by their deep experience in our target market. Our integrated electronic property management and information system and standardised processes allow real time data analysis and our hands-on approach ensures that we identify changing trends early and capitalize on new opportunities as they become available. STRATEGIC FOCUS AREA ENHANCE PROPERTY PERFORMANCE MANUFACTURED CAPITAL We acquire yield accretive properties, upgrade our existing properties with the aim to unlock rental growth opportunities, convert unlettable space and attract quality tenants Our ability to identify, acquire and maintain quality properties in our selected markets, creates maximum value for our stakeholders which provide consistent and growing income and capital growth for our shareholders. STRATEGIC FOCUS AREA CONCLUDE YIELD ACCRETIVE ACQUISITIONS FINANCIAL CAPITAL We use a combination of debt and capital to fund acquisitions and growth We maintain strong relationships with shareholders as well as debt providers to ensure access to sufficient capital to take advantage of the opportunities we identify. STRATEGIC FOCUS AREA GAIN ACCESS TO CAPITAL 20

23 ABOUT US HUMAN CAPITAL Our employees drive the performance for our stakeholders Fairvest maintains a small, competent team of experienced property professionals. Our well-qualified team is passionate, committed to service excellence with a strong focus on honesty, accountability and responsibility. STRATEGIC FOCUS AREA INVEST IN OUR PEOPLE SOCIAL AND RELATIONSHIP CAPITAL We engage in strategic partnerships to grow our asset base and engage with the communities in which our properties are situated Fairvest is committed to incorporating social and strategic relationship considerations in its decision making at both company level and at property level. Our understanding of and engagement with the communities in which we operate is key to giving each of our properties an identity and vision to strive towards. We continuously evaluate various initiatives to not only enhance the quality of our centres but also ensure that contributions are made to the development of the communities in the areas in which Fairvest owns its retail centres. STRATEGIC FOCUS AREA ENGAGE IN STRATEGIC PARTNERSHIPS NATURAL CAPITAL We use natural resources such as solar energy and recycled rain water to reduce our environmental footprint and cost of occupancy Fairvest is committed to reducing our environmental impact associated with energy and water consumption. We have embarked on various initiatives that not only make investment sense but also allow for a lower cost of occupancy, such as solar energy, advanced energy monitoring solution and rain water recycling. STRATEGIC FOCUS AREA ENHANCE PROPERTY PERFORMANCE 21

24 BUSINESS REVIEW Chairman s report 24 In conversation with the Chief executive officer 26 Chief financial officer s review 28

25 BUSINESS REVIEW

26 CHAIRMAN S REPORT I am extremely excited at the achievements of Fairvest in the past financial year. Not only did we deliver on promises and delivered shareholders a significant return, we also managed to beat our forecast distribution growth of 9% and 10% with a total distribution of c for the year under review. What is particularly pleasing is that we have managed to beat our budget projections for the past five years. As always, we remain very conservative in our projections for the coming year. We believe, given our size, that for Fairvest to remain relevant in the sector, we should target growth rates that are higher than sector average. What makes us even prouder is the fact that our research show that we have been the top performing SA REIT over our financial period with a return of 38.5%. As a shareholder this has been very rewarding and I hope that you as my fellow shareholders feel the same. I hope that I can call on you for your continued support in the year that lies ahead. We raised R190 million of new capital during the year, as well as retained R34.5 million of equity through our dividend reinvestment alternative. We thank you for your support in these capital raisings and will appreciate your continued support in the year that lies ahead. The SA Listed Property Index (SAPI) delivered a total return of 2.8% for the twelve months ended 30 June 2017, only just outperforming the JSE s All Share Index total return of 1.7%. The All Bond Index managed to deliver 7.9% over the same period followed by cash (STEFI Index) delivering 7.6%. On a year to date basis the sector has underperformed equities, bonds and cash. The year started off on a strong note. In January the rand strengthened more than it has done in previous Januaries. This has benefitted Fairvest, as all our assets are local, compared to the SAPY s offshore exposure of roughly 36%. Bond yields declined to a low of 8.37% in March. Political conditions were calm and commodity prices rose on the back of a weaker US Dollar. The calm was however short-lived as another cabinet reshuffle and policy uncertainty triggered a foreign currency rating downgrade to junk status by two of the rating agencies. On the local front, we saw the economy rebound in the second quarter of the year, with quarter-on-quarter GDP growth at 2.5%, freeing itself from the technical recession that gripped our economy. Confidence levels, however, remain very low and this could keep economic growth subdued over the medium-term. The South African Reserve Bank has lowered its forecast for GDP growth to 1.2% for 2018 and 1.5% for Confidence indicators have become very sensitive to political developments, which potentially implies low confidence and low growth leading up to the ruling party conference and elections at the end of the year. During the second quarter of 2017 we have seen credit to households picking up slightly. Like many, we believe that general credit conditions will remain subdued, given weak household and business confidence and weak demand. On the positive side, Consumer Price Inflation ( CPI ) has fallen to the mid-point of the Reserve Bank s target bands. The Reserve Bank has also lowered its forecast for headline CPI to 4.9% for 2018 and 5.2% for

27 This bodes well for a reduction in interest rates, with the market expecting two decreases in the next six months. This will be good for embattled consumers, as well as retailers, with the latter ultimately being our tenants and income stream. Consumers will see their debt service costs come down. We have seen some growth in real disposable income although we believe this may not be sustainable, given the high levels of unemployment and moderating wage growth. Despite the weak economic backdrop we have managed to control vacancy rates. Given our unique focus on retail assets servicing the lower LSM market, we believe we will be resilient in this tough environment. This together with a low risk tenant base should serve us well in the year to come. On the global front, a year ago we were in the midst of a Trump/ Clinton showdown, Brexit had just happened and global uncertainty was elevated. Fast forward a year and the global growth backdrop is positive, with positive growth forecasts in most regions. This is despite continued uncertainty regarding Trump s ability to implement economic policy reforms. This positive backdrop has contributed to a favourable environment for emerging markets. Asian property stocks were the strongest performers during the first half of the year, buoyed by better Chinese economic data and a positive economic environment in Singapore and Hong Kong. European properties delivered decent returns on the back of a weaker dollar and accelerating growth. South Africa has benefitted from investment flows, given the continued global search for yield. Heightened risk aversion in the wake of the sovereign downgrades earlier this year and possible political and policy uncertainty towards the end of the year could, however, leave the rand vulnerable. OUTLOOK While mindful of the prevailing economic and political challenges in South Africa, we believe that our portfolio is well-positioned and, provided there are no macro-economic or corporate failures, are confident that Fairvest should be able to achieve distribution growth of between 9% and 10% for the 2018 financial year. We will also continue to actively pursue yield accretive acquisitions and development joint ventures to further enhance the portfolio. Our property portfolio remains well diversified across South Africa, with no province contributing more than 25% of revenue. We have a high national tenant component which provides our shareholders with a low risk investment profile in a sector of the market which is very resilient to economic downturns. During the year we will continue to focus on tenant retentions and renewals. Although we remain conservatively geared, any reduction in the lending rates will be beneficial to our income growth. I would like to thank our board members for their contribution during the past year and would like to take the opportunity to welcome Trevor Cohen, a seasoned property specialist to our board. I would like to commend the board for their continued support of the group and their tireless effort in turning Fairvest into the successful company it is today. I would like to thank our executive team and their staff for delivering another great set of results. I would also like to once again thank you as shareholders for your support during the past year. And finally, I would like to reiterate our undertaking that we will once again endeavour to improve on the past year. JACQUES DU TOIT BUSINESS REVIEW CHAIRMAN

