TOWER PROPERTY FUND INTEGRATED ANNUAL REPORT Tower Property Fund

Transcription

1 TOWER PROPERTY FUND INTEGRATED ANNUAL REPORT 2016 Tower Property Fund Integrated Annual Report 2016

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3 TOWER PROPERTY FUND CONTENTS Year in review 3 Introducing the report 5 Tower at a glance 7 Group strategy 8 Board and management 10 Chairman s letter to shareholders 14 Chief executive s report 16 Operational report 30 Top 10 properties by value 34 Greening strategy 38 Corporate governance report 42 Social and ethics committee report 48 Summary financial statements and notes 50 Directors report 67 Capital structure of the group 69 Shareholder analysis 70 Notice of annual general meeting 71 Shareholder diary 78 Form of proxy 79 Corporate information 81 INTEGRATED ANNUAL REPORT 2016

4 TPF 2016 Tower Property Fund Limited owns a diversified portfolio of 50 retail, office and industrial properties valued at R5.1 billion (as at 30 June 2016), located in South Africa and in Croatia, representing CROATIA 69% and 31%, by value, respectively. The South African portfolio is spread across the Western Cape (26% by value), Gauteng (33% by value) and KwaZulu-Natal (10% by value). R5.1 billion 69% 2

5 TOWER PROPERTY FUND YEAR IN REVIEW Distribution of 92 cents per share in line with forecast Headline earnings up 36% to R170 million Market capitalisation increased by 19% to R1.9 billion (and by 69% to R2.7 billion at end June 2016) R500 million raised through accelerated book build (June 2015) A further R740 million raised through a book build to fund the Agrokor acquisition and the internalisation of the asset management company Portfolio expanded to 46 properties (50 properties June 2016) Portfolio value increased by 25% to R3.9 billion (68% to R5.1 billion, June 2016) Offshore properties totalling R1.6 billion acquired in Croatia Management company internalised (June 2016) South Africa + 31% Croatia Exposure to South Africa debt reduced to 41% (59% debt exposure to stable European markets) Greening programme gaining momentum INTEGRATED ANNUAL REPORT

6 Tower Property Fund is an internally managed company which owns a R5.1 billion portfolio of 50 high quality commercial, industrial and retail properties as at 30 June 2016.

7 TOWER PROPERTY FUND INTRODUCING THE REPORT Through this report the group aims to provide shareholders with greater insight into how the business creates and sustains value over the short, medium and long term. The report also focuses on the group s green building philosophy and aims to demonstrate how this strategy can enhance value for our shareholders. Our reporting is aligned with best practice based on the principles of the King Code of Governance Principles (King lll). The integrated report complies with the relevant sections of the Companies Act and the JSE Listings Requirements. Management plans to align reporting with the International Integrated Reporting Framework in future years. Report scope and boundaries The integrated report covers the activities and financial performance of Tower Property Fund for the financial year 1 June 2015 to 31 May During this period the group acquired its first offshore property in Zagreb, Croatia. In June 2016 the group acquired four more properties in Croatia taking its total offshore assets to 31% of its portfolio. There has been no significant change from last year in the scope of the report. Management s interpretation of materiality has been applied in determining the content and disclosure in this report. Materiality has been defined as being those issues that could affect the group s ability to create value over time or that could impact on an investor s valuation of the group. In line with our commitment to greening and sustainability, the group has only published summarised financial statements in the integrated report and made the full annual financial statements available online. This not only results in a meaningful cost saving on paper, printing and postage but importantly also reduces our impact on the environment. The audited annual financial statements are available on the company s website or by request from the company secretary. Assurance This integrated annual report contains fowardlooking statements that, unless otherwise indicated, reflect the group's expectations as at 31 May Actual results may differ materially from the group's expectations if known and unkown risks or uncertaintities affect the business, or if estimates or assumptions realise differently. The group cannot guarantee that any foward-looking statement will materialise and, accordingly, readers are cautioned not to place undue reliance on these foward-looking statements. The group disclaims any intention and assumes no obligation to update or revise any foward-looking statement even if new information becomes available as a result of future events or for any other reason. The content of the integrated report has been reviewed by the directors and management but has not been externally assured. The group s external auditor, Mazars, has provided assurance on the annual financial statements and expressed an unmodified audit opinion. Approval of Integrated Annual Report The board acknowledges its responsibility to ensure the integrity of the integrated report. The audit and risk committee has oversight for integrated reporting. The committee confirms the report fairly represents the integrated performance of the group and recommended the report for approval by the board of directors. The board accordingly approved the 2016 integrated report for release to shareholders on 27 September Andrew Dalling Marc Edwards Independent Chief Executive Non-executive Officer Chairman INTEGRATED ANNUAL REPORT

8 The Portfolio value increased by 25% to R3.9 billion (by 68% to R5.1 billion, June 2016) Portfolio at a glance End May 2016 End June 2016 Property portfolio value R3.9 billion R5.1 billion Rentable area (GLA) m m 2 Occupancy rate 95% 96% Portfolio escalations 7.8% Average gross rental R107/m 2 Gearing (LTV) 41% 39% 6 INTEGRATED ANNUAL REPORT 2016

9 TOWER AT A GLANCE Tower Property Fund is an internally managed company which owns a R5.1 billion portfolio of 50 high quality commercial, industrial and retail properties as at 30 June The properties are located in South Africa (69%) and Croatia (31%). In South Africa the geographic split is, Western Cape (26%), Gauteng (33%) and KwaZulu-Natal (10%). Flagship properties in the portfolio include Cape Quarter, the landmark retail and office building in De Waterkant, Cape Town, VMD Kvart Block B, the premium grade office property in Zagreb, Croatia, Link Hills Shopping Centre in Kwazulu-Natal, SunClare Office Block in Claremont, Cape Town and Upper Grayston Drive Office Park in Sandton. The group is managed by a highly experienced and respected property team. In line with international best practice, the asset management function was internalised, in June Management and shareholders are now fully aligned as there is a perception in the market that external management creates drivers for growth which are not aligned with shareholders interests. Tower became South Africa s first new real estate investment trust (REIT) to list when the group made its debut on the JSE Limited in July Tower is committed to a strategy of "greening" to increase the competitiveness and values of buildings in the portfolio. The founders of Tower included founding members of the Green Building Council of South Africa. The focus of the greening strategy is on improving energy efficiency which serves to reduce operating costs and lower carbon footprints, making properties more valuable and marketable to prospective tenants. The group believes that unless property owners begin to retrofit their properties from a green perspective, those properties will become obsolete over time. Tower s portfolio includes a five- and six-star Green rated property with its flagship property, Cape Quarter, currently undergoing evaluation for an existing building rating. Tower has implemented greening initiatives across the portfolio at attractive yields and is currently saving circa R4 million per annum in operating costs as a result. These initiatives include lighting retrofits and solar photo voltaic (PV) installations at certain properties which will reduce energy consumption and carbon emissions significantly. For further information refer to the Greening Report on page 38. 8% 43% (June 2016) Revenue 26% (June 2016) Revenue 31% Office Industrial Retail 49% 10% W.Cape KZN Croatia Gauteng Sectoral Profile 33% Geographic Profile 7

10 GROUP STRATEGY The ability to reduce a property s energy demands is a key consideration when purchasing a property as the group believes in future proofing its assets by reducing energy demands and therefore increasing tenant retention and values. Property investment strategy The group targets mainly medium-sized (R80 million to R300 million) properties, and aims to ensure diversification in terms of sector and geographic location. The ability to reduce a property s energy demands is a key consideration when purchasing a property as the group believes in future proofing its assets by reducing energy demands and therefore increasing tenant retention and values. The objective of having more than 50% of its properties in the retail sector is close to being achieved. At the end of June 2016, the group s portfolio was split as to 49% retail, 43% office and 8% industrial. This is a marked shift from when the company listed (in July 2013) where offices accounted for a large portion of the company s assets. The properties are split between South Africa and Eastern Europe. South Africa accounts for 69% of the portfolio by value (Gauteng 33%, Western Cape 26% and KwaZulu-Natal 10%) with Eastern Europe (Croatia) accounting for 31%. Property types The group has focused on well located properties in strong nodes with good growth potential. Hands-on asset management focused on extracting additional value by creating new lettable space has proven successful over the past year with key assets Cape Quarter and SunClare in Cape Town, performing well. Additional bulk in the portfolio is identified and worked through a development process to identify community needs. Examples of this strategy are the new residential property currently under construction at 32 Napier Street, Cape Town. In the retail portfolio, Tower focuses mainly on convenience shopping centres. This sector has performed well in South Africa of late and is not affected by the online shopping trend which is growing internationally. In Croatia, retail and office properties are being targeted at attractive yields relative to the South African equivalent demonstrating the opposite position the countries find themselves in the property cycle. Debt in Croatia is low and therefore the positive gearing the group achieves through its acquisitions has a strong impact on short-term returns. Growth in Europe remains a key focus and the group has secured excellent growth in its recent acquisition with a turnover clause being negotiated with the anchor tenant which should translate to healthy, Euro-based, lease escalations into the future. Head lease structures over all of the Croatian properties acquired to date result in strong, secure cash flows for the Company. The head leases which have been negotiated with the sellers of the various properties (a head lease ensures that the vendor is responsible for the payment of rental for the entire property) are "triple net" in nature (Tower receives a guaranteed net income each month). 8 INTEGRATED ANNUAL REPORT 2016

11 GROUP STRATEGY Tower's active, hands-on asset and property management enables the group to turn around underperforming properties. Significant value has been added in the past year through management effort and expertise. This has been demonstrated with the continued low vacancies in the portfolio. 22% 4% (May 2016) GLA Greening Tower has a strong focus on greening its property portfolio, through no- or low-cost initiatives which reduce the total cost of occupancy for tenants. Tower's "Green Committee" sets the overall green policy, both for the business and for the portfolio. 15% Croatia Gauteng KZN Cape Town 60% Geographic Spread The green initiatives make for more competitive buildings: in the current competitive market, tenants are increasingly focusing on the total cost of occupation, as well as their impact on the environment through business activities. Electricity costs have increased dramatically in recent years, putting pressure on owners net rentals. These, above inflation increases, are anticipated to continue in the medium term. Green buildings, with lower energy demands, are naturally more attractive to tenants as a result. Several initiatives have been implemented which are serving to reduce operating costs and increase the competitiveness of Tower s properties in attracting and retaining tenants. For further information refer to the Greening Report on page 38 to % (May 2016) GLA Industrial Retail Office 24% 32% Sectoral Spread 9

12 BOARD AND MANAGEMENT Andrew Dalling (72) Dip Law Chairman, Independent Non-Executive Director Marc Edwards (42) NQF5 Real Estate Chief Executive Officer Executive Director Joanne Mabin (37) CA(SA) Chief Financial Officer, Executive Director Andrew practiced as an attorney for 32 years, and gained a formidable reputation in the litigation and human rights fields. He retired as a senior partner of Cliffe Dekker Hofmeyr in Andrew was the chairman of Paramount Property Fund and served on various Law Society committees. Marc co-founded Tower in 2012 after a number of years in property and financial management. Marc, together with Bruce Kerswill, Keith Craddock and Rodney Squire-Howe is a shareholder of Spire Property Group, a property services company with a strong reputation in South Africa. Marc serves as a director for a number of property related companies. Joanne qualified as a chartered accountant in 2004 after which she spent seven years working in the UK at Rowan Asset Management and M&G Investments Limited where she was responsible for the financial management and reporting for several property and infrastructure funds. After returning to South Africa, Joanne joined Old Mutual Investment Group where she was responsible for the financial reporting of their African infrastructure funds. 10 INTEGRATED ANNUAL REPORT 2016

13 BOARD AND MANAGEMENT Bruce Kerswill (60) B Sc (Town and Regional Planning), MBA Keith Craddock (60) B Sc (Civil Eng), MBA Martin Evans (59) B Sc (Town and Regional Planning), MBA Non-Executive Director Non-Executive Director Non-Executive Director After a career in town planning Bruce moved into property development and worked with a number of the country s leading property companies. He cofounded Spire Property Group in 1999, which listed Paramount Property Fund in Bruce is currently group MD of Spire. He was also the founding chair of the Green Building Society of South Africa (GBCSA) and was chair of the World Green Building Council. Keith practiced as a structural engineer before moving into the property industry and gaining experience in property and asset management in some prominent JSE listed companies. He joined Spire in 2002 where he is currently group operations director. He was also a director of IPD South Africa, a subsidiary of a global provider of property benchmarking statistics. Martin has been involved in the property industry for over 30 years, mainly focused on the Gauteng region. He worked for a leading property developer prior to forming his own company, Brydens Property Group. The company has built several A grade commercial developments in Johannesburg and Pretoria. 11

14 BOARD AND MANAGEMENT John Bester (68) B Com (Hons), CA (SA), CMS (Oxon) Nicola Milne (41) B Com, PGDA, CA(SA) Athi Magwentshu (38) B Tech (QS), MBA Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director John spent 16 years in the accounting profession, including 10 years as a partner at Ernst & Young. He has been involved in commerce and industry for over three decades, holding several financial directorships. He currently serves as a non-executive director of Clicks Group, Ascendis Health, Sovereign Foods and Business Connexion Group. He was previously a director of Paramount Property Fund. Nicola worked in finance in New York and London before joining Old Mutual Property Group in She gained wide-ranging exposure to property development and management, mainly focusing on new business start-ups such as Old Mutual Property s joint venture in India. Nicola was the founding CEO of GBCSA in 2007 and continues to consult to the council. Athi started his career as a quantity surveyor and worked for Stocks and Stocks and later WBHO Construction. In 2003 he joined Absa CPF where his role included providing debt funding to investors, developers and listed property counters. He served on the board of Paramount Asset Managers. Athi is currently a partner in a property investment company. 12 INTEGRATED ANNUAL REPORT 2016