28 IN CONVERSATION WITH THE CHIEF EXECUTIVE OFFICER FAIRVEST HAS HAD AN EXCEPTIONAL YEAR. WHAT WOULD YOU SAY WERE THE MOST SIGNIFICANT FEATURES OF THE PAST YEAR? As most commentators have noted, trading conditions in South Africa remain very challenging, with low economic growth and constrained consumer expenditure. In our industry that translates into rising vacancies, higher arrears and pressure on rentals. Navigating through this tough environment requires strong execution of operational fundamentals. We are one of a handful of South African teams that have been running property portfolios in both bear and bull markets. Now more than ever, you want experienced property people looking after your investments. That means a team that is hands-on and in control of all the controllable items in the business, with solid relationships with key tenants. Fairvest possesses all these characteristics and this has allowed us to maintain low vacancies and arrears despite the difficult times. A strong focus on cost containment, whereby we prudently manage our costs whilst maximising recoveries, notably improved our expense ratios. Our management philosophies are simple, lease space and collect the rentals. We have also managed to conclude new leases and a range of renewals at attractive levels, while ensuring that these rentals are sustainable for both ourselves and our tenants. Our base rentals remain very competitive, which has allowed us to continue to show growth despite the economic environment. Achieving a strong operational result and distribution growth of 10% for the year, generally does not come from windfalls in a single area of business, but rather from focus and modest victories across every aspect of your operations. We define ourselves through performance not size. This is evident in the like-for-like annualised property income that increased by 9.3% in Our results reflect sound management of controllable factors in difficult trading times. YOU WERE THE TOP PERFORMING REIT THIS YEAR WITH A 38.5% RETURN. WHAT DO YOU ATTRIBUTE THIS OUTPERFORMANCE TO? While proud of this achievement, we believe it is more important to take note of the good longer-term performances over three years and five years. It takes years to build a track record of consistent performance and we have focused for the past five years on building a reputation of keeping to our promises, not drifting from our strategic proposition of investing in quality rural community centres and focusing on operational excellence. This has culminated in creditable dividend growth of more than 10% per year for the past four years, and investors recognise the compounding effect of our consistent performance. We consistently look to de-risk our income stream. The resilience of the Fairvest portfolio is particularly evident in these tough conditions. Our customers generally shop daily and mainly target staple foods and these shopping patterns have remained robust through economic cycles. Our high national and anchor tenant ratio of 75%, also reduces risk and provide stability of returns. HOW DID THE PORTFOLIO CHANGE OVER THE PAST YEAR AND WHAT ARE YOUR PLANS FOR THE PORTFOLIO IN 2018? The total property portfolio increased by 14.5% to R2.20 billion. An indication of the quality of the assets is that the value of the historic portfolio increased by 10.1%, compared to 30 June We have a good track record as to how we deploy our capital. We raised R222.6 million of new equity during the year. This was utilised to acquire three new properties, the Mqanduli Boxer and Tabankulu Boxer in the Eastern Cape and Macassar Shoprite in the Western Cape. 26

29 Since our recapitalisation in December 2012, we have consistently communicated that, as part of our growth strategy, we believe it is important to bring new properties to the market, as opposed to just recycling existing assets. In line with our communicated strategy we continue to build relationships with a select group of experienced development partners in our market to participate in yield enhancing developments. We will look to provide both equity and debt funding to developers in order to secure access to the quality development stock. In this regard, we have established strong relationships with experienced developers and private landlords and all three of the newly acquired properties are the outcome of these successful joint ventures. To remain relevant and keep ongoing maintenance cost contained, we have developed a strategy per property which includes life-cycle maintenance programmes and capital expenditure upgrades. Over the past 24 months, we incurred capital expenditure of R35.7 million to maintain and upgrade our centres and attract key anchor tenants. We believe our strategic approach to life-cycle capital expenditure and maintenance programmes are key to effectively manage our operating costs into the future. Fairvest maintains an investment strategy that is fairly unique, which is to be a focused retail fund, weighted towards the lower income retail market, in the form of non-metropolitan and rural shopping centres, as well as convenience and community shopping centres, in high-growth nodes, close to commuter networks. These assets are by their very nature smaller, more unique and geographically dispersed. We continue to differentiate ourselves by performance, which allows us the freedom and flexibility to not pursue asset growth at any price. Acquisitive growth is part of our strategy and we remain opportunistic, but selective, in our approach. An attractive yield as well as opportunities to implement strategic redevelopments to extract maximum value, are key criteria in our evaluation of prospective acquisitions. There is currently strong demand and some attractive opportunities in outlying areas. Over the next 24 months of trade, Fairvest will strategically focus on and target retail assets weighted toward rural and community shopping centres servicing the lower LSM market, in high-growth nodes, close to commuter networks. A SUSTAINABLE BUSINESS MODEL IS OBVIOUSLY ABOUT MORE THAN JUST GETTING THE FINANCIAL METRICS RIGHT. HOW DO YOU THINK ABOUT YOUR RELATIONSHIPS WITH STAKEHOLDERS AND THE ENVIRONMENT? The continued success of our business is very much dependent on the health of our relationships with our staff, suppliers, tenants and communities. We work hard at regularly engaging with all our key stakeholders, understanding their concerns and finding ways to address these in a mutually beneficial way. Fairvest has a small team of highly experienced and committed staff and the development of our people remains a key aspect our long-term strategy. During the year, we introduced a new training and development programme to enhance their ability to operate more effectively within their environment. New skills and competencies have been introduced through one-on-one coaching and team training sessions, which provides the space to thrive and, at the same time, have a positive impact on their ability to perform their specific function in the business. Fairvest is continuously evaluating various options to ensure that we contribute towards the development of communities in the areas in which we own our retail centres. These range from engaging with service providers to hire staff from the area in which the property is situated, to the provision of vacant space to community organisations for training and skills development, as well as contributing towards charitable organisations that operate in the communities where Fairvest s properties are located. We also have a focus on reducing our environmental footprint and conducting our business in the most energy efficient way possible. During the year we implemented energy efficiency initiatives at Middestad Mall and Mala Plaza, and have recently initiated the same process at Kim Park and Sibilo. We have engaged a team of engineers and software developers of an Energy Monitoring and Management Software solution, with the aim to achieve sustained energy savings and improved energy saving behaviour for our tenants. We have also implemented Solar PV plants at The Ridge, Sibilo and Kim Park and initiated solar feasibility assessments at Nyanga Junction and Tokai Junction which, if successful, will see the implementation of two more Solar PV plants in the next financial year. YOUR BALANCE SHEET REMAINS STRONG WITH GOOD ACCESS TO CAPITAL. COULD YOU PROVIDE MORE INSIGHT INTO HOW FAIRVEST THINKS ABOUT BALANCE SHEET MANAGEMENT? Fairvest maintains a conservative approach to debt, while constantly evaluating ways to enhance value for shareholders. Our low loan to value ratio of 22.39% at year-end, as well as ample undrawn facilities, provide capacity for expansion. We will raise further equity as and when required, should we identify attractive acquisitions. Our distribution reinvestment programme has also served to preserve capital. Fairvest s high proportion of fixed debt safeguards the company against changes in the interest rate environment, as well as against potential political upheavals as we move closer to the next election. We maintain relationships with a range of funders and engage regularly to raise further funding as our debt matures. APPRECIATION We extend our appreciation to our directors, management and staff for their valued efforts as well as our advisers and shareholders for their continuing belief in and support of Fairvest. BUSINESS REVIEW DARREN WILDER CHIEF EXECUTIVE OFFICER 27

30 CHIEF FINANCIAL OFFICER S REVIEW Fairvest board of directors are pleased to announce a 10.49% increase in the final dividend distribution of cents per share for the six months ended 30 June This brings the total combined dividend for the year to cents per share, which is a 10.04% increase from the previous year, again exceeding our guidance issued of between 9% and 10% growth in distribution for the full year. The net asset value increased by 29.8% to R1.72 billion. On a per share basis, this equates to cents per share, or an increase of 8.2%. 28

31 FINANCIAL HIGHLIGHTS Distributable earnings R m Interim distribution per share cents Final distribution per share cents Total distribution per share cents Gearing (LTV) % % of fixed rate interest-bearing debt % Interest cover times Weighted average cost of funding % Weighted average debt maturity months Weighted average maturity of fixes/swaps months Market capitalisation R m Net asset value per share cents Share price cents Number of shareholders Shares in issue Opening balances Shares issued Closing balance Treasury shares DISTRIBUTABLE INCOME STATEMENT % Income Rental income Recoveries Investment revenue Expenses Property expenses 17.7 ( ) ( ) (65 773) Finance cost 22.0 (52 673) (43 162) (20 153) Corporate administrative expenses 16.3 (19 393) (16 680) (12 142) Shares issued cum distribution Non-controlling interest share (443) (12) Distributable earnings Distributable earnings for the year increased by 31.2% compared to the previous year to R143.9 million. The increase is mainly as a result of the larger asset base and increased debt from the acquisitions during the year. All acquisitions made during the year were yield accretive. Strong operational growth was achieved within the portfolio, with the like-for-like annualised property income increasing by 9.3%. This was achieved through good renewals and letting, effective recoveries of municipal charges and efficient operating cost management. CAPITAL RAISING ACTIVITIES Shareholders are referred to the company s SENS announcement dated 7 November 2016, regarding the placement of new ordinary shares which were issued through combination of a vendor consideration placement and a general authority to issue shares for cash at an issue price of R1.70 per share, raising R190.0 million of new equity. Shareholders are referred to the company s SENS announcements dated 17 October 2016 and 18 April 2017, regarding the placement of and new ordinary shares which were issued through the dividend reinvestment alternative. The shares were issued at R and R per share respectively resulting in the retention of R34.5 million of equity. PROPERTY VALUATIONS The total property portfolio increased by 14.5% from R1.93 billion at 30 June 2016 to R2.20 billion. The growth is attributable to acquisitions to the value of R113.5 million, as well as capital expenditure incurred of R35.7 million, offset by the disposal of the SASSA House asset for R40.0 million. The historic portfolio increased by 10.1% compared to 30 June Asset quality continues to improve, with the average value per property increasing by 8.9% to R53.8 million, and the average value per square meter increased by 9.6% to R11 345/m 2. BUSINESS REVIEW Distribution per share (cents)

32 CHIEF FINANCIAL OFFICER S REVIEW CONTINUED R million PORTFOLIO VALUATION % 10.1% Property portfolio Disposal Acquisition Rand/m² PORTFOLIO VALUATION/m² % In line with the accounting policy of the group, at least a third of the portfolio was valued by independent external valuers. Of the 41 properties in the portfolio, 14 properties equating to 39.5% by value, was valued by independent valuers, DDP Valuers and De Leeuw Valuers, with the remainder valued by the directors. All properties are valued by independent external valuers at least every three years. The properties are valued using the five-year discounted cash flow method. Assumptions are made on the discount rates used to determine the present value of the cash flows and on the capitalisation rate on an assumed sale after five years. The weighted average discount rate used was 15.0% compared to 15.2% in 2016 and the weighted average capitalisation rate used was 10.2% compared to 10.3% in The annualised yield of the property portfolio is 9.9% (calculated as historic earnings over the historic valuation or purchase price). BORROWINGS The loan to value ( LTV ) ratio at 22.4%, decreased from 29.7% at 30 June 2016 as a result of the new equity raised in during the year (LTV is calculated as total interest-bearing debt divided by total property assets). 87.1% of the debt was fixed either through swaps or fixed rate loans as at 30 June 2017, with a weighted average expiry for the fixed debt of 18 months. The weighted average all-in cost of funding increased to 9.46% compared to 9.42% in The weighted average maturity of debt decreased from 27 months to 15 months. MATURITY PROFILE OF FLOATING RATE DEBT Sep % Sep % Aug % Jun % May % May % Sep % Aug % Aug % Jun % May % May % Dec % R million Drawn - floating Available - floating MATURITY OF HEDGES Aug % Jul % Apr % Apr % % Jul % Jan % R million Prime linked swap JIBAR linked swap Fixed rate loan 30