15 BOARD AND MANAGEMENT Raven Naidoo (51) B Sc (Hons), M Sc (Nuclear Physics), M Sc (Tech Innovation Mgt), Ph D Independent Non-Executive Director Johan Malherbe (53) BA LLB, HDip Tax Asset Manager Bruce Rogerson (54) Asset Manager Raven has academic qualifications in physics and information technology, and is the executive chairman of Future Perfect Corporation. He has served on the boards of the Cape IT Initiative, the Cape Town International Convention Centre, Tellumat and Sentech. He is currently the senior adviser to the City of Cape Town on its telecommunications and broadband strategies. Johan has a legal, tax and specialised finance background and has been involved in property transactions for almost 20 years. He was a founding member of Mettle Limited, a specialised finance house which was listed on the JSE. Johan is responsible for the asset management of Tower s portfolio in the Western Cape. After starting his career in corporate banking with Standard Bank and Investec, Bruce moved into the commercial property industry. He was a co-founder of Ernst & Young Retail Estate Advisory and Mettle Property Group. His property experience includes deal making, advisory and consulting, investments, asset management and specialised property finance. Bruce is responsible for the asset management of Tower s portfolio in Gauteng and KwaZulu-Natal. 13

16 CHAIRMAN S LETTER TO THE SHAREHOLDERS R740 million capital was raised through a highly successful book-building exercise. Dear Shareholders On considering the achievements of Tower Property Fund over the year-ended May 2016, and on contemplating Tower s prospects for next year, I am imbued with the same sense of satisfaction, anticipation, and enthusiasm as I felt and expressed in my letter to shareholders last year. As we all know the decline in the general economic climate in South Africa and the stuttering volatility of the market has continued during the last year. Notwithstanding this, however, Tower s executive and management team under the inspiring leadership of CEO Marc Edwards has continued to distinguish itself and Tower has developed and grown significantly in this period. While the activities and achievements of Tower in the past year will be dealt with comprehensively in the CEO s Report, I draw attention to the following: > Tower s portfolio grew from R3.1 billion to R3.9 billion (R5.1 billion as at 30 June 2016). > R740 million capital was raised through a highly successful book-building exercise. > Implementation of Tower s greening strategy across the portfolio is having a profound influence and has been a significant factor in the consolidation of lettings and in the reduction of vacancies within the portfolio. > Tower s long-term strategy of unlocking, where appropriate, the unused development potential of properties within the portfolio has commenced to unfold and has the potential to produce substantial future benefit to shareholders. > Tower s distributions to shareholders have been in line with its guidance to the market. In addition, negotiations conducted and concluded during the past year have led to the subsequent and successful accomplishment of the internalisation of the management of Tower, which was achieved with the overwhelming support of our shareholders at a General Meeting of Shareholders held on 13 May > R400 million worth of property was acquired in Croatia (a further R1.1 billion s worth acquired in June 2016). 14 INTEGRATED ANNUAL REPORT 2016

17 CHAIRMAN S LETTER TO THE SHAREHOLDERS Notwithstanding the parlous economic conditions which have prevailed and have been experienced in the country throughout the last year the continued development and growth of Tower during this period has been more than remarkable and is consequent upon the inspirational leadership of CEO Marc Edwards, and the qualities of determination and skill which he and his closely-knit executive and management team have brought to bear in all of Tower s operations, activities, and transactions. Together with these qualities, a high level of ethics and integrity has been ever-present and has continued to govern all actions and aspects of the stewardship and business of Tower throughout. This is a much-prized hallmark of Tower recognised and appreciated by all who interact or deal with it; a hallmark of which Tower is justifiably proud. It is appropriate also to record that without the full-hearted support and loyalty of our shareholders the development and advances achieved over the last year would not have been possible. In this regard on behalf of Tower and the board I wish to express our thanks and appreciation to our shareholders for the confidence they have placed and continue to place in Tower and its board. team who have used their skills superbly and given him admirable support throughout. In conclusion, I must again commend and thank my entire board of directors, executives and nonexecutives alike, for the clear direction they have given over the past year. As before, the openhearted interaction, mutual respect and support which exists and which is constantly exercised and enjoyed between all board members continues to redound to the credit of all. This, too, is a hallmark of Tower and I am privileged to chair its board of directors. Andrew Dalling Chairman My thanks and congratulations are also clearly due particularly to CEO Marc Edwards. His leadership has been inspirational and catalytic and his stewardship of all aspects of Tower has been exemplary. It is a privilege for me as Chairman to work with a CEO of such outstanding calibre. Thanks and plaudits are also due to the Marc s executive co-directors and management 15

18 CHIEF EXECUTIVE S REPORT My fellow shareholders, Economic challenges, mainly as a result of political instability, have made for a difficult operating environment. Our team has been forced to adapt to the ever changing market in order to retain and increase shareholder value. The Rand has weakened significantly in the past 12 months and the looming threat of a sovereign rating downgrade has created instability in financial markets. This volatility has hit the property sector which is closely correlated to South African bonds and interest rates. Companies with offshore exposure have weathered the storm better than their counterparts focussed purely on South African properties. Despite these macro conditions, Tower has produced a pleasing set of results, achieving our year-end guidance by paying a distribution of 92 cents per share. Based on forward looking numbers, the group (at a share price of R8), should produce a core earnings return for shareholders of 10.5%. (These forecasts are the responsibility of the directors and have not been reviewed and reported on by the group's auditors). The SA Reit Association has recently released a best practice document aimed at ensuring Real Estate Investment Trust s (Reit s) reporting is uniform and transparent. Tower intends following the guidelines of this document in its annual reporting. Management's key focus going forward will be growth in core earnings and reducing reliance on once off profits (which make the objective performance of a Reit difficult to compare). Going forward, rather than paying out once off profits, management will look to reinvest those profits in the company by inter alia, buying-back Tower shares where value exists, reducing debt and acquiring new properties in South Africa and Europe. Any once off profits which are distributed will be disclosed and explained. As managers, shareholders entrust us to grow our total returns and to sweat the assets under our control to the best of our ability. I am pleased with our progress in this regard in difficult operating conditions where macroeconomic growth is flat or negative. Tower s management team has focused on enhancing property fundamentals in the portfolio to sustain value for shareholders and to future proof properties through greening initiatives. The group has continued to grow by acquiring well located properties which we believe will deliver above average growth in the long term. Acquisitions have come about as a result of management s network of contacts in the property sector with very few, if any, unsolicited deals being consummated through property brokers. Despite these macro conditions, Tower has produced a pleasing set of results, achieving our year-end guidance by paying a distribution of 92 cents per share. 16 INTEGRATED ANNUAL REPORT 2016

19 CHIEF EXECUTIVE S REPORT The net asset value is R9.85 per share and the portfolio has grown in value by 25% to R3.9 billion (R5.1 billion at end June 2016). Certain non-core properties were sold in the past year. We will continue to offload non-core properties into the future with five properties currently on the market. The proceeds of these properties will be used to reduce debt and to buy back Tower shares. Strategy Tower aims to generate competitive investment performance by adding value through property asset management and the cost-effective greening of properties in the portfolio. This results in lower operational expenditure and increased tenant retention. The investment strategy is to expand the portfolio by targeting mainly medium-sized properties and to ensure a diversified sectoral and geographic portfolio. Management targets properties with sound fundamentals, good cash flows and good growth potential, and manages risk through a combination of built-in vacancy allowances and rental guarantees. Tower adopts an active management approach, which focuses on constant tenant interaction and feedback, based on the philosophy that benefits can be maximised when the landlord and tenant work together. The group s strategy is detailed on page 8 and 9 of the report. Financial and operational performance Tower achieved its guidance for the year-ended May 2016 by declaring a total distribution of 92 cents per share. Net operating profit increased to R302 million and distributable earnings to R221 million. The group uses distribution per share as its relevant unit of measure for trading statement purposes. The net asset value is R9.85 per share and the portfolio has grown in value by 25% to R3.9 billion (R5.1 billion at end June 2016). The group s market capitalisation has grown by 19% in the past 12 months to R1.9 billion at year-end (R2.7 billion at 30 June 2016). Operationally, it is pleasing to report that vacancies remain low at 4% (June 2016), representing a 60% reduction since 31 November A total of m 2 of space has been let, comprised of m 2 of renewable space and m 2 of new space. The group has also attracted stronger tenants as part of this process, resulting in more sustainable earnings for the group. Rental escalations continue to beat inflation with a competitive weighted average escalation of 7.83% per annum (the weighted average rental escalation, per sector, based on existing leases is as follows: industrial 8.5%; office 7.3% and retail 7.85%). 17

20 CHIEF EXECUTIVE S REPORT As at 30 June 2016, the sectoral profile of the group has been further diversified, with retail accounting for 49%, office 43% and industrial 8%.The company is close to achieving its listing target of having roughly 50% of its properties in the retail sector. Convenience retail has performed well in South Africa and the company sees this sector of the retail market as the most defensive with pressure coming in other retail properties through online shopping and over saturation of malls. Retail, office and industrial property of R728 million was purchased during the past financial year with a transformative Croatian transaction of R1.1 billion being concluded in June Successful move into Croatia As advised in last year s CEO s report, Tower ventured into Eastern Europe and acquired its first off shore property in Croatia. In August 2015, Tower formed a partnership with the VMD Group based in Zagreb, Croatia and acquired 15 floors of their recently developed VMD KVART Block B. This premium grade property has met and exceeded management s expectations and has increased in value by approximately R130 million in 10 months. This increase in value is mainly due to Euro/ZAR currency movement, however, the property has seen a reduction in its cap rate from 8.5% to 7.75%. This move in cap rate is as a result of the property being let to leading international and national tenants. Our partnership with VMD has been highly beneficial to the group. VMD is extremely well regarded in the region and our experience with them has been a pleasure. The product they have produced in VMD KVART is market leading and compares well to international premium grade office properties. The property attracted major international tenants who operate in Croatia and rentals have grown steadily as a result. The five-year head lease Tower has with the developer has provided a safe, defensive entry into a new jurisdiction and we expect the value of this property to continue to grow as rentals increase from the low base they are coming off after the long recession Croatia found itself in following the 2008 global financial crisis. Tower finalised the acquisition of four Croatian retail properties in June These four properties were acquired from Agrokor d.d. Agrokor is the largest company in the Adriatic region employing over people with an annual turnover of 6.5 billion. This acquisition is far and away the largest and most important in the company s history and positions Tower for strong future growth with the largest company in the region. 18 INTEGRATED ANNUAL REPORT 2016

21 CHIEF EXECUTIVE S REPORT This acquisition is far and away the largest and most important in the company s history and positions Tower for strong future growth with the largest company in the region. The four properties are anchored by Konzum d.d. Konzum is a listed company and is owned by Agrokor. Konzum is similar to South Africa's Pick n Pay and is the dominant retailer in the region. It operates numerous stores throughout Croatia and the region ranging in size from a street corner shop of a few hundred square meters to a large Super Konzum, similar to a Pick n Pay Hypermarket. Of particular importance to the transaction is the triple net, escalating, head lease which was successfully negotiated. The lease is with Konzum (guaranteed by Agrokor) and covers all four properties (two properties head lease is in the form of a "management agreement" but has the same effect as a head lease). The head lease is fully maintaining and repairing. Therefore, Konzum covers all costs with the ownership of the property, including management, maintenance, rates and taxes, etc while at the same time being fully responsible for leasing, tenant management and other income related tasks. A contractual net income is paid to Tower quarterly and all risks are assumed by Konzum. expect the lease to escalate at between 4% to 5% per annum in Euro. This transformative transaction increases Tower s assets to R5.1 billion and increases our offshore exposure to 31%. After the transaction, our exposure to highly volatile South African interest rates and debt has reduced to 41% of our total debt with European exposure now accounting for 59% of the company s debt obligations. 77% of our South African debt is fixed (from an interest rate perspective) and 72% of the European exposure is fixed for up to five years (it is anticipated that 100% of the group's European debt will be fixed in the short term). Information on the Agrokor properties and all the properties of the group, can be found on the group s website, The lease is linked to inflation and has a turnover clause attached to the Konzum stores. Using Konzum s anticipated turnover in stores which occupy the four properties, we 19