33 DEBT STRUCTURE Loan to value ratio % % of interest-bearing debt fixed % Weighted average cost of funding % Interest cover times Weighted average maturity months Weighted average maturity of fixes/swaps months Total debt R m Total facilities R m Undrawn facilities R m BUSINESS REVIEW PORTFOLIO PERFORMANCE REVIEW WEIGHTED AVERAGE BASE RENTAL 150 Base rentals and escalation m² 120 Gross rentals across the portfolio trended upwards, with a 4.6% increase in the weighted average rental to R103.99/m2 at 30 June 2017 compared to R99.40/m 2 at 30 June The weighted average contractual escalation for the portfolio reduced marginally from 7.5% as at 30 June 2016 to 7.4% at 30 June Letting activity Rand per Retail Office Total LEASE EXPIRY PROFILE BY GLA % 80% During the year, 71 new leases were concluded with a total GLA of m 2. Fairvest successfully renewed m 2 of leases with a positive reversion of 7.5% achieved. Tenant retention for the period was 72.8%, a reduction from the 85.2% for the previous financial year. The weighted average lease term increased from 36 to 38 months. GLA (m²) Vacant Monthly Jun-22 and beyond LEASE EXPIRY PROFILE BY GROSS RENTAL R m Vacant Monthly Jun-22 and beyond 80% 60% 40% 20% 0% 60% 40% 20% 0% 100% Office Retail Cumulative % 2017 Cumulative % 2016 Office Retail Cumulative % 2017 Cumulative % Weighted average contractual escalation % New leases concluded during the period m² Renewals concluded during the period m² Weighted average increase on renewals (reversion) % Tenant retention % Weighted average lease term months

34 CHIEF FINANCIAL OFFICER S REVIEW CONTINUED Vacancies Vacancies increased from 3.8% to 4.7% or 9 094m 2 during the year, mainly as a result of some new vacancies at Middestad Mall in anticipation of a redevelopment, The Palms, Clubview Corner and Masingita Centre, partly offset by positive letting at Nyanga Junction, Parow Valley Centre and Sebokeng m 2 of vacant space has been let after 30 June VACANCY BY SECTOR (%) 81 Retail Office VACANCY BY REGION (%) 26 Free State Gauteng Western Cape KwaZulu-Natal Limpopo Northern Cape Mpumalanga Omniplace Qualbert Centre Westville Junction Kim Park Shopping Centre The Ridge Masingita Shopping Centre Richmond Shopping Centre Clubview Corner The Palms St Georges Square Middestad Centre * For vacancies greater than 200m² GLA m² Vacant area m² Vacancy % Expense ratios and recurring expenses A strong focus on cost containment and more efficient recoveries of municipal charges improved the net property expense ratio (expenses net of utility recoveries) to 15.5% compared to 17.3% for the previous financial year. Certain municipal expenses provided for in the previous financial year, being lower than anticipated, also contributed to the improved ratio. This resulted in the gross cost to income ratio reducing from 38.6% to 37.6%. 32

35 Expense ratios and recurring expenses A strong focus on cost containment and more efficient recoveries of municipal charges improved the net property expense ratio (expenses net of utility recoveries) to 15.5% compared to 17.3% for the previous financial year. Certain municipal expenses provided for in the previous financial year, being lower than anticipated, also contributed to the improved ratio. This resulted in the gross cost to income ratio reducing from 38.6% to 37.6% EXPENSES (%) 56 Municipal services Rates and taxes Cleaning and security Property management Sundry expenses Bad debts Letting commission and TI Insurance Levies Maintenance BUSINESS REVIEW Acquisitions Shareholders are referred to Fairvest s various SENS announcements, regarding certain acquisitions by the company. Four new properties were acquired during the period, of which three transferred during the current period and one transferred after year-end. PROPERTIES TRANSFERRED DURING THE YEAR Location GLA m² Purchase price R 000 Anchor tenant Date of transfer Mqanduli Boxer * Eastern Cape Boxer 7 Jul 16 Tabankulu Boxer * Eastern Cape Boxer 15 Jul 16 Macassar Shoprite ** Western Cape Shoprite 12 Sep 16 * The Mainstream portfolio was acquired in a subsidiary FPP Property Venture 103 Proprietary Limited, of which Fairvest owns 80%. ** Macassar Shoprite was acquired in a newly incorporated subsidiary, Macassar Retail Centre Proprietary Limited (previously Urban Growth Properties Proprietary Limited), of which Fairvest owns 80%. TRANSACTIONS AFTER YEAR-END Location GLA m² Purchase price R 000 Anchor tenant Date of transfer Shoprite Empangeni KwaZulu-Natal Shoprite 18 Jul 17 * S hoprite Empangeni was acquired in a newly incorporated wholly-owned subsidiary FPP Property Venture 102 Proprietary Limited. Disposals Fairvest disposed of the SASSA House asset with an effective date of transfer of ownership of 1 October Fairvest provided vendor finance to the purchaser for the transaction. Value extraction Various value extraction projects continued during the financial year on the current portfolio. R34.08 million was spent on these capital enhancement projects. The largest projects were at Parow Valley Spar and Macassar Shoprite. Parow Valley Spar redevelopment was completed during the financial year and the expansion of Macassar Shoprite is expected to be completed before the end of the next financial year. 33

36

37 ACCOUNTABILITY Risk management 36 Stakeholder engagement 38 Corporate structure 39 Corporate governance report 40 Board of directors 46 ACCOUNTABILITY

38 RISK MANAGEMENT The board recognises the importance of an effective risk management process and has adopted an enterprise-wide approach to risk management. The board, assisted by the audit and risk committee, is responsible for the risk management of the group. Management is responsible for establishing, monitoring and communicating the appropriate risk and control policies. Risk management is regarded as a key business process which ensures that the group is protected against uncertain events which could prevent the group from achieving its objectives. Management is committed to developing, implementing and maintaining strategies to minimise our risks and to ensure the growth of our company for the best benefit of stakeholders. The major risks as identified by the audit and risk committee are as follows: RANKING LIKELYHOOD SEVERITY RISK EVENT IMPACT ON OUR PERFORMANCE Slowing consumer spend affecting trading density and rent to sales ratio s which could lead to default of tenants resulting in arrears, bad debt and vacancy. Leases not renewed or discounted rental to retain tenants and possibly bad debt, leading to reduced return from the property Rising cost of occupancy for tenants from increased rates, taxes and utilities and inability of tenants to absorb the cost. Decreased recoveries or negative rental reversals on renewals Increased supply of retail space in the market resulting in failure to retain tenants and letting of vacant space. Discounted rental to retain tenants, increased vacancies, loss of revenue and distributable earnings Volatility in interest rate risk. Increase or volatility of funding cost reducing distributable earnings and limiting the ability to fund acquisition growth New acquisitions/investments not meeting the company s investment criteria of capital growth and optimised net rental. Increased potential of diminished returns Over reliance on and under performance of the property manager and meter reading company resulting in a breakdown of internal controls. Inaccurate billings and reporting, tenant dissatisfaction and non-renewal of leases Inability to refinance major debt at acceptable terms and conditions. Higher cost of funding and a decrease in distributable earnings. Disruption in operations and reputational damage Non-compliance with statutory laws and regulations. Reputational risk and possible penalties. 36

39 HEATMAP Major SEVERITY Critical Serious Moderate Minor LIKELIHOOD CAPITAL TRADE-OFFS STRATEGIC RESPONSE Engage financially sound national tenants with strong balance sheets and proven business models. Strong collections and arrears process, monthly tenant trading density analysis. Energy and water saving initiatives. Monthly monitoring of electricity and water consumption per building including common areas. Municipal expense vs cost of sales analysis. Municipal valuation objections. ACCOUNTABILITY Strong broker relationship, full leasing and renewal function performed in-house. Interest rate fixes and swaps Acquisitions assessed against mandated acquisitions parameters and extensive due diligence procedures. Acquisitions approved by the investment committee and presented to the board for approval Service level agreements, Fairvest Standard Procedures and key performance indicators which are monitored regularly. Integrated property management and information system. Training and development relating to municipal bylaws and tariffs. Diversified funder base and staggered maturities to manage refinancing concentration risk. Regular interaction with debt providers Regular interaction with independent sponsor PSG Capital and oversight from audit and risk committee and company secretary. 37

40 STAKEHOLDER ENGAGEMENT Fairvest builds and maintains relationships with a range of stakeholders to inform the business of issues that may impact the industry or in some cases, the company itself. Regular engagement with stakeholders allows the company to adapt to and manage expectations and to continuously improve the alignment between the group and its key stakeholders. The stakeholder groups below have been identified through a review of the extent to which they are either affected by Fairvest s operations, or to which they can influence the performance or strategic direction of the group. STAKEHOLDER FOCUS AREAS HOW WE ENGAGE Shareholders provide financial capital to grow our business. Funders provide finance to grow our business. Tenants let space and prosper to enable Fairvest to grow sustainable income. Employees and property brokers drive performance and grow sustainable income. Local communities provide foot traffic at our properties. Government and regulators provide a regulatory framework for fair and transparent business. Suppliers provide services which preserve and enhance our properties. Financial returns Quality of properties Gearing levels Cash flows Operational excellence Cost ratios Strategic direction Loan covenants Quality of assets Adequate security Tenant quality Cost of occupancy Clean, safe and secure environment Refurbishments and improvements Marketing and advertising initiatives Create opportunities for internal advancement Fair and equitable treatment Communication Safety Uplifting the community Taxes Compliance with AHS Act, Building Act and regulations Municipal compliance and charges Fair tender process Timeous payments BBBEE compliance One-on-one meetings Investor roadshows, including bi-annual results presentations JSE SENS announcements/circulars Annual integrated report Website Media announcements One-on-one meetings Property site visits Bi-annual results presentations Annual integrated report Website Media announcements Property site visits Personal interactions and meetings Operational notices Electronic and print communication Website One-on-one meetings Strategy presentations Training and development Website Incentive programmes CSI initiatives at our properties Marketing and promotional activities at our properties Property Facebook page Tax returns Relationships with municipal offices Communication with decision-makers One-on-one meetings Procurement process 38

41 CORPORATE STRUCTURE FAIRVEST PROPERTY HOLDINGS LIMITED granted REIT status with the JSE SHAREHOLDERS REGULATORS EXTERNAL AUDITORS BOARD OF DIRECTORS AUDIT AND RISK COMMITTEE REMUNERATION AND NOMINATION COMMITTEE SOCIAL AND ETHICS COMMITTEE INVESTMENT COMMITTEE ACCOUNTABILITY EXECUTIVE DIRECTORS The board is collectively responsible to the group s stakeholders for the overall strategic direction and control of the group. The executive directors control through a governance framework that includes the review and implementation of detailed reporting represented to the board and its subcommittees, a system of internal controls and a delegation of authority through an approval framework. In terms of the asset management agreement the asset manager provides a total and comprehensive asset management service. ASSET MANAGER NEW STAR ASSET MANAGEMENT The asset manager s performance criteria are outlined in the agreement between Fairvest and the asset manager. The review of the asset manager s performance relative to the KPIs is undertaken by Fairvest s independent non-executive directors. The model enables the asset managers to focus on the strategic objectives per property and ensure that KPIs are being achieved. Fairvest has adopted an outsourced property management model which is currently the most efficient and effective model based on the size and geographic location of the portfolio. PROPERTY MANAGERS JHI PROPERTIES BROLL PROPERTY GROUP MOOLMAN GROUP MAINSTREAM GROUP AXIS PROPERTY FUND The property managers focus on the operational management of the properties and provide support to the asset manager in the realisation of their objectives. The performance of the property managers is managed by way of service level agreements with specific performance clauses and formalised monthly meetings to monitor operations. The review of the asset manager s performance relative to the KPIs is undertaken by Fairvest s independent non-executive directors. 39

42 CORPORATE GOVERNANCE REPORT Fairvest is committed to the promotion of good corporate governance and to following the principles of fairness, accountability, responsibility and transparency as advocated in the King Code of Governance principles ( King III ). Fairvest s corporate governance policies have been applied accordingly during the year under review and the company is satisfied that it has complied with the King III in all material respects. In supporting King III, the board recognises the need to conduct the business of the group with integrity and in accordance with generally accepted corporate practices. The board endorses, has addressed, and, where possible and relevant to the company, has applied the principles of King III. However, given the size of the group and its operations, there are certain instances where it has not been possible to comply and these areas are highlighted and explained below. As Fairvest continues its significant growth strategy, the board continually reviews the composition of the board, to determine the appropriate skills and experience, and on improving the structures that are in place. The board has made several appointments during the past few financial years which have strengthened the board and given it access to a range of additional skills and experience. The elements of King III that are partially applied or are under review are as follows: Boards and directors o The chairman of the board is not independent. In accordance with paragraph 7.F.6(c) of the JSE Listings Requirements, Mr LW Andrag, an independent nonexecutive director, has been appointed as the lead independent director. Integrated reporting and disclosure o Sustainability reporting and disclosure is continually being assessed as part of the improvement of our reporting to stakeholders. THE BOARD A detailed analysis of the group s adherence to the 75 principles of KING III is available on our website at The board is collectively responsible to the group s stakeholders for the overall strategic direction and control of the group. The board exercises control through a governance framework that includes the review and implementation of detailed reporting presented to the board and its subcommittees, a system of internal controls and a delegation of authority through an approval framework. The board has adopted a charter that sets out the practices and processes it follows to discharge its responsibilities. The charter specifically sets a description of roles, functions, responsibilities and powers of the board, the shareholders, the chairman, individual directors, company secretary, and executives of the company. The board charter requires a clear division of responsibilities at board level to ensure a balance of power and authority, so that no one individual has unfettered powers of decision making. At the date of this report the board of directors of Fairvest consists of nine members: JF du Toit LW Andrag DM Wilder BJ Kriel KR Moloko N Mkhize JD Wiese TJ Cohen AJ Marcus Board meeting attendance Non-executive chairman Lead independent non-executive director Chief executive officer Chief financial officer Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director (appointed 19 June 2017, with effect from 1 July 2017 Chief operating officer (alternate director to DM Wilder) 07-Sep Nov Feb May-17 JF du Toit LW Andrag DM Wilder BJ Kriel KR Moloko N Mkhize JD Wiese AJ Marcus TJ Cohen # # # # present absent with apology # not a director at the time The board assesses its performance and that of its individual directors, as well as their independence, on an ongoing basis. The outcomes of evaluations are considered by the board as a whole and actions are identified to enhance the effectiveness of the board and its committees, including directors development needs. Appointments to the board are formal and transparent and are a matter for the board as a whole, through recommendations from the remuneration and nomination committee. Input from material stakeholders and external references, combined with experience levels, qualifications and skill-sets are considered given the board s requirements at the time before a candidate is submitted 40