22 Debt Profile 79% Standard Bank of South Africa (Rand) 1% Nedbank (Rand) 10% Standard Bank of South Africa (Euro) 10% Privredna Banka Zagreb (Euro) 1% 10% 10% May 81% exposed to South Africa 40% Standard Bank of South Africa (Rand) 1% Nedbank (Rand) 32% Standard Bank of South Africa (Euro) 20% Privredna Banka Zagreb (Euro) 7% Zagrebacka Banka (Euro) 20% 7% June 41% exposed to South Africa 40% 79% 32% 1% Capital raising The group raised R500 million in an accelerated book-build undertaken in June These funds were used for the acquisition of various properties acquired in the second half of the 2015 calendar year. The group undertook a further book-build in May 2016 and successfully raised R740 million to settle the Agrokor transaction and to internalise the asset management company. Internalisation of asset manager Tower was managed by an external asset manager, Tower Asset Managers (Proprietary) Limited, since its founding and listing. The founders of Tower followed this approach to avoid the dilutionary effect of high head office costs when the fund was relatively small. As the fund has grown, however, head office costs have become lower than the asset management fee charged by the manager which was a contributor to the group s decision to internalise its asset management function. Internalised management is the internationally preferred method of management from a shareholder perspective as the interests of management and shareholders are aligned. As the transaction was a related party agreement, a fairness opinion was sought through an independent expert (BDO Spencer Stuart Inc). The sales agreement and price of R145 million were deemed to be fair to Tower shareholders. The R145 million was settled as to 50% cash and 50% Tower shares. Shares were issued to management at the last published net asset value of the company being R10.07 per share (this despite the share price trading at approximately 20% below this level in the market). Borrowings Tower has loan facilities totalling R1.7 billion at 31 May Interest rates are hedged on 40% of the total loan facility (65% as at 30 June 2016). On 31 May 2016, the group cancelled its Rand denominated swap and caps totalling R780 million, which expired within one to two years. These fixes were significantly in the money and the profit made on the cancellation was used to purchase a R500 million swap at 7.70%, expiring on 31 May The weighted average rate of interest is 8.09% (6.11% as at 30 June 2016) for the portfolio. Based on investment properties valued at R3.9 billion, the loan to value (LTV) ratio of the fund was 41% at the end of the period (39% as at 30 June 2016). The Fund has a targeted LTV of 40%. There are no restrictive funding arrangements in place. The group continues to explore the option of raising debt finance in the capital markets through its relationship with Investec Bank. This will reduce the total cost of borrowings into the future. It has, however, not been appropriate to utilise this method of debt 20 INTEGRATED ANNUAL REPORT 2016

23 CHIEF EXECUTIVE S REPORT Tower has two green star rated properties with Cape Quarter currently undergoing an existing building rating. funding to date given the competitive senior debt provided by our banking partners. However, as the group continues to grow its asset base, this source of funding will be considered. Greening The greening strategy is the bedrock on which we manage our properties. We firmly believe that greening properties is both responsible from a planet perspective but also is financially prudent. Properties which are not managed in line with green principles will simply not attract quality tenants in the future. We continue to focus intensely on this aspect of our business through occupancy cost reduction. Greening is aimed at making our properties more attractive to tenants as utility costs rise and assists in retaining tenants in a highly competitive market. The solar and lighting initiatives installed at various properties (some in December 2014) are all performing above expectations and we anticipate continued efficiencies as the costs of this technology continues to come down. Tower has two green star rated properties (a five and six star) with Cape Quarter currently undergoing an existing building rating. Existing building ratings are being strongly pushed internationally as it is commonly believed that more than 90% of the world's buildings have already been built so focusing purely on new buildings in an effort to reduce the built environment's impact on climate change is a bit like going into a war armed with a spoon. Massive changes are being made to existing buildings world-wide with the green revolution now moving main stream with large international corporates on board pushing the agenda. This is an exciting space to operate in and we believe interesting innovations will emanate from landlords and tenants around the world as we all pull in the right direction towards reducing our impact on our planet. New developments Development has started at Tower s first residential conversion at 32 Napier Street in Cape Town. This property is located in the Cape Quarter precinct where residential property is in high demand. The previous property has been demolished and a new, five story property, containing two floors of commercial space and three floors of residential, containing 19 upmarket apartments, is being built. The project is scheduled for occupancy in mid The apartments will likely be sold by the group. Another residential development of 54 apartments is in the planning phase at the Piazza property in Cape Quarter. This project is currently in the approval process with residents and the City of Cape Town. We are working closely 21

24 CHIEF EXECUTIVE S REPORT with ratepayers' associations and architects to ensure the unique feel of the De Waterkant area is preserved. A total of 119 parking bays are being added to the underground parking of Cape Quarter as a result of the Napier Street development which will be a welcome relief for shoppers and neighbours as parking is scarce in the area. Parking at Cape Quarter is performing exceptionally well. When the property was acquired in May 2013 the rentals we achieved per bay were R750 and this has increased to R2 500 per bay, an increase of 230% in three years. The way forward Tower has undergone a large transition in the past year with the acquisitions of the Agrokor properties and the internalisation of the asset management function. It is our intention to settle the portfolio down in the short-term by selling non-core properties and sweating our well located larger assets by adding lettable area and looking at initiatives like residential and greening projects. With a 31% offshore exposure, we believe we are well positioned and hedged to protect against short-term South African macroeconomic woes while taking advantage of the impressive growth of Eastern Europe. Tower has a significant pipeline of opportunities both locally and abroad (mainly in Eastern Europe) and will look to realise these opportunities over time. A key consideration to acquiring additional assets will be our cost of capital and the cap rates on which the sellers are basing their sales. We expect cap rates to move out in South Africa and will not rush into transactions where price expectations are unreasonable. We expect a tough 12 months ahead however we are confident that the underlying portfolio is stronger than it has ever been and that our balance sheet is strong enough to weather macro changes. 22 INTEGRATED ANNUAL REPORT 2016

25 CHIEF EXECUTIVE S REPORT Appreciation Thank you to our fellow shareholders for their loyal support and we welcome those who invested in Tower for the first time this year. Thank you to our new Croatian partners and friends, the VMD Grupa. I also extend my appreciation to our funders and professionals. Special thanks go to our property managers, Spire Property Management, for their continued hard work, professionalism and dedication in managing our growing portfolio. Thank you to our board, under the chairmanship of Andrew Dalling, for their support, guidance and encouragement. Lastly, my thanks to my partners in Tower Asset Managers. The founders of the fund have delivered a strong product to the market which the current management team will continue to grow into the future. Marc Edwards Chief Executive Officer 23

26 Vacancy per property by GLA (31 May 2016) Woodlands Office Park, Woodmead, JHB Willowvale, Ruimsig, JHB Whitby Manor, Midrand Waterford Office Park, Woodmead, JHB VMD Kvart, Zagreb, Croatia Viscount Road Office Park, Bedfordview, JHB Upper Grayston Block F, Sandton, JHB Upper Grayston Block E, Sandton, JHB Upper Grayston Block D, Sandton, JHB Upper Grayston Block B, Sandton, JHB Upper Grayston Block A, Sandton, JHB The Braides, Gallo Manor, JHB Sunclare, Claremont St Andrews Office Park, Bedfordview, JHB Shoprite Modimolle Shoprite Ennerdale Shoprite Brits Route 21, Irene Pick 'n Pay DC, Pinetown Nampak, Pinetown Medscheme, Florida North Meadowbrook DC, Edenvale Link Hills Shopping Centre Hanover Square, Edenvale, JHB - Evagold Shopping Centre, Evaton De Ville Centre, Durbanville Constantia View, Quelerina, JHB Coachmans Crossing D, Bryanston, JHB Coachmans Crossing C, Bryanston, JHB Clifton Place, Berea, Durban Cleveland Rd, Cleveland Clearview Village, Florida North, JHB Cape Quarter Square, Cape Town Cape Quarter Piazza, Cape Town Arrowfield, Pinetown 8 Industry Rd, Isando 7 Stirrup Lane, Woodmead, JHB 6-8 Sturdee Ave, Rosebank, JHB 382 Jan Smuts Ave, Craighall Park, JHB 320 Kuit Street, Watloo 32 Napier Rd, Cape Town 31 Beacon Rd, Florida North, JHB 308 Kent Rd, Randburg, JHB 3 River Rd, Bedfordview, JHB 19 Section Street, Cape Town 15 Wellington Road, Parktown 135 Musgrave Rd, Berea, Durban m

27

28

29 Lease expiry profile by Revenue per sector (Rmillion) % Monthly <May 2017 <May 2018 <May 2019 <May 2020 <May 2021 <May 2022 >May 2023 Industrial Office Retail Lease expiry profile by GLA per sector % Vacant Monthly <May 2017 <May 2018 <May 2019 <May 2020 <May 2021 <May 2022 >May 2023 Industrial Office Retail

30 Tenant profile by GLA - 31 May 2016 % A B C A. Large national tenants, large listed tenants, government and major franchises. "Large" refers to top tier nationals and listed tenants "Major" refers to top tier franchises recognised as industry leaders. B. National Tenants, listed tenants, franchises, medium to large professional firms."medium" to "Large" refers to industry leaders in their respective fields (law, accounting, advertising etc.) C. Other Vacancy profile by sector by GLA - 31 May 2016 % Total Vacancy Office Retail Industrial

31

32 OPERATIONAL REPORT Portfolio management Tower continued with its strategy of targeting medium-sized assets with strong, dependable cash flows in the retail and premium grade office sectors locally and abroad. It continues to add value through active asset management, developing under utilised bulk and through the cost-effective greening of its properties. Four properties were acquired during the period for R728 million which increased the value of the portfolio (net of sales) by 26% to R3.9 billion at year-end. Locally the acquisitions included two shopping centres and one office block, while the offshore acquisition was that of 15 floors of premium grade office block in Zagreb, Croatia. Two properties were disposed of during the period. One a small sectional title unit in Midrand and the other, 73 Hertzog Boulevard in Cape Town, a larger office property, which was sold as a strategic site assembly. Tower continued with its energy reduction programmes with the successful completion of lighting retrofits and solar PV installations at three office blocks in Johannesburg as well as De Ville Shopping Centre. These greening initiatives continue to be a priority at Tower in order to ensure that it makes measurable strides in addressing operating cost reductions which assist in buildings remaining competitive while rentals continue to be under pressure. Together with its property manager, Spire Property Management, Tower has focused on key, basic management issues that have resulted in pleasing tenant retentions and upward reversions averaging 6.5%. The year under review also provided time to bed down previous acquisitions with a strong focus on managing service provider contracts and related expenses. Service providers play an integral role in the daily management of the properties, however, they have a major impact on the operating expenses of each property. As a result, Spire continues to analyse these expenses in terms of industry benchmarks as well as actual service delivery in order to ensure maximum efficiencies. Vacancies have fluctuated throughout the year ending marginally below 5%. Tenant retention and leasing activity Tenant relationships together with active marketing can be measured by the successful letting of over m 2 of space during the year. Of this total, m 2 was let to new tenants while m 2 of space was renewed by existing tenants. Property highlights The office market remains under pressure in South Africa, with overall vacancies, according to SAPOA, greater than 10%. It is therefore pleasing to report that while Tower is not immune to macroeconomic factors, it has managed to renew leases and let vacancies which have kept its occupancy levels in the office sector at 98%. 30 INTEGRATED ANNUAL REPORT 2016

33 Cape Quarter, Cape Town The positive results of proactive management at Cape Quarter are bearing fruit: Retailers are experiencing impressive growth of up to 30% year on year New tenants such as Bootleggers and Jenny Morris have added new impetuous to the Square Deloitte has grown into additional 800m 2 Spar has grown into under utilised space Successful greening initiatives performing ahead of forecasts 32 Napier redevelopment has commenced Development of 73 residential apartments is expected to commence in the short term. Sunclare, Claremont The property is showing steady growth and is fully let. Strong demand in the Claremont office market Tower has increased rentals by between 15% and 25% The entrance lobby, lifts and basement parking upgrades are complete The much anticipated opening of Tigers Milk will happen in September 2016 Costing of greening initiatives has commenced to introduce lighting retrofits as well as solar PV panels to help reduce operating costs in order for rentals to remain competitive in this node. 31

34 OPERATIONAL REPORT De Ville Shopping Centre, Durbanville The centre is fully let and the greening initiatives are complete and producing the desired cost savings. Asset management is working on initiatives to capture revenue from under utilised capacity such as roof parking and poorly designed retail space. VMD Kvart, Zagreb Completed in 2015, this office tower is the tallest office block in Zagreb and is a stand out land mark which has no equal in Croatia. The design and green credentials that have given the building its stature has also ensured that it has the lowest operating costs in the Zagreb office market. Tower Europe d.o.o (Tower Europe) acquired 15 of the 26 floors with a GLA of m 2. Tower owns 80% of Tower Europe with the other 20% owned by the developer, VMD Grupa d.o.o (VMD Grupa). VMD Grupa is a highly regarded property development and investment company with an impeccable track record. VMD Services manage the property on behalf of VMD Europe which provides Tower with the on ground expertise and management it requires for its initial foray into South Eastern Europe. The building has attracted blue chip tenants such as the National Bank of Croatia, Swiss Embassy, Unilever and Grey Worldwide. Projects Tower continues to identify under utilised capacity in all its properties and besides the Cape Quarter and De Ville initiatives mentioned above, it is in the initial planning phases at three properties in Gauteng. These initiatives involve unlocking idle bulk that exists on the sites by assessing the demand for additional space at the centres. The proposed initiatives are currently in the early planning stages which involve the development of approximately m 2 of new retail and office space. 32 INTEGRATED ANNUAL REPORT 2016

35 Retailers are experiencing impressive growth of up to 30% year on year. Development 73 residential apartments 119 basement bays

36 TOP 10 PROPERTIES BY VALUE R654m R455m Cape Quarter Square Green Point, Cape Town VMD KVART Zagreb, Croatia Mixed Use Type Office Type m 2 Size (GLA) m 2 Size (GLA) R159 Gross rent (R/m 2 ) EURO 16 Gross rent (EUR/m 2 ) 100% Occupancy 100% Occupancy 88 Number of tenants 18 Number of tenants Sample tenants Sample tenants Deloitte, Pernod Ricard, Spar, Zone Fitness, Uwe Koeter, Vida e Caffé, Pierre Cronje, Bootleggers Unilever, Swiss Embassy, Grey Worldwide, National Bank of Croatia 34 INTEGRATED ANNUAL REPORT 2016