43 for nomination and appointment. The gender diversity policy is reviewed annually by the remuneration and nomination committee and will remain a key consideration in future appointments. The directors are entitled to seek independent professional advice at the group s expense concerning group affairs and have access to any information they may require in discharging their duties as directors. They also have unrestricted access to the services of the company secretary. Induction and development of directors All new appointees to the board are required to undergo the induction programme approved by the board and managed by the company secretary. Directors are provided with all the necessary information and documentation to familiarise themselves with the company and issues typically facing the board. Ongoing training and development includes sponsor updates on JSE Listings Requirements, site visits, and attendance at investor presentations, workshops, formal training and reading material circulated by the company secretary. Rotation of directors In line with the current provisions of the memorandum of incorporation ( MOI ), one third of all directors, are required to retire annually at the company s annual general meeting ( AGM ) and if eligible, may be re-elected. In addition to this, the appointment of directors by the board during the year is required to be confirmed at the AGM. JF du Toit, DM Wilder and N Mkhize retire by rotation and being eligible offer themselves for re-election at the AGM. The appointment of TJ Cohen is to be confirmed at the AGM. Independent non-executive directors The independent non-executive directors are fully independent of management and are free to make their own decisions. They are free from any business or other relationship which could be seen to materially interfere with the individual s capacity to act in an independent manner. The company s non-executive directors are appointed to provide an independent perspective with the relevant industry experience and to complement the skills and experience of the executive directors, assessing strategy, performance, risk, key performance areas and conduct. Directors trading in the company s securities All directors are required to obtain clearance prior to trading in the company s securities. Such clearance must be obtained from the chairman or, in his absence, from the lead independent nonexecutive director. Directors are required to inform their portfolio/ investment managers not to trade in the securities of the company unless they have specific written instructions from that director to do so. Directors also may not trade in their shares during closed periods. Directors are further prohibited from dealing in their shares at any time when they are in possession of unpublished price-sensitive information in relation to those securities, or otherwise where clearance to deal is not given. Conflicts of interest As legally required, members of the board must make full and timely disclosures of their other business interests, and particularly those that conflict or might conflict with those of the group. Potential conflicts of interest are appropriately managed. The directors confirm these disclosures annually to the company secretary and the board and, in addition, individual declarations are made at every meeting. Directors adhere to the conflict of interest policy as adopted by the board and are required to annually confirm that they have read and understood the contents of the policy. BOARD COMMITTEES The Board is assisted in the performance of its duties by four subcommittees, an audit and risk committee, a remuneration and nomination committee, an investment committee and a social and ethics committee. The Board is conscious of the fact that such delegation of duties is not an abdication of the Board members responsibilities. The various committees terms of reference are reviewed annually. Audit and risk committee The audit and risk committee consisted of the following members, all of whom are independent non-executive directors: KR Moloko (Chairperson) JD Wiese N Mkhize with DM Wilder, BJ Kriel, the external auditors of the company and the company secretary in attendance. The committee met three times during the period under review to review and approve the annual financial statements and to receive reports on findings of audits carried out by the external auditors. The audit and risk committee assisted the board by providing an objective and independent view on the organisation s finance, accounting and control mechanisms The committee met three times during the year: 31-Aug Feb-17 4-May-17 KR Moloko JD Wiese N Mkhize present ACCOUNTABILITY 41

44 CORPORATE GOVERNANCE REPORT CONTINUED The committee satisfied itself that the chief financial officer has the requisite qualifications, expertise and experience to carry out his duties as required by the Companies Act and the JSE Listings Requirements. Subject to the re-appointment of N Mkhize as a director of the company at the next AGM, all members of the committee offer themselves for re-election as members of the committee at the AGM. IT Governance Refer to page 36 for further details on risk management. The majority of the IT function of the group is outsourced to external service providers. The risks regarding the security, backup, conversion and update of the information technology systems are continually assessed and addressed by the audit and risk committee. Disaster recovery plans are regularly reviewed to limit the impact on that disruptions will have to critical management information and continuing operations. Remuneration and nomination committee The remuneration and nomination committee consisted of the following members, all of whom are non-executive directors: LW Andrag (Chairman) KR Moloko JF du Toit with DM Wilder, BJ Kriel and the company secretary in attendance. Although King III recommends that the remuneration section of the committee be chaired by an independent non-executive director and the nomination section be chaired by the chairman of the board, the group chose to have the combined committee chaired by the lead independent non-executive director. The chairman of the board is an active member of the committee. The committee assists the board to ensure that the company remunerates directors and staff fairly and responsibly. Such fees are market related, commensurate with the time required to undertake their duties. The Remuneration and Nomination Committee adopted and approved a Gender Diversification Policy. Identifying suitable candidates for appointment to the Board, the Committee will consider candidates on merit against objective criteria and with due regard for the potential benefits of gender diversity at a Board level. The Committee will continue to discuss and annually agree all measurable targets for achieving gender diversity on the Board. Appointments to the board are formal and transparent and are a matter for the board as a whole. The committee met once during the year: LW Andrag JF du Toit KR Moloko present 31-Aug-16 Executive directors remuneration BJ Kriel is the only executive director remunerated by the company. DM Wilder and AJ Marcus are remunerated by the Asset Manager, New Star Asset Management Proprietary Limited; refer to page 53 for further details. The committee used external a consultant, Deliotte Consulting, to benchmarks the executive director s remuneration and benefits. The remuneration philosophy is to structure packages in such a way that incentives are aimed at achieving business objectives and the delivery of shareholders value. The executive director receives a fixed annual salary and an increase, benchmarked against industry norms. Annual increases are awarded subject to adequate overall performance and profitability of the company. The payment of an annual incentive to the executive director is linked to performance, which is measured amongst others against growth in distributions. Non-executive directors remuneration Non-executive directors receive a fixed monthly fee and a meeting attendance fee for attending board and subcommittee meetings. These fees are for services and they do not receive any other incentives. The fees paid to non-executive directors are approved by shareholders at the annual general meeting. Chairman Year to 30-Jun-17 Proposed for year to 30-Jun-18 Annual retainer R R Meeting attendance fee (per board and committee meeting) R7 814 R Non-executive directors Annual retainer R R Meeting attendance fee (per board and committee meeting) R5 920 R7 640 No separate remuneration report is presented as the only remuneration paid by the company is fees paid to directors. For further details of directors remuneration, refer to the directors report on page

45 Investment committee The investment committee consisted of the following members: JF du Toit (Chairman) N Mkhize JD Wiese DM Wilder BJ Kriel AJ Marcus TJ Cohen (appointed to the committee on 4 September 2017) The committee meets when decisions are required to acquire, dispose of or significantly redevelop property assets. Given the role played by the committee, it is acknowledged that the committee does not fully comply with King III in that the committee does not have a majority of independent non-executive directors. A full due diligence is undertaken before any property is considered for acquisition, and is circulated to all members of the committee and board of directors in advance of meetings. Decisions of the committee and board of directors require consensus. The investment committee has met prior to the conclusion of each acquisition or disposal. The committee met twice during the year: 01-Feb May-17 JF du Toit N Mkhize JD Wiese DM Wilder BJ Kriel AJ Marcus TJ Cohen # # present absent with apology # not a member of the committee at the time Social and ethics committee The social and ethics committee consisted of the following members: LW Andrag (Chairman) DM Wilder AJ Marcus The statutory duties of the committee are discharged in terms of sections 72 (4) and (5) of the Companies Act, 2008, read with regulation 43 of the Companies Regulations 2011, which states that all listed companies must establish a social and ethics committee. The committee has adopted a formal term of reference which have been approved by the board and are reviewed on an annual basis. The committee met twice during the year: 7-Sep-17 4-May-17 LW Andrag DM Wilder AJ Marcus present The committee acts on behalf of the board and is responsible for evaluating social and ethical responsibilities and making recommendations to the board. Fairvest is committed to incorporating social and environmental considerations in its decision making at both company level and at property level. Company secretary The board is of the opinion that the company secretary is suitably qualified and experienced to carry out their duties as stipulated under section 84 of the Companies Act. The company secretary provides board members with guidance in respect of their statutory duties and ensures that they are up to date on all relevant statutory requirements. All directors have unfettered access to management and management information, to the advice and services of the company secretary and in appropriate circumstances, they may seek independent professional advice about the affairs of the group at the company s expense. The board has reviewed, through discussion and assessment, the qualifications, experience and competence of the individuals employed by the company secretary and has noted that the company secretary performed all formalities and substantive duties timeously and in an appropriate manner. The board is satisfied that an arm s length relationship exists. Sustainability Fairvest is committed to being a good corporate citizen and to operate a sustainable business for all stakeholders, with financial, social and environmental aspects being the focus areas. We continue with various initiatives to reduce energy consumption at our properties through the investment in improved efficiencies of the lighting and air-conditioning. Solar installations are now completed at three of our buildings, Kim Park, Sibilo Shopping Centre and The Ridge Shopping Centre. Viabilities on further properties are currently being performed. We also seek to reduce overall water consumption, and water usage is metered to ensure accurate reporting on each property s performance. ACCOUNTABILITY 43

46 CORPORATE GOVERNANCE REPORT CONTINUED Fairvest is continuously evaluated various initiatives to ensure that contributions are made to the development of the communities in the areas in which Fairvest owns its retail centres. These include: Engaging with service providers to hire a large portion of staff from the area in which the property is situated. The provision of vacant space to community organisations for training and skills development. Contributing towards charitable organisations that operate in the communities where Fairvest s properties are located. During the period under review, Fairvest has engaged in the following projects under the guidance of its social and ethics committee: Fairvest secured training and skills advancement for staff members. Fairvest again contributed towards the following organisations during the year: o Atlantic Hope Established in 2010, Atlantic Hope is a safety house for vulnerable babies, providing temporary and immediate placement within a safe and loving environment. They provide basic developmental, physical and mental care. Medical needs are prioritised, and babies are fed, kept warm, and given affection in a stable environment. o Grass Boots Football Club Grass Boots has made it a priority to take an active role in nurturing various communities. They reach this goal through work with charities by bringing children from the townships into venues for life skill training, a meal and great soccer coaching. They have established a local Boot Bank and throughout the year they hold collections at various points to collect boots and kit to share with disadvantaged children from all over Cape Town. o Learn to Earn Their skills development and training centres are based in vibrant Khayelitsha and the seaside town of Hermanus. Here, they endeavour to eradicate unemployment and other legacies of injustice in South Africa. Since 1989 they have trained more than unemployed people with market-related skills. They have seen over 80% of their graduates become economically active, with up to 11% starting their own businesses. o Jam SA JAM SA has been serving disadvantaged communities in South Africa since At the end of 2015, JAM SA was supporting more than Early Childhood Development (ECD) Centres. JAM SA operates in seven provinces in South Africa: Gauteng, KwaZulu-Natal, Eastern Cape, Western Cape, Northern Cape, Limpopo and North West. Through partnerships with various organisations and donors, JAM SA feeds over children every school day. As part of measuring their impact and ensuring they continue to remain effective, as of January 2014, JAM SA introduced nutritional assessments to measure the impact of our programmes. o Uthando Social Development Program Uthando is a unique model of Travelling Philanthropy and Responsible Tourism linking the local and international tourism industry focused on South Africa with a broad range of innovative, inspiring and well managed community development projects. Fairvest continue to have R2 million invested in the Cadiz Enterprise Development Investment ( CENT ). CENT undertakes to invest into unlisted debt investments that comply with the Broad-based BEE Codes of Good Practice. This gives Fairvest the opportunity to invest in a platform that is commercially scalable in its approach to SME growth and job creation. This investment will also contribute to Fairvest s Enterprise Development spend. During the 2017 financial year Fairvest obtained its rating under the Property Charter s B-BBEE Code at a level 6 contributor to B-BBEE. This process has again identified focus areas that can contribute to an improved rating. Fairvest recognises that integrating transformation into business practice is crucial for the sustainability of the company. KING IV King IV was released in November 2016 and is effective for financial years commencing on 1 April The Company Secretary are in the process of finalising a gap analysis of King III versus King IV and during the 2018 financial year, the company s governance practices will be aligned with the 16 principles as contained in King IV. 44