37 TOP 10 PROPERTIES BY VALUE R233m R233m R228m Sunclare Claremont, Cape Town De Ville Centre Durbanville, Cape Town Link Hills Shopping Centre Waterfall, KZN Retail and Office Type Retail and Office Type Retail Type m 2 Size (GLA) m 2 Size (GLA) m 2 Size (GLA) R114 Gross rent (R/m 2 ) R139 Gross rent (R/m 2 ) R127 Gross rent (R/m 2 ) 100% Occupancy 96% Occupancy 95% Occupancy 47 Number of tenants 50 Number of tenants 47 Number of tenants Sample tenants Sample tenants Sample tenants Redisa, SACAP, Sell Direct, Tigers Milk Pick 'n Pay, Clicks, Foschini, Virgin Active, Ocean Basket, Wimpy Pick 'n Pay, Ford, Mica, KFC, Zebbies, Bed Centre 35

38 TOP 10 PROPERTIES BY VALUE R175m R160m R137m Upper Grayston Sandton, Johannesburg Cape Quarter Piazza Green Point, Cape Town 6-8 Sturdee Ave Rosebank, Johannesburg Office Park Type Retail and Office Type Office Blocks Type 8 493m 2 Size (GLA) 6 443m 2 Size (GLA) 7 284m 2 Size (GLA) R149 Gross rent (R/m 2 ) R155 Gross rent (R/m 2 ) R163 Gross rent (R/m 2 ) 90% Occupancy 94% Occupancy 96% Occupancy 20 Number of tenants 38 Number of tenants 15 Number of tenants Sample tenants Sample tenants Sample tenants Mimecast, 10X Capital, SA Energy, Retroviral, Infiniti Insurance Lindt, Hilton Worldwide, Private Collections, Africa Nova Sasol, Netcare 36 INTEGRATED ANNUAL REPORT 2016

39 TOP 10 PROPERTIES BY VALUE R120m R99m Medscheme Florida North, Johannesburg Evagold Shopping Centre Evaton, Gauteng Office Type Retail Type 7 967m 2 Size (GLA) m 2 Size (GLA) R94 Gross rent (R/m 2 ) R89 Gross rent (R/m 2 ) 100% Occupancy 90% Occupancy 1 Number of tenants 28 Number of tenants Sample tenants Sample tenants Medscheme Holdings Cambridge Food, Build Rite, Picardi, McDonalds, Fair Price 37

40 30%. GREENING REPORT Global research shows that green buildings outperform non-green buildings on all investment criteria, on average achieving rental premiums of 6%, capital value improvement of 12% while reducing operating costs up to 30%.

41 Greening strategy The greening strategy is aimed at increasing the competitiveness and values of buildings in the portfolio while adopting sound sustainability practices to reduce the negative impact of the portfolio on the environment. The focus of the greening strategy is on improving energy, water and resource efficiency to reduce operating costs and lower carbon footprints, making properties more valuable and marketable to prospective tenants. Greening also enhances Tower s ability to attract and retain tenants through reduced operating costs and superior indoor environmental quality. Global research shows that green buildings outperform non-green buildings on all investment criteria, on average achieving rental premiums of 6%, capital value improvement of 12% while reducing operating costs up to 30%. Green committee Highlighting Tower s commitment to sustainable property asset management is the existence of a green committee of the board, aimed at ensuring that the group s greening practices enhance the competitiveness of properties. The committee has oversight of the green strategy, approves targets, monitors performance, and considers business risks relating to greening. The green committee is chaired by independent non-executive director, Nicola Milne, the founding chief executive officer of the Green Building Council of South Africa (GBCSA). Tower non-executive director, Bruce Kerswill is one of the leading figures in green building in the world. He was instrumental in launching the GBCSA in 2007 and served as the founding chairman. He was previously chair of the World Green Building Council. Bruce was an executive director of Tower from inception but changed to non-executive director with the internalisation of the asset management company. Sustainability strategy Tower is implementing sustainability practices to reduce the negative impact of buildings on the environment and on occupants, as well as improving efficiencies, through the following focus areas:» Responsible investing by assessing relevant sustainability metrics of new building acquisitions and the potential to improve sustainability performance.» Sustainable portfolio management by adopting greening strategies to improve the performance of properties owned by the group, including energy usage and efficiency, water consumption and waste management, as well as setting performance improvement targets.» Partnering with tenants to improve efficiencies, environmental performance and IEQ, ultimately aiming for a "green lease" which details the roles of both the landlord and tenant for monitoring and improving sustainability performance. IEQ

42 kg of C0 2 offset per year which equates to km driven by an average passenger vehicle or almost fully grown trees purifying the air. The GBCSA s Energy and Water Benchmarking Tool, which allows management to assess energy and water consumption of properties relative to industry norms, and the Green Star Performance Tool for Existing Buildings are being used to develop standards of sustainability best practice. Greening the portfolio Tower s focus is on improving energy efficiency across the portfolio. This is expected to result in significant savings in electricity costs, make the buildings more competitive and also future-proof the properties against rising tariffs. Basic energy and water savings measures that can be implemented at low or no cost are being applied, while additional measures will be implemented over time as opportunities arise. Several properties, including Cape Quarter, have either undergone or are undergoing extensive transformation as part of the group s greening and occupancy cost reduction strategy. Common area lighting has been replaced with energy efficient LED lighting. The return on investment is significant with the group generating a yield of greater than 20% after sharing the savings with tenants. Lighting retrofits also have a positive, aesthetic effect on the properties as previously darkened areas now appear lighter, aiding to improved line of sight particularly in retail centres. To date, Tower has installed close to 800kWp of rooftop PV solar power across the country, these systems are generating power at an expected combined output of approximately 1300MWhs per annum. This equates to approximately kg of C0 2 offset per year which equates to km driven by an average passenger vehicle or almost fully grown trees purifying the air. Tower will in the next few months complete another round of rooftop PV solar power plants. Through lighting retrofits Tower has reduced across the portfolio its buildings combined consumption by close to kWhs which equates to approximately kg of C0 2 offset per year. This is equivalent to diverting kg of waste from landfill to recycling or removing 385 passenger car per year from the road.

43 Payback periods for renewable energy technologies continues to reduce and the group expects to continue to roll these projects out to key properties in the future. Capital expenditure incurred in implementing these greening initiatives is recovered. Tenants share in the saving on a 50% basis until the capital expenditure has been repaid after which tenants receive the full benefit of the saving which reduces their cost of occupancy and in turn makes the property more desirable. The Cape Quarter is currently undergoing a rating from the GBCSA s Existing Building Performance Tool. This will provide an objective assessment of the "greenness" of the property and will allow management the opportunity to target any areas requiring further attention. Through lighting retrofits Tower has reduced across the portfolio its buildings combined consumption by close to kwhs which equates to approximately kg of C0 2 offset per year.

44 CORPORATE GOVERNANCE Corporate governance philosophy Tower recognises the need to conduct the business with integrity and provide effective leadership based on an ethical foundation. The board directs the strategy and operations to build a sustainable business while considering the short- and long-term impacts on the economy, society and the environment. In line with the group s green building strategy, a green committee ensures sustainable property management strategies are adopted to improve performance. The board will ensure that the group acts as a responsible corporate citizen by adhering to the corporate governance policies outlined in this report. The board is aware that stakeholders' perceptions affect the company's reputation. The group is committed to promoting the highest standards of ethical business practice in all aspects of its operating activities. The board acts as the custodian for corporate governance. King lll principles Tower subscribes to the spirit of good corporate governance contained in the King Report on Corporate Governance (King lll). The directors confirm that the group applies the principles of King lll in all material respects. A schedule of how the group has applied the King lll principles is available on the website Board of directors Board charter The scope of authority, responsibility and functioning of the board is detailed in a formal charter. In terms of the charter the directors retain overall responsibility and accountability for the following:» Adopting strategic plans and setting performance objectives.» Monitoring operational performance and management.» Ensuring effective risk management and internal controls.» Legislative, regulatory and governance compliance.» Determining investment and performance criteria.» Selection, orientation and evaluation of directors.» Ensuring appropriate remuneration policies and practices.» Shareholder communications and stakeholder engagement. TOWER PROPERTY FUND /066457/06 GAI Applied / Partially Score Applied / Not applied + Chapter 1: Ethical leadership and corporate citizenship AAA Applied + Chapter 2: Boards and directors AAA Partially not applied + Chapter 3: Audit committees AAA Partially not applied + Chapter 4: The governance of risk AAA Applied + Chapter 5: The governance of information technology AAA Applied + Chapter 6: Compliance with laws, rules, codes and standards AAA Applied + Chapter 7: Internal audit AA Applied + Chapter 8: Governing stakeholder relationships AAA Applied + Chapter 9: Integrated reporting and disclosure AAA Applied Overall Score AAA powered by GAI 42

45 CORPORATE GOVERNANCE Board composition Tower has a unitary board structure with eight non-executive directors and two salaried executive directors. Biographical details on the directors appear on page 10 to 13. Five of the non-executive directors, including the chairman, are classified as independent in terms of King lll. Martin Evans is not considered to be independent as at year-end he was a shareholder of the group s asset manager, Tower Asset Managers (Pty) Ltd. Bruce Kerswill and Keith Craddock are not considered to be independent as they are shareholders of the group's property manager, Spire Property Management (Pty) Ltd. The roles of the chairman, Andrew Dalling, and the chief executive officer, Marc Edwards, are separate and clearly defined in terms of the board charter. This division of responsibilities at the helm of the group ensures a balance of authority and power, with no individual having unrestricted decisionmaking powers. Board appointment The appointment of directors is undertaken in a formal and transparent manner by the board, assisted where appropriate by the nomination and remuneration committee. All non-executive directors are subject to retirement by rotation and re-election by shareholders at least once every three years. Nominations for the re-appointment of a director will only take place after the evaluation of the performance and attendance of the director. The independence of all non-executive directors will be reviewed on an ongoing basis. Board evaluation The review of the performance of the board and individual directors was undertaken during the year. The outcome of the evaluation was discussed with each director and the chairpersons of the respective committees. This evaluation will be undertaken annually by the chairman or by an independent service provider. The ongoing training and development of the board is conducted through formal processes Company secretary The company secretarial function is outsourced to Ovland Management Services (Ovland). The individual at Ovland responsible for performing company secretarial services is Fred Jenkings. As a chartered accountant with over 40 years' experience of secretarial requirements and obligations, and of corporate accounting, the board is satisfied that he has the competence, qualifications and experience to perform the role. The company secretary provides guidance to directors on governance, compliance and their fiduciary duties, and assists in the appointment of directors to the board. Directors have unrestricted access to the advice and services of the company secretary. The board confirms that the relationship between the board and the company secretary remains at arm's length. The board reviews the relationship on an annual basis by confirming that the company secretary is not a director of the group, does not take on any management or executive duties on behalf of the board and has not entered into any contractual relationships with the group or any directors of the group. The company secretary has unfettered and direct access to the chairman. 43

46 CORPORATE GOVERNANCE Board committees The directors have delegated responsibilities to five committees to assist the board in meeting its oversight responsibilities. The directors confirm that the committees have functioned in accordance with their terms of reference during the financial year. Audit and risk committee Role and responsibilities: Ensures the group has adequate and appropriate financial and operating controls. Ensures the group has an effective policy and plan for risk management. Maintains oversight for financial results, integrated reporting and monitors sustainability reporting. Ensures satisfactory standards of governance, reporting and compliance. Refer to the audit and risk committee report in the annual financial statements. Nomination and remuneration committee Role and responsibilities: Ensures the group has a remuneration policy which is aligned with the strategic objectives and goals. Proposes fees for non-executive directors for approval at the AGM. Ensures the board has an appropriate balance of skills, experience and diversity. Identifies and recommends candidates for the board. Co-ordinates the annual board evaluation process. Oversight of the succession plan of management. Composition Chair: John Bester The committee comprises three independent non-executive directors. Composition Chair: Andrew Dalling The committee comprises three independent non-executive directors. Athi Magwentshu chairs matters of remuneration. For the year ended May 2016, Tower s executive directors were remunerated through the asset manager. No remuneration policy therefore existed in the fund. Following the internalisation of the asset manager during June 2016, the board embarked on the process of preparing and implementing a remuneration policy. The board is currently benchmarking the executive remuneration through an independent assessment by PriceWaterhouseCoopers Inc. (PWC). 44 INTEGRATED ANNUAL REPORT 2016

47 CORPORATE GOVERNANCE On receipt of the PWC report, the board will decide on an appropriate remuneration policy, which policy, once finalised will be shared with shareholders and put to a non-binding advisory vote, as recommended by King III, at the annual general meeting to be held during Investment committee Role and responsibilities: Considers acquisitions, development and sales of investment properties; Ensures green opportunities exist in property acquisitions. Social and ethics committee Role and responsibilities: Monitors the group s activities relating to social and economic development, the environment, and health and public safety. Considers the impact of property letting activities on the environment, society and the economy. Monitors adherence to corporate citizenship principles and ethical behaviour. Ensures the group s interactions with stakeholders are guided by legislation and regulation. Refer to the social and ethics committee report on page 48. Green committee Role and responsibilities: Monitors the group s sustainability strategy to ensure responsible business practices are implemented. Ensures sustainability and greening performance is measured and goals set for improvement. Ensures sustainable portfolio management strategies are adopted to improve performance. Monitors business risks relating to the greening strategy. Maintains oversight of greening activities aimed at reducing operating costs for tenants and enhancing value for shareholders. Refer to the Greening Report on pages 38 to 41. Composition Chair: Athi Magwentshu The committee comprises four non-executive directors and one executive director. Composition Chair: Raven Naidoo The committee comprises two non-executive directors and two executive directors. Composition Chair: Nicola Milne The committee comprises three non-executive directors and one executive director. 45