47 ACCOUNTABILITY

48 BOARD OF DIRECTORS JF (JACQUES) DU TOIT (AGE 46) LW (LOUIS) ANDRAG (AGE 44) DM (DARREN) WILDER (AGE 48) BJ (JACQUES) KRIEL (AGE 38) Non-executive chairman Date appointed: 10 October 2007 Committees: Remuneration and Nomination; Investment Jacques is a chartered financial analyst and has been involved in the financial services industry since joining HSBC Simpson McKie as a stockbroker in He joined the portfolio management side at HSBC in 2003 and headed up the investment process until 2005 when he joined Investec Securities Limited as senior portfolio manager. In August 2008 he jointly set up a financial services company, Cohesive Capital. He serves as a director on the boards of a number of private companies. Lead independent non-executive director Date appointed: 1 December 2010 Louis graduated from the University of Stellenbosch in 1996 with a B.Engineering (Industrial Mechanical) degree and worked in Germany and the USA as an engineer before returning to South Africa, and joined Stellenbosch Farmers Winery as site engineer. He joined an agricultural business as logistics manager and obtained his Honours and Masters degree in Business Administration through part-time studies from the University of Stellenbosch. He was later appointed as general manager of the Agricultural Machinery Division and Director. In 2009 Louis started his privately owned property investment and residential development company Leggato Investments with investments in South Africa and Germany. He serves as chairman and director on the boards of a number of private companies. Chief executive officer executive director Date appointed: 22 September 2011 Committees: Social and Ethics; Investment Darren worked for Seeff Properties in various positions from 1991 until During 1997 he was appointed to the board of the then JSE-listed company, Capital Alliance Properties, and was a participant in its management buy-out. Darren co-founded Spearhead Property group and was part of the team that listed the company on the JSE. He was appointed COO in Darren s work experience also includes national leasing director for Madison Properties, business development director of the V&A Waterfront and also a consultant to the chief executive officer of the V&A Waterfront. Chief financial officer executive director Date appointed: 19 January 2010 Committees: Investment Jacques was the CEO and financial director of Fairvest from January 2010 until October Jacques is qualified as a chartered accountant. After completing his training he relocated to the United Kingdom where he joined Ernst & Young, London. Jacques joined the Bank of England in 2008 and was, until he joined Fairvest, responsible for the financial reporting of the United Kingdom s Foreign Currency Reserves. LENGTH OF TENURE JF du Toit BJ Kriel LW Andrag DM Wilder AJ Marcus KR Moloko N Mkhize JD Wiese 13 STRUCTURE (%) 25 Executive Independent non-executive TJ Cohen Appointment (years) 62 Non-executive Chairman 46

49 KR (KENEILWE) MOLOKO (AGE 48) Independent nonexecutive director Date appointed: 1 February 2013 Committees: Audit and Risk; Remuneration and Nomination Keneilwe started her career as a Quantity Surveyor with Grinaker Building, Dawson & Frazer and CP De Leeuw Quantity Surveyors. After a period of six years in the construction industry, she went back to study to become a Chartered Accountant. On completion of her articles at KPMG working in the financial services and tax divisions, she took up the position of development executive at Spearhead Properties. Thereafter, she joined Coronation Fund Managers as a Fixed Interest credit analyst and a member of the Coronation Credit Committee. Keneilwe currently serves as an independent non-executive Director on several boards. N (NDABE) MKHIZE (AGE 39) Independent nonexecutive director Date appointed: 2 June 2014 Committees: Audit and Risk; Investment Ndabe is the Chief Investment Officer of the Eskom Pension and Provident Fund with overall investment oversight over R135 billion in assets. His previous experience includes co-portfolio management positions at STANLIB Asset Management and Coronation Fund Managers as well as an equity analyst role at Prudential Portfolio Managers. Ndabe holds a BSc (Actuarial Science) degree from the University of Cape Town (UCT) and the designations of Chartered Financial Analyst and Chartered Alternative Investment Analyst. In addition, he has gone through the Property Development Programme at the UCT Graduate School of Business. ADVOCATE JD (JACOB) WIESE (AGE 36) Independent nonexecutive director Date appointed: 2 June 2014 Committees: Audit and Risk; Investment Jacob holds a BA (Value & Policy studies) degree from the University of Stellenbosch, a Master s degree in International Economics and Management from Universita Commerciale Luigi Bocconi in Italy and an LLB degree from the University of Cape Town. In 2009 Jacob completed his pupilage at the Cape Bar and was admitted as an Advocate of the High Court. Jacob is a director of Steinhoff International Holdings, a non-executive director of Steinhoff Africa Retail and Invicta Holdings and an alternate director of Shoprite Holdings and Tradehold. He is also involved with the management of Lourensford Wine Estate, one of South Africa s largest and most prestigious wine farms. TREVOR COHEN (AGE 75) Independent nonexecutive director Date appointed: 19 June 2017, with effect from 1 July 2017 Committees: Investment Trevor holds a BComm and Post Graduate degree of Bachelor of Law (LLB) from University of Witwatersrand. Trevor has over 35 years of experience in the retail real estate sector. His experience includes being a senior member of the real estate division at Ellerines Group of Companies, joint head of the Real Estate Division at OK Bazaars, head of the Gauteng branch of the New Business Development Division of Shoprite and until his retirement in April 2017, he was a Senior Consultant at Shoprite. AJ (ADAM) MARCUS (AGE 44) Chief operating officer alternate director to DM Wilder Date appointed: 22 September 2011 Committees: Social and Ethics; Investment Adam graduated in 1995 from the University of Cape Town with a BSc (CM). After graduating, Adam jointed a commercial property brokerage where he headed up the Investment Sales Division, structuring investment and development transactions. In 1999, he founded Gateway Property Developments, which has a 12-year track record of delivering commercial & residential property developments. Having successfully managed a property development business, Adam s skill set encompasses a full spectrum of property skills from deal structuring, structured finance, green fields and brown field developments, re-developments, value engineering, property management and leasing. ACCOUNTABILITY GENDER DIVERSITY (%) 74 White male Black male Black female 50 AVERAGE AGE (%) 38 < >50 47

50 CONSOLIDATED ANNUAL FINANCIAL STATEMENTS for the year ended 30 June 2017 The reports and statements set out below comprise the group annual financial statements presented to the shareholders: Report of the audit and risk committee 50 Report of the Company Secretary 50 Directors responsibilities and approval 51 Directors report 52 Independent Auditor s report 56 Statement of financial position 59 Statement of comprehensive income 60 Statement of changes in equity 61 Statement of cash flows 62 Accounting policies 63 Notes to the group annual financial statements 70 Details of property portfolio 99 Property portfolio statistics 101 Analysis of shareholders 102 The following supplementary information does not form part of the group annual financial statements and is unaudited: Stock exchange performance 103 JSE statistics 103 Shareholders calendar 103 Corporate information 104

51 ANNUAL FINANCIAL STATEMENTS