48 CORPORATE GOVERNANCE Accountability and compliance Risk management and internal controls The board is responsible for the oversight of the risk management process. The audit and risk committee reports to the board in this regard. A risk management policy has been adopted to identify, assess, manage and monitor the risks to which the business is exposed. Management has implemented systems of internal control aimed at:» safeguarding assets and reducing the risk of loss, error, fraud and other irregularities;» ensuring the accuracy and completeness of accounting records and reporting;» preparing timely and reliable financial statements and information in compliance with relevant legislation;» complying with accounting policies and practices in accordance with IFRS; and» increasing the probability of anticipating unpredictable risk. The group follows a practical and risk-based approach to internal audit to ensure that the business has an effective system of internal control and risk management. Based on the size and life-stage of the group, a dedicated internal audit function is not presently considered necessary and external specialists are used as required. Appropriate insurance cover is taken for all material risks above board approved self-insured limits. Levels of cover are reviewed annually based on claims experience and events affecting the business. The board will consider turnaround mechanisms such as business rescue proceedings if the company is financially distressed. Information technology governance Information technology (IT) governance forms an integral part of the group s risk management process, with the audit and risk committee assisting the board in meeting its responsibilities in this regard. An IT governance framework has been thoroughly implemented to ensure that information assets are managed effectively. The board monitors and evaluates significant IT investment. External IT specialists are contracted as required. Legislative compliance Legislative and regulatory compliance is monitored by the company secretary. There were no cases of material legislative or regulatory non-compliance and no penalties or sanctions were imposed on the group or any of its directors or officers during the year. Personal share dealings Directors and the company secretary are required to obtain written approval prior to dealing in Tower shares. All share transactions are disclosed on SENS within the time prescribed by the JSE. Details of dealings by directors during the reporting period are contained in the directors report. 46 INTEGRATED ANNUAL REPORT 2016

49 CORPORATE GOVERNANCE Board and committee attendance - 1 June 2015 to 31 May 2016 Audit Nomination Social and and and Board risk remuneration Investment ethics Green Number of meetings Andrew Dalling 5 4* 2 3 John Bester Keith Craddock 5 4* Marc Edwards 5 4* Bruce Kerswill Joanne Mabin 5 4* Athi Magwetshu Nicola Milne Raven Naidoo Martin Evans Aug (1) 17 Aug (1) 14 July (1) 16 Oct (1) 24 Aug (1) 16 Oct (1) 30 Oct (2) 27 Oct (2) 10 Sept (2) 19 Jan (2) 22 Jan (2) 1 Feb (3) 26 Jan (3) 26 April (3) 13 April (3) Agrokor/Internalisation 7 April (4) 25 April (4) 26 April (5) * By invitation Chairman 47

50 SOCIAL AND ETHICS COMMITTEE REPORT Tower Property Fund is committed to adopting good corporate citizenship practices and integrating these into all aspects of the group s operations. The social and ethics committee (the committee) has oversight for monitoring ethics practices, in line with the requirements of the Companies Act. The committee has an independent role and is governed by a formal charter. This report is prepared in compliance with the Companies Act and will be presented to shareholders at the annual general meeting in October Role of the committee The committee assists the board in monitoring the group s activities in terms of legislation, regulation and codes of best practices relating to ethics, stakeholder engagement and transformation. The committee has a responsibility to:» monitoring the group s activities relating to social and economic development, the environment, and health and public safety;» considering the impact of property letting activities on the environment, society and the economy;» monitoring adherence to good corporate citizenship principles and ethical behaviour; and» ensuring the group s interactions with stakeholders are guided by legislation and regulation. Composition and functioning of the committee The committee comprises two independent non-executive directors, namely Raven Naidoo (chairman) and Andrew Dalling, one non-executive director, namely Bruce Kerswill and one executive director, namely Marc Edwards. Biographical details of the committee members appear on pages 10 to 13 and attendance at committee meetings on page 47. The committee met three times during the year and acknowledges the encouraging progress made by management in addressing social and ethics issues during the year of operation. Activities undertaken by the group The directors recognise the need to support education to assist in the sustainable development of the economy and are committed to assisting promising companies and individuals in grassroots and tertiary education. 48 INTEGRATED ANNUAL REPORT 2016

51 SOCIAL AND ETHICS COMMITTEE REPORT Tower offered a full bursary for a third year or honours student in the BSc Property Studies course at the University of Cape Town (UCT). This course has consistently delivered top graduates to the property industry and by offering this bursary Tower will gain access to the brightest young talent in the industry. Unfortunately, despite engagement with UCT, there were no suitable candidates for the bursary this year and it will be held over until next year. In line with Tower s commitment to green and sustainable property management, the group contributed R towards a book prize at UCT for the student who best embraces "greening" as part of their thesis. Tower sponsorship with the Ubuntu Trust continued. Ubuntu is an educational trust focusing on talented soccer players from disadvantaged areas. The trust identifies young talent and offers them soccer training in an academy. School fees are paid for the children and accommodation is provided to a select few where home circumstances are not conducive to learning. The emphasis of the trust is on education and aligns with Tower s commitment to supporting early childhood development. The trust is currently or has put over 80 children through school. Conclusion The members of the committee believe the group is substantively addressing the issues required to be monitored in terms of the Companies Act, based on the size, structure and age of the business. The committee plans to expand reporting on these issues in the integrated annual report in subsequent years. Raven Naidoo Chairman Social and ethics committee Tower is investigating the establishment of a BEE Trust and aims to have Ubuntu as one of the beneficiaries. Details on this will be released to shareholders as and when appropriate. 49

52 TOWER PROPERTY FUND LIMITED INTEGRATED ANNUAL REPORT for the year ended 31 May 2016 SUMMARY CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Audited year ended 31 May 2016 R 000 Audited year ended 31 May 2015 R 000 Revenue Contractual rental income Straight-line lease accrual Net property operating expenses (30 733) (34 928) Net property income Administration expenses (23 946) (14 952) Other income Foreign exchange loss (30 519) Net operating profit Fair value adjustments on investment properties (10 604) Fair value adjustments on interest rate derivatives (7 533) 762 Profit from operations Finance income Finance costs 2 ( ) (78 776) Indirect capital raising expenses (894) (206) Profit before taxation Taxation Profit for the year Other comprehensive income Items that may subsequently be reclassified to profit or loss Exchange differences on translation of foreign operations Total comprehensive income for the year Profit for the year attributable to: Equity shareholders of Tower Property Fund Limited Non-controlling interest Total comprehensive income for the year attributable to: Equity shareholders of Tower Property Fund Limited Non-controlling interest Basic and diluted earnings per share (cents)

53 TOWER PROPERTY FUND LIMITED INTEGRATED ANNUAL REPORT for the year ended 31 May 2016 SUMMARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION Audited as at 31 May 2016 R 000 Audited as at 31 May 2015 R 000 Assets Non-current assets Investment property Straight-line lease accrual Other financial assets Current assets Trade and other receivables Cash and cash equivalents Amounts receivable for the sale of investment property Investment property held for sale Total assets Equity and liabilities Equity Stated capital Treasury capital (2 854) (1 212) Foreign currency translation reserve Retained earnings Shareholders interest Non-controlling interest Liabilities Non-current liabilities Other financial liabilities Loan payable to non-controlling interest Current liabilities Other financial liabilities Trade and other payables Amounts owing for the acquisition of investment property Total equity and liabilities towerpropertyfund.co.za 51

54 TOWER PROPERTY FUND LIMITED INTEGRATED ANNUAL REPORT for the year ended 31 May 2016 SUMMARY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Stated capital R 000 Treasury capital R 000 Foreign currency translation reserve R 000 Retained earnings R 000 Shareholders interest R 000 Noncontrolling interest R 000 Total equity R 000 Balance at 1 June 2014 (restated) Shares issued during the year Share issue expenses (13) (13) (13) Antecedent dividends Acquisition of treasury shares (1 212) (1 212) (1 212) Profit for the year Dividends paid ( ) ( ) ( ) Balance at 31 May (1 212) Shares issued during the year Share issue expenses (7 500) (7 500) (7 500) Antecedent dividends Acquisition of treasury shares (1 642) (1 642) (1 642) Acquisition of foreign subsidiary Profit for the year Foreign currency translation differences Dividends paid ( ) ( ) ( ) Balance at 31 May (2 854)

55 TOWER PROPERTY FUND LIMITED INTEGRATED ANNUAL REPORT for the year ended 31 May 2016 SUMMARY CONSOLIDATED STATEMENT OF CASH FLOWS Audited year ended 31 May 2016 R 000 Audited year ended 31 May 2015 R 000 Cash flows from operating activities Operating cash flows before working capital changes (Increase)/Decrease in trade and other receivables (8 201) (31 970) Increase/(Decrease) in trade and other payables (16 451) Cash generated by operating activities Finance income Finance costs ( ) (77 130) Net cash from operating activities Cash flows from investing activities Investment property acquired ( ) ( ) Proceeds on sale of investment property Net cash from investing activities ( ) ( ) Cash flows from financing activities Proceeds from the issue of shares Direct capital raising expenses (7 500) (13) Acquisition of treasury capital (1 642) (1 212) Loans raised Loans repaid ( ) ( ) Foreign loan raised Dividends paid ( ) ( ) Acquisition of interest rate derivatives (2 066) (9 133) Net cash utilised in financing activities Increase/(Decrease) in cash and cash equivalents (22 713) Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year towerpropertyfund.co.za 53

56 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 1. Accounting policies 1.1 Basis of preparation The summary financial statements are only a summary of the information in the full consolidated annual financial statements and do not contain full or complete details and any investment decisions by investors and shareholders should be based on consideration of the full consolidated annual financial statements. The summary information presented on pages 50 to 66 has been extracted from the full audited consolidated annual financial statements for the year ended 31 May These summary financial statements are not audited. The full consolidated annual financial statements from which the summary financial information was derived, were audited by Mazars who expressed an unqualified opinion thereon. The full consolidated annual financial statements and the auditor s report thereon are available for inspection at the group s registered office and on the group s website: These summary financial statements are prepared in accordance with the framework concepts, the measurement and recognition requirements of International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and the information required by IAS 34: Interim Financial Reporting, the JSE Listings Requirements and in the manner required by the Companies Act of South Africa. The accounting policies and methods of computation applied in the preparation of the financial statements are in accordance with IFRS and are consistent with those applied in the audited annual financial statements for the year ended 31 May 2015, except for the new and amended standards and interpretations of IFRS adopted as set out below. The directors of Tower Property Fund take full responsibility for the preparation of the summary information and confirm that the information has been correctly extracted from the underlying full consolidated annual financial statements. In the current year, the group has adopted all new and revised IFRSs that are relevant to its operations and effective for the reporting period beginning on 1 June Amendment to IAS 40 Investment property; Amendment to IFRS 3 Business Combinations; Amendment to IFRS 8 Operating segments. The adoption of the above standards has not had a material impact on the annual financial statements. These financial results were prepared under the supervision of Mrs J Mabin CA(SA), in her capacity as group Chief Financial Officer. 54

57 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 1.2 Fair value measurement Fair value measurement of financial instruments The group measures fair values using the fair value hierarchy that reflects the significance of the inputs used in making the measurements. Fair value measurement of interest rate swaps The valuation of interest rate swaps uses observable market data and requires management judgement and estimation. The availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces uncertainty associated with the determination of fair values. The fair value of the interest rate swap is determined by the bank using a valuation technique that maximises the use of observable market inputs. Interest rate swaps are valued by discounting future cash flows using risk free rates and yield curves derived from quoted rates. Interest rate swaps are classified as level 2 financial instruments and the fair value of the interest rate swap asset at 31 May 2016 is equal to R (2015 liability: R ). Fair value measurement of interest rate caps The valuation of interest rate caps uses only observable market data and requires management judgement and estimation. The availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces uncertainty associated with the determination of fair values. The interest rate caps have been fair valued externally by the bank using a valuation technique that maximises the use of observable market inputs. Interest rate caps are valued by discounting future cash flows using the interest rate yield curve. Interest rate caps entered into by the group are included in level 2 and the fair value of interest rate caps at 31 May 2016 is equal to Rnil (2015: R ). The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measured. Fair value measurement of investment property An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued, values approximately one third of the properties every year. The balance being valued by the directors. In the absence of current prices in an active market, valuations are prepared that make maximum use of relevant observable inputs and minimal use of unobservable inputs. Discounted cash flow analysis is applied which is prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. Then a yield that reflects the specific risks inherent in the net cash flows is applied to the net annual cash flows to arrive at the property valuation. The valuation process also makes use of the net income method which assumes a rental stream into perpetuity and uses the capitalisation rate to account for the risk of projected market, business and financial volatility and to adjust for the sustainability of the cash flow into perpetuity. Once the capitalisation value has been calculated further adjustments are made to the valuations relating to project costs and values. The directors confirm that there have not been any material changes to the information used and assumptions applied by the valuer. towerpropertyfund.co.za 55

58 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 2016 R R Finance costs Borrowings Other Reconciliation of earnings and distributable earnings Gross Net Reconciliation of earnings: Profit attributable to ordinary equity holders Adjusted for: Change in fair value of investment properties ( ) Profit on sale of investment property (10 377) (10 377) Headline earnings Adjusted for: Straight- line rental income accrual (20 765) (16 792) Antecedent dividends Change in fair value of interest rate derivatives (762) Profit on sale of investment property Distributable profit Adjusted for: Indirect capital raising expenses Foreign exchange loss Contracted adjustment * Debt cancellation fees Amortisation of debt raising fees Distributable earnings * The contracted adjustment relates to the net operating income earned between the effective date and the transfer date of properties which transferred during the period. 56

59 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 3. Reconciliation of earnings and distributable earnings (continued...) 2016 R R 000 Distributable income Taxable dividend (declared on 4 August 2016) Taxable dividend (declared on 4 February 2016) Taxable dividend (declared on 24 August 2015) Taxable dividend (declared on 4 February 2015) Weighted average number of shares in issue ( 000) Number of shares issue at period end, including treasury shares ( 000) Number of shares in issue at period end, excluding treasury shares ( 000) Distribution per share Six months ended 31 May Six months ended 30 November Basic and diluted earnings per share (cents) Headline and diluted headline earnings per share weighted average shares in issue (cents) Distributable earnings per share weighted average shares in issue (cents) Net Asset Value per share shares in issue at year-end (rands) towerpropertyfund.co.za 57

60 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 4. Investment property 2016 R R 000 Cost to group Tenant installations Fair value adjustment Straight-line lease accrual Fair value including non-current assets held for sale Transfer of investment property held for sale (14 667) Straight-line lease accrual held for sale 182 Fair value of investment property Movement in investment property Opening balance Acquisitions at cost Improvements and additions Net exchange differences on translation Disposals ( ) (9 488) Tenant installations Transfer to non-current assets held for sale (14 485) Transfer from non-current assets held for sale Fair value adjustment (10 604) Straight-line lease accrual Fair value of investment property During the current year Woodlands Drive Office Park was reclassified from investment property held for sale back to investment property. In the prior year an offer to purchase was received from a tenant at that building but they could not obtain the necessary funding and the sale did not take place. 58

61 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 5. Other financial liabilities 5.1 Borrowings Interest rate at 31 May 2016 Interest rate at 31 May 2015 Expiry date 2016 R R 000 Standard Bank Limited Loan % 7.99% August Loan % 7.91% April Loan % 7.91% April Loan % 8.01% August Loan % 7.55% February Loan % 7.92% February Loan % 7.55% February Loan % 7.55% February Loan % 7.45% August Loan % 7.65% May Loan % 7.35% February Loan % 7.48% March Loan % 7.60% March Loan % June Loan % July Loan % August Loan % July Loan % June Nedbank Limited Loan % 8.55% December Privredna Banka Zagreb d.d. Loan % December Interest accrual Interest rates Rand denominated borrowings Standard Bank Limited: The loans bear interest at rates ranging from prime less 1.90% to prime less 1.55% as well as JIBAR linked rates. Nedbank Limited: The loan bears interest at prime less 0.70%. Foreign denominated borrowings Standard Bank Limited: The loan bears interest at a three-month Euribor linked interest rate. Privredna Banka Zagreb d.d.: The loan bears interest at a three-month Euribor linked interst rate of 4.35%. Security The above mentioned loans are secured by mortgage bonds over all the group s investment property as detailed in note 4 and in the property portfolio schedule in the full consolidated annual financial statements. towerpropertyfund.co.za 59

62 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 2016 R R Other financial liabilities (continued...) 5.2 Interest rate derivatives At fair value through profit or loss Interest rate swap (3 184) 679 Interest rate caps (9 331) (3 184) (8 652) Total other financial assets (3 184) Total other financial liabilities At 31 May 2016, 40% (2015: 60%) of the group's interest rate exposure was managed with interest rate swaps with expiry dates ranging from May 2019 to August On the 31st of May 2016 the group cancelled its Rand denominated swap and caps totalling R780 million, which expired within 1 to 2 years. These fixes were significantly in the money and the profit made on the cancellation thereof was used to purchase a R500 million swap at 7.70%, expiring on 31 May The weighted average cost of borrowings at 31 May 2016 was 8.03% (2015: 7.73%). The interest rate has been fixed via the following interest rate swaps: 1) On EUR 7 million of borrowings fixed at 4.10%. 2) On EUR 2.54 million of borrowings fixed at 3.70% 3) On R500 million of borrowings fixed at 7.70%. Current portion of other financial assets Non-current portion of other financial assets (3 184) Total other financial assets (3 184) Current portion of other financial liabilities Non-current portion of other financial liabilities Total other financial liabilities Amounts receivable for the sale of investment property 73 Hertzog Boulevard was sold for a total purchase consideration of R The effective date of the sale was 25 May 2016 and the property is expected to transfer to the new owner during September

63 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 7. Amounts owing for the acquisition of investment property The group acquired investment property on 27 May The purchase price was settled during the current year through the issue of a variable number of shares totalling R45 million, R188 million from cash reserves and an additional issue of a variable number of shares totalling R142.8 million. 8. Segment analysis For the year ended 31 May 2016 (R 000) Retail Office Industrial Total Property assets Segment liabilities* Revenue (excluding straight-line lease adjustments) Net operating costs (13 279) (16 776) (678) (30 733) Segment profit Straight-line lease adjustment Non-property related expenses (23 946) Other income Foreign exchange loss (30 519) Net operating profit For the year ended 31 May 2015 (R 000) Retail Office Industrial Total Property assets Segment liabilities* Revenue (excluding straight-line lease adjustments) Net operating costs (12 979) (21 462) (487) (34 928) Segment profit Straight-line lease adjustment Non-property related expenses (14 952) Other income Net operating profit towerpropertyfund.co.za 61

64 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 8. Segment analysis (continued...) 2016 R R 000 * Segment liabilities Non-segment liabilities Trade and other payables Loan to non-controlling interest Amounts owing for the acquisition of investment property Total liabilities The prior year segment liabilities balance has been amended to include trade and other payables. South Africa Croatia R 000 R 000 Statement of profit or loss and other comprehensive income extracts for the year ended 31 May 2016 Contractual rental income Straight-line lease accrual Statement of financial position extracts as at 31 May 2016 Investment property Straight-line lease accrual

65 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 9. Events after the reporting period The group raised R740 million by issuing shares at R8.00 per share in a bookbuild. The shares were issued and the funds received after year-end. The funds raised are being used for the acquisitions of properties. The group acquired the following investment properties after year-end from Agrokor on 12-year, triple net head leases, guaranteed by Agrokor: 1) Tower Europe Retail d.o.o. was incorporated in May 2016 in Croatia with no assets and no liabilities and at this point the group became the sole founding shareholder. Tower Europe Retail acquired the Gračani property in Zagreb, Croatia for the purchase price of R262 million (Euro 15.7 million)* which was settled using proceeds from the capital raise. The acquisition of the Gračani property comprises the acquisition of investment property only, and does not include associated rental and property management or other processes. This acquisition is not considered to be the acquisition of a business and is therefore accounted for in terms of IAS 40: Investment Property. The property transferred on 21 June ) Tower Europe Retail 2 d.o.o. was incorporated in May 2016 in Croatia with no assets and no liabilities and at this point the group became the sole founding shareholder. Tower Europe Retail 2 acquired two Konzum store properties in Croatia, Vukovarska and Velica Gorica, for the purchase prices of R219 million (Euro 13.2 million)* and R147 million (Euro 8.8 million)* respectively. Vukovarska was settled through using R88 million debt and R131 million proceeds from the capital raise. Velica Gorica was settled using R59 million debt and R88 million proceeds from the capital raise. The acquisition of the Velika Gorica property and Vukovarska property comprise the acquisitions of investment properties only, and do not include associated rental and property management or other processes. These acquisitions are not considered to be the acquisition of a business and are therefore accounted for in terms of IAS 40: Investment Property. The properties transferred on 21 June ) SUB Dubrovnik d.o.o. in Dubrovnik, Croatia, for a total purchase consideration of R217.3 million (Euro 13 million)*, which was settled through R200 million worth of equity issued at a price of R8.00 per share and proceeds from the capital raise of R17.3 million. The acquisition of the shares in the Dubrovnik company is accounted for in terms of IFRS 3: Business Combinations. Refer to note 10. After the reporting period the group acquired the management company, Tower Asset Managers Proprietary Limited, for R145 million. The acquisition was funded using R72.5 million debt and R72.5 million equity issued at a price of R10.07 per share. The acquisition of the shares in the Tower Asset Managers company is accounted for in terms of IFRS 3: Business Combinations. The effective date of this acquisition was 30 June Refer to note 10. A final dividend of cents were declared to shareholders after year-end. * 1 EUR = R16.68 towerpropertyfund.co.za 63

66 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 10. Business Combinations 1. After the reporting date, the Group acquired 100% of the share capital of Sub Dubrovnik d.o.o. in Dubrovnik, Croatia, for a total purchase consideration of R217.3 million, which was settled through R200 million worth of equity issued at a price of R8.00 per share and cash of R17.3 million. Refer to note 9. In this transaction the Group acquired a company (Sub Dubrovnik d.o.o.) containing, inter alia, a property consisting of a shopping centre and it resulted in the recognition of goodwill. As a result this transaction has been classified as a business combination and accounted for in terms of IFRS 3: Business Combinations. The acquisition is in accordance with the Group s strategy of establishing an offshore European platform to seek out new markets that provide strong diversification opportunities through premium, high quality properties. 2. After the reporting date, the Group acquired 100% of the share capital of the management company, Tower Asset Managers Proprietary Limited (TAM), for R145 million. The acquisition was funded using R72.5 million debt and R72.5 million equity issued at a price of R10.07 per share. The effective date of this acquisition was 30 June The acquisition of the shares in the Tower Asset Managers company is accounted for in terms of IFRS 3: Business Combinations. Going forward, the Manco internalisation will better align the interests of management with that of the Group s shareholders and is in line with global best practice. Refer to note 9. In this transaction the Group acquired the property management business of TAM. The transaction resulted in the settlement of the property management contract between TAM and Tower Property Fund Limited and the transfer of TAM s employees and management to Tower Property Fund Limited. The value of the at-market component of the property management contract as well as the TAM employees is included in the goodwill arising from the business combination. 64

67 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 10. Business Combinations continued Sub Dubrovnik Tower Asset Managers R 000 R 000 The assets and liabilities arising from the acquisition are as follows: Investment properties Property, plant and equipment Trade and other receivables* Cash and cash equivalents Deferred Tax 28 Assets Borrowings ( ) Trade and other payables (10 785) (685) Tax payable (4 940) Liabilities ( ) (5 625) Fair value of assets and liabilities acquired Total purchase consideration (fair value) Goodwill ** *** Purchase consideration (fair value): Add: acquisition related costs Less: settled in Tower shares ( ) (72 500) Purchase consideration settled in cash Cash and cash equivalents in subsidiary acquired (8 621) (5 591) Net cash outflow on acquisition * Gross contractual amounts receivable in Sub Dubrovnik are R4.7 million, all of which is expected to be collected. ** The goodwill in Sub Dubrovnik arose as a result of the expected synergies from the acquisition. *** The goodwill arising from the TAM acquisition is attributable to the at-market component of the property management contract between TAM and Tower Property Fund, the TAM management and employees that transferred to Tower Property Fund and the expected synergies from the acquisition. towerpropertyfund.co.za 65

68 NOTES TO THE SUMMARY FINANCIAL STATEMENTS 11. Related party transactions Relationships Subsidiaries property holding companies: City Square Trading 522 Proprietary Limited Cross Atlantic Properties 162 Proprietary Limited De Ville Shopping Centre Proprietary Limited HTP Holdings Proprietary Limited Lexshell 492 Investments Proprietary Limited Link Hills Shopping Centre Proprietary Limited Lucky Bean Property Investments Proprietary Limited Micawber 219 (RF) Proprietary Limited NIB 69 Share Block Proprietary Limited Parch Properties 30 Proprietary Limited Plenty Properties 118 Proprietary Limited The Cape Quarter Property Company Proprietary Limited Tower Europe d.o.o. Turquoise Moon Trading 258 Proprietary Limited Key management personnel services companies companies that provide key management personnel services: Spire Property Management Proprietary Limited Tower Asset Managers Proprietary Limited 2016 R R 000 Transactions Spire Property Management Proprietary Limited fees as property managers Tower Asset Managers Proprietary Limited fees as asset managers Transactions with directors Refer to directors report and note 18 in the full consolidated annual financial statements. 66

69 DIRECTORS REPORT 1. Review of activities Main business and operations Tower Property Fund Limited carries on the business of a property investment group. The operating results and consolidated statement of financial position of the group are fully set out in the accompanying financial statements and do not in our opinion require any further comment. 2. Going concern The consolidated and separate annual financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of business. The directors are of the opinion that the group has adequate resources to continue operating for the foreseeable future and that it is appropriate to adopt the going concern basis in preparing the group s annual financial statements. The directors have satisfied themselves that the group is in a sound financial position and that it has access to sufficient borrowing facilities to meet its foreseeable cash requirements. 3. Events after reporting date All events subsequent to the date of the consolidated annual financial statements have either been adjusted or disclosed in note 9 of the summary financial statements 4. Authorised and issued share capital No changes were approved or made to the authorised share capital of the group during the year under review. During the current financial year (2015: ) ordinary shares were issued shares were issued at R9.50 per share through an accelerated bookbuild, of which were issued pursuant to the general authority to issue shares for cash. The funds raised were used for the acquisition of properties and the reduce debt. The balance of ordinary shares were issued to vendors for properties purchased. During the year under review, the group bought back (2015: ) shares at an average repurchase price of R8.47 (2015: R8.42) per share. These shares are held as treasury shares and represent 0.14% (2015: 0.09%) of the total number of shares in issue. 5. Borrowing limitations In terms of the Memorandum of Incorporation of the group, the directors may exercise all the powers of the group to borrow money, as they consider appropriate. 6. Dividends An interim dividend of cents per share was declared for the six- month period ended 30 November The distribution was paid on 29 February Shareholders are given notice of a final dividend declaration made on 4 August 2016 of cents per share for the year ended 31 May Directors The directors of the group during the year and to the date of this report are as follows: Executive directors 1. M Edwards 2. J Mabin 3. B Kerswill* 4. K Craddock* Non-executive director 5. M Evans Independent non-executive directors 6. A Dalling 7. J Bester 8. A Magwentshu 9. N Milne 10. R Naidoo * Subsequent to year-end and the internalisation of Tower Asset Managers Proprietary Limited (refer point 10), B Kerswill and K Craddock resigned as executive directors but will continue to serve as non-executive directors on the board. 8. Secretary The group s company secretary is Ovland Management Services Proprietary Limited. towerpropertyfund.co.za 67

70 DIRECTORS REPORT 9. Directors' shareholding As at the reporting date the following shares were held by directors of the group: Direct Indirect Non beneficial beneficial beneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill Direct Indirect Non beneficial beneficial beneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill No financial assistance was provided by the group for the acquisition of shares by the directors. Subsequent to year-end and the internalisation of Tower Asset Managers Proprietary Limited (refer point 10), the shareholding of K Craddock, M Edwards, M Evans and B Kerswill changed and are as follows: Direct Indirect Non beneficial beneficial beneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill Other than these changes, there have been no further changes in the interests of directors since year-end to the date of approval of the annual financial statements. 10. Directors interests in contracts Tower Property Fund was managed, in an exclusive asset management contract, by Tower Asset Managers Proprietary Limited (TAM). All the executive directors of the group were employed by TAM. TAM had the following shareholders: Spire Property Group Proprietary Limited, Johan Malherbe, Bruce Rogerson and Bryden Property Investments Proprietary Limited. Marc Edwards, Bruce Kerswill and Keith Craddock are shareholders of Spire Property Group Proprietary Limited. Martin Evans has an indirect interest in Bryden Property Investments Proprietary Limited through the Pencil Creek Trust. Subsequent to year-end TAM was acquired by Tower Property Fund. Spire Property Management Proprietary Limited is contracted, exclusively, to perform the property management functions of the fund. Marc Edwards, Keith Craddock and Bruce Kerswill are shareholders and directors of Spire Property Group Proprietary Limited, the holding company of Spire Property Management. Ovland Management Services Proprietary Limited is the company secretary. The contract for the secretarial services is between Ovland Management Services Proprietary Limited and Tower Asset Managers, which is liable for the fees. 11. Solvency and liquidity Treasury shares A resolution was passed by the board of directors that the board of the group authorises the repurchase of Tower Property Fund Limited's shares. The board is satisfied that the group has passed the solvency and liquidity test as set out in section 4 of the Companies Act 71 of 2008 and that, since the test was performed, there have been no material changes to the financial position of the group. Distributions The board is satisfied that the solvency and liquidity test for the group in terms of section 4 of the Companies Act 71 of 2008 have been met and has concluded that the group will satisfy the test immediately after payment of the interim and final distribution. 12. Auditors Mazars have indicated their willingness to continue in office as auditors. A resolution to appoint them as auditors will be proposed at the annual general meeting scheduled to take place on Wednesday, 19 October towerpropertyfund.co.za

71 CAPITAL STRUCTURE OF THE GROUP Shares in issue Total shares in issue Weighted average number of shares in issue Trading volumes Value traded ('R) Volume traded (shares) Volume traded as % of shares in issue 14.31% 15.40% Volume traded as % of weighted number of shares in issue 14.53% 16.87% Market capitalisation at 31 May ('R) Shares repurchased Number of shareholders Shares issued during the year A total of (2015: ) shares were issued during the year Unissued shares At 31 May 2016 there were (2015: ) unissued shares. These shares are under the control of the directors until the AGM. 69

72 SHAREHOLDER ANALYSIS Beneficial shareholders holding in excess of 5% Number of shares % Number of shares % Coronation Fund Managers STANLIB Asset Management Allan Gray Asset Management Nedbank Group Total Shareholder spread 2016 Number of shareholders % Number of shares % Non-Public Shareholders Directors of the company Own Holdings Public shareholders Total Number of shareholders % Number of shares % Non-Public Shareholders Directors of the company Own Holdings Public shareholders Total Number of shareholders 2016 Number of shareholders % Number of shares 000 % shares shares shares shares shares shares and over Total Number of shareholders % Number of shares % shares shares shares shares shares shares and over Total towerpropertyfund.co.za

73 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING Tower Property Fund Limited (Incorporated in the Republic of South Africa) (Registration number: 2012/066457/06) (JSE share code: TWR ISIN: ZAE ) (Approved as a REIT by the JSE) ("Tower" or "the group") Notice is hereby given that the AGM of shareholders of Tower Property Fund Limited will be held at the Belmont Conference Centre, Belmont Road, Rondebosch, on Wednesday, 19 October 2016 at 10:00 for the purpose of conducting the following items of business:» Consider and adopt the Directors Report, the Annual Financial Statements, the Audit and Risk Committee Report and the Social and Ethics Committee Report for the year ended 31 May 2016 contained in the Annual Integrated Report;» Consider and, if deemed fit, pass, with or without modification, the ordinary and special resolutions of shareholders set out hereunder, in the manner required by the Companies Act, 71 of 2008 as amended (Companies Act), as read with the Listings Requirements of the JSE Limited (JSE Listings Requirements) on which the group s securities are listed, which meeting is to be participated in and voted at by shareholders registered in the group s securities register as shareholders as at the record date for voting of 14 October 2016; and» To deal with such business as may lawfully be dealt with at the AGM. Kindly note that, in terms of Section 63 (1) of the Companies Act, meeting participants (including proxies) will be required to provide reasonably satisfactory proof of identification before being entitled to attend, participate and vote at the meeting. Forms of identification include valid identity documents, driver s licences and passports. Please note the following important dates with regard to the AGM:» Record date for receiving this notice of AGM Friday 16 September 2016» Distribution of the Integrated Annual Report and Notice of AGM Tuesday 20 September 2016» Last day to trade in order to be eligible to attend and vote at the AGM Tuesday 11 October 2016» Record date for voting purposes Friday 14 October 2016» Last day to lodge proxy forms for the AGM (by 10:00) Monday 17 October 2016» AGM to be held at 10:00 on Wednesday 19 October 2016» Results of AGM published on SENS Wednesday 19 October 2016 In terms of Section 62 (3) (e) of the Companies Act:» A shareholder who is entitled to attend and vote at the AGM is entitled to appoint a proxy, or two or more proxies, to attend, participate in and vote at the meeting in place of the shareholder, by completing the form of proxy in accordance with the instructions contained therein; and» A proxy need not be a shareholder in the group. Electronic participation The group intends to offer shareholders reasonable access to attend the AGM through electronic conference call facilities, in accordance with the provisions of the Companies Act. Shareholders wishing to participate electronically in the AGM are required to deliver written notice to the group at Ground Floor, Spire House, Tannery Park, 23 Belmont Road, Rondebosch 7701, or ed to inquiries@ovland.co.za (marked for the attention of the company secretary) by no later than 10:00 on Wednesday 12 October 2016 that they wish to participate in the AGM via electronic communication (the Electronic Notice). In order for the Electronic Notice to be valid it must contain: (a) If the shareholder is an individual, a certified copy of his/her identity document and/or passport; (b) If the shareholder is not an individual, a certified copy of a resolution passed by the relevant entity and a certified copy of the identity documents and/or passports of the persons who passed the relevant resolution, which resolution must set out who is authorised to represent the relevant entity at the AGM via electronic communication; and (c) A valid address and/or facsimile number (the contact address/number); and 71

74 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING (AGM) (d) Full details of the shareholder s title to the shares in the form of copies of the share certificate (in the case of certificated shareholders) and (in the case of dematerialised shareholders) written confirmation from the shareholder s CSDP confirming the shareholder s title to the dematerialised shares. Voting will not be possible via electronic communication and shareholders participating electronically and wishing to vote their shares at the meeting will need to be represented at the meeting, either in person, by proxy or by letter of representation. The group will use its reasonable endeavours on or before 12:00 on Friday, 14 October 2016 to notify each shareholder, who has delivered a valid Electronic Notice, at its contact address/number, of the relevant details through which the shareholder can participate in the AGM via electronic communication. The following proposed resolutions will be considered by shareholders at the AGM, and, if deemed fit, passed with or without modification: 1. Proposed Ordinary Resolution 1 Adoption of annual financial statements "Resolved that the annual financial statements of the group for the year ended 31 May 2016, together with the reports of the directors, independent auditors, Audit and Risk Committee and Social and Ethics Committee, be and they are hereby received and adopted". In order for ordinary resolution 1 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 2. Proposed Ordinary Resolution 2 Re-appointment of auditors "Resolved that Mazars, together with Ms Y Ferreira, be and are hereby re-appointed as the independent auditors of the group from the conclusion of the AGM." The Audit and Risk Committee has nominated for appointment Mazars as auditors of the group under Section 90 of the Companies Act, with Ms Y Ferreira being the designated audit partner responsible for the group s audit. In order for ordinary resolution 2 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 3. Proposed Ordinary Resolution 3 Re-election of Mr A Magwetshu "Resolved that Mr A Magwetshu, who retires by rotation as a director of the group at this AGM and who is eligible and available for re-election, be re-elected as a director of the group." A brief curriculum vitae of Mr A Magwetshu is set out on page 10 of the Integrated Annual Report of which this notice forms part. The Nomination and Remuneration Committee has considered Mr A Magwetshu s past performance and contribution to the group and recommends that Mr A Magwetshu is re-elected as a director of the group. In order for ordinary resolution 3 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 4. Proposed Ordinary Resolution 4 Re-election of Ms N Milne "Resolved that Ms N Milne, who retires by rotation as a director of the group at this AGM and who is eligible and available for re-election, be re-elected as a director of the group." A brief curriculum vitae of Ms N Milne is set out on page 10 of the Integrated Annual Report of which this notice forms part. The Nomination and Remuneration Committee has considered Ms N Milne s past performance and contribution to the group and recommends that Ms N Milne is re-elected as a director of the group. In order for ordinary resolution 4 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 72

75 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING 5. Proposed Ordinary Resolution 5 Re-election of the Audit and Risk Committee members "Resolved that the members of the group s Audit and Risk Committee set out below be, and are hereby re-appointed, each by way of a separate vote, with effect from the end of this AGM in terms of section 94(2) of the Companies Act. The membership as proposed by the Nomination and Remuneration Committee is as follows: 5.1 J Bester (Chairman); 5.2 N Milne; and 5.3 R Naidoo, all of whom are independent non-executive directors. Brief curriculum vitae of each of the above Audit and Risk Committee members are set out on page 10 and 13 of the Integrated Annual Report of which this notice forms part". In order for ordinary resolutions 5.1, 5.2 and 5.3 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass each resolution. 6. Proposed Ordinary Resolution 6 Control over unissued shares "Resolved that, subject to the provisions of the group s Memorandum of Incorporation, the authorised but unissued ordinary shares of the group be and are hereby placed under the control of the directors of the group until the next AGM, with the authority to allot and issue and otherwise dispose of all or part thereof at their discretion, provided that such allotment, issue or disposal is subject to a maximum discount of 5% of the weighted average traded price on the JSE of those shares over the 30 days prior to the date the price of the issue is agreed between the group and the party subscribing for the shares, adjusted for dividend where the ex-date in respect of the dividend occurs during the 30 business days in question". In order for ordinary resolution 6 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 7. Proposed Ordinary Resolution 7 General authority to issue ordinary shares for cash "Resolved that, subject to the restrictions set out below, the directors be and they are hereby authorised to allot and issue ordinary shares for cash, subject at all times to the provisions of the Companies Act, the group s Memorandum of Incorporation and the JSE Listings Requirements. This authority shall lapse at the next AGM or 15 months from the date of passing this special resolution, whichever occurs first:» the allotment and issue of shares for cash must be made to persons qualifying as public shareholders and not to related parties, as defined in the JSE Listings Requirements;» the shares issued for cash must be of a class of shares already in issue or, where this is not the case, must be limited to such shares or rights that are convertible into a class already in issue;» the total aggregate number of shares which may be issued for cash in terms of this authority may not exceed shares, being 5% of the group s ordinary issued shares at the date of this notice. Accordingly any shares issued under this authority prior to this authority lapsing shall be deducted from the shares the group is authorised to issue in terms of this authority for the purpose of determining the remaining number of shares that may be issued in terms of this authority;» in the event of a sub-division or consolidation of shares prior to this authority lapsing, the existing authority will be adjusted accordingly to represent the same allocation ratio;» the maximum discount at which such shares may be issued in terms of this authority is 5% of the weighted average traded price of such shares measured over the 30 business days prior to the date that the price of the issue is agreed between the group and the party subscribing for the shares;» an announcement giving full details, including the number of shares issued, the average discount to the weighted average traded price of the shares over the 30 business days prior to the date that the price of the issue was determined or agreed to by the directors and an explanation, including supporting documentation (if any) of the intended use of the funds, will be published after any issue representing, on a cumulative basis within any one financial year, 5% or more of the number of shares in issue prior to such issue". In order for ordinary resolution 7 to be adopted, the support of at least 75% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. towerpropertyfund.co.za 73

76 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING 8. Proposed Special Resolution 1 Approval of Non-executive directors remuneration "Resolved that in terms of section 66(9) of the Companies Act, the group be and is hereby, authorised to pay remuneration to its non-executive directors and that the remuneration structure and amounts, as set out below, be and they are hereby approved for a period of two years from the passing of this resolution or until its renewal, whichever is the earliest, or until such time as rescinded or amended by shareholders as follows": Proposed (R) Current (R) Board Chairman Audit Committee Chairman Non-executive directors Independent non-executive directors In order for special resolution 1 to be adopted, the support of at least 75% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. Reason for and effect of Special Resolution 1 The reason for this special resolution 1 is that Section 66 (9) of the Companies Act requires that shareholders approve the remuneration of directors. The effect of the resolution will be that directors will be remunerated for the coming year in accordance with the schedule tabled. 9. Proposed Special Resolution 2 General authority to repurchase shares "Resolved that the group or any of its subsidiaries be and are hereby authorised by way of a general authority to acquire ordinary shares issued by the group, in terms of sections 46 and 48 of the Companies Act, and subject to the following provisions of the JSE Listings Requirements:» any acquisition of shares shall be implemented through the order book of the JSE and without prior arrangement;» this general authority shall be valid until the group s next AGM, provided that it shall not extend beyond 15 months from the date of passing this special resolution;» the group (or any subsidiary) is duly authorised by its Memorandum of Incorporation to do so;» acquisitions of shares in the aggregate in any one financial year may not exceed 20% (or 10% where the acquisitions are effected by a subsidiary) of the group s issued ordinary share capital as at the date of passing this special resolution;» in determining the price at which shares issued by the group are acquired by it or any of its subsidiaries in terms of this general authority, the maximum premium at which such shares may be acquired will be 10% of the weighted average of the market value on the JSE over the five business days immediately preceding the repurchase of such shares;» at any point in time the group (or any subsidiary) may appoint only one agent to effect repurchases on its behalf;» repurchases may not take place during a prohibited period (as defined in paragraph 3.67 of the JSE Listings Requirements) unless a repurchase programme is in place (where the dates and quantities of shares to be repurchased is fixed) and has been submitted to the JSE in writing prior to the commencement of the prohibited period;» an announcement will be published as soon as the group or any of its subsidiaries have acquired shares constituting, on a cumulative basis, 3% of the number of shares in issue prior to the granting of the repurchase authority and pursuant to which the aforesaid threshold is reached, and for each 3% in aggregate acquired thereafter, containing full details of such repurchases;» the board of directors of the group must resolve that the repurchase is authorised, the group and its subsidiaries have passed the solvency and liquidity test, as set out in section 4 of the Companies Act, and since that test was performed, there have been no material changes to the financial position of the group. In accordance with the JSE Listings Requirements the directors record that although there is no immediate intention to effect a repurchase of the shares of the group, the directors will utilise this general authority to repurchase shares as and when suitable opportunities present themselves, which may require expeditious and immediate action. The directors undertake that, after considering the maximum number of shares that may be repurchased and the price at which the repurchases may take place pursuant to the general authority, for a period of 12 months after the date of this AGM;» the Company and the group will, in the ordinary course of its business, be able to pay its debts; 74

77 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING» the consolidated assets of the Company and the group fairly valued in accordance with International Financial Reporting Standards, will exceed the consolidated liabilities of the group fairly valued in accordance with International Financial Reporting Standards; and» the Company's and the group s share capital, reserves and working capital will be adequate for ordinary business purposes. The following additional information, some of which may appear elsewhere in the Integrated Annual Report of which this notice forms part, is provided in terms of paragraph of the JSE Listings Requirements for purposes of this general authority:» Major beneficial shareholders page 20;» Capital Structure of the group page 19. Directors responsibility statement The directors whose names appear on pages 10 to 13 of the Integrated Annual Report of which this notice forms part, collectively and individually accept full responsibility for the accuracy of the information pertaining to this special resolution and certify that, to the best of their knowledge and belief, there are no facts that have been omitted which would make any statement false or misleading, and that all reasonable inquiries to ascertain such facts have been made and that the special resolution contains all information required by the Companies Act and the JSE Listings Requirements. Material changes Other than the facts and developments reported on in the Integrated Annual Report of which this notice forms part, there have been no material changes in the affairs or financial position of the group and its subsidiaries since the date of signature of the audit report for the financial year ended 31 May 2016 and up to the date of this notice. In order for special resolution 2 to be adopted, the support of at least 75% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. Reason for and effect of Special Resolution 2 The reason for special resolution 2 is to afford the directors of the group (or a subsidiary of the group) general authority to effect a repurchase of the group s shares on the JSE. The effect of the resolution will be that the directors will have the authority, subject to the JSE Listings Requirements and the Companies Act to effect repurchase of the group s shares on the JSE. 10. Proposed Special Resolution 3 Financial Assistance to Related and Inter-related Parties "Resolved that, to the extent required by section 45 of the Companies Act, the board of directors of the group may, subject to compliance with the requirements of the group's Memorandum of Incorporation, the Companies Act and the JSE Listing Requirements, authorise the group to provide direct or indirect financial assistance as contemplated in section 45 of the Companies Act by way of loans, guarantees, the provision of security or otherwise, to any of its present or future subsidiaries and/or any other company or corporation that is or becomes related or inter-related (as defined in the Companies Act) to the group for any purpose or in connection with any matter, such authority to endure for a period of not more than 2 years, and further provided that inasmuch as the group's provision of financial assistance to its subsidiaries will at any and all times be in excess of one-tenth of 1% of the group's net worth, the group hereby provides notice to its shareholders of that fact." In order for special resolution 3 to be adopted, the support of at least 75% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. Reason for and effect of special resolution 3 The group would like the ability to provide financial assistance in appropriate circumstances and if the need arises, in accordance with section 45 of the Companies Act. This authority is necessary for the group to provide financial assistance in appropriate circumstances. Under the Companies Act, the group will, however require the special resolution referred to above to be adopted, provided that the board of directors of the group are satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the group and, immediately after providing the financial assistance, the group would satisfy the solvency and liquidity test contemplated in the Companies Act. In the circumstances and in order to, inter alia, ensure that the group's towerpropertyfund.co.za 75

78 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING subsidiaries and other related and inter-related companies and corporations have access to financing and/or financial backing from the group (as opposed to banks), it is necessary to obtain the approval of shareholders, as set out in special resolution 3. Therefore, the reason for, and effect of, special resolution 3 is to permit the group to provide direct or indirect financial assistance (within the meaning attributed to that term in section 45 of the Companies Act) to the entities referred to in special resolution 3 above. Notice in terms of section 45(5) of the Companies Act in respect of special resolution 3 Notice is hereby given to shareholders of the group in terms of section 45(5) of the Companies Act of a resolution adopted by the board authorising the group to provide such direct or indirect financial assistance as specified in the special resolution above» by the time that this notice of annual general meeting is delivered to shareholders of the group, the board will have adopted a resolution (section 45 board resolution) authorising the group to provide, at any time and from time to time during the period of 2 years commencing on the date on which the special resolution is adopted, any direct or indirect financial assistance as contemplated in section 45 of the Companies Act to any 1 or more related or inter-related companies or corporations of the group and/or to any 1 or more members of any such related or inter-related company or corporation and/or to any 1 or more persons related to any such company or corporation;» the section 45 board resolution will be effective only if and to the extent that the special resolution under the heading "special resolution 3" is adopted by the shareholders of the group, and the provision of any such direct or indirect financial assistance by the group, pursuant to such resolution, will always be subject to the board being satisfied that (i) immediately after providing such financial assistance, the group will satisfy the solvency and liquidity test as referred to in section 45(3)(b)(i) of the Companies Act, and that (ii) the terms under which such financial assistance is to be given are fair and reasonable to the group as referred to in section 45(3)(b)(ii) of the Companies Act; and» in as much as the section 45 board resolution contemplates that such financial assistance will in the aggregate exceed one tenth of 1% of the group's net worth at the date of adoption of such resolution, the group hereby provides notice of the section 45 board resolution to shareholders of the group. 11. Proposed Ordinary Resolution 8 Specific authority to issue shares pursuant to a reinvestment option "Resolved that, subject to the provisions of the Companies Act, the JSE Listings Requirements and the group s Memorandum of Incorporation, the directors be and are hereby authorised by way of a specific standing authority to issue ordinary shares of no par value as and when they deem appropriate, for the exclusive purpose of affording shareholders opportunities from time to time to elect to reinvest their distributions in new no par value shares of the group pursuant to a reinvestment option". In order for ordinary resolution 9 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 12. Proposed Ordinary Resolution 9 Implementation of resolutions "Resolved that any director or the secretary of the group, be and is hereby authorised to do all such things, sign all such documents and take all actions as may be necessary to implement the above ordinary and special resolutions". In order for ordinary resolution 10 to be adopted, the support of more than 50% of the total number of votes exercised by shareholders present, in person or by proxy, is required to pass this resolution. 76

79 NOTICE TO SHAREHOLDERS - ANNUAL GENERAL MEETING Quorum A quorum for purposes of considering the resolutions above shall consist of three shareholders of the group personally present or represented by proxy (and if the shareholder is a body corporate, the representative of the body corporate) and entitled to vote at the AGM. In addition a quorum shall comprise 25% of all voting rights entitled to be exercised by shareholders in respect of the resolutions above. The date on which shareholders must be recorded as such in the register maintained by the transfer secretaries, Link Market Services South Africa Proprietary Limited, (13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein) for the purposes of being entitled to attend, participate in and vote at the AGM is Friday, 14 October Voting and proxies A shareholder entitled to attend and vote at the AGM is entitled to appoint one or more proxies (who need not be a shareholder of the group) to attend, speak and vote in his/her stead. On a show of hands, every shareholder of the group present in person or represented by proxy shall have one vote only. On a poll, every shareholder of the group present in person or represented by proxy shall have one vote for every share held in the group by such shareholder. A form of proxy is attached for the convenience of any shareholder holding certificated shares who cannot attend the AGM but who wishes to be represented thereat. Forms of proxy may also be obtained on request from the group s registered office. The completed form of proxy must be deposited at, or posted to the office of the transfer secretaries, Link Market Services South Africa Proprietary Limited, (13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein or PO Box 4844, Johannesburg 2000), to be received by no later than 10:00 on Monday, 17 October Any shareholder who completes and lodges a form of proxy will nevertheless be entitled to attend and vote in person at the AGM should the shareholder subsequently decide to do so. Attached to the proxy form is an extract of section 58 of the Companies Act, to which shareholders are referred. Dematerialised shareholders, who have elected own name registration in the sub-register through a CSDP and who are unable to attend but wish to vote at the AGM must complete the attached form of proxy and lodge it with the transfer secretaries, Link Market Services South Africa Proprietary Limited, (13th Floor, Rennie House, 19 Ameshoff Street, Braamfontein or PO Box 4844, Johannesburg 2000), to be received by no later than Monday, 17 October Alternatively, the form of proxy may be handed to the transfer secretaries or the chairman of the AGM at the AGM prior to the commencement of the AGM. All beneficial shareholders whose shares have been dematerialised through a CSDP other than with own name registration, must provide the CSDP or broker with their voting instructions in terms of their custody agreement should they wish to vote at the AGM. Alternatively, they may request the CSDP or broker to provide them with a letter of representation in terms of the custody agreement, should they wish to attend the AGM. Such shareholder must not complete the attached form of proxy. In terms of section 63(1) of the Companies Act, meeting participants (including proxies) will be required to provide identification to the reasonable satisfaction of the chairman of the AGM and the chairman must be reasonably satisfied that the right of any person to participate in and vote (whether as a shareholder or as a proxy for a shareholder) has been reasonably verified. By order of the board Ovland Management Services Proprietary Limited Company secretary Per: F J Jenkings Registered Office Transfer Secretaries 2nd Floor Link Market Services South Africa Proprietary Limited Spire House 13th Floor Tannery Park Rennie House 23 Belmont Road 19 Ameshoff Street Rondebosch 7700 Braamfontein 2001 towerpropertyfund.co.za 77

80 SHAREHOLDERS DIARY Annual General Meeting 19 October 2016 Reporting Interim results to November 2016 on or about 31 January 2017 Annual results to May 2017 on or about 31 July 2017 Integrated Annual Report 2017 end September 2017 Dividends 2016 final dividend Dividend declared 29 July 2016 Dividend paid 29 August interim dividend Dividend declared on or about the 31 January 2017 Dividend paid 27 February final dividend Dividend declared on or about 31 July 2017 Dividend paid 28 August towerpropertyfund.co.za

81 FORM OF PROXY Tower Property Fund Limited (Incorporated in the Republic of South Africa) (Registration number 2012/066457/06) JSE share code: TWR ISIN: ZAE (Approved as a REIT by the JSE) ("Tower" or "the group") Where appropriate and applicable the terms defined in the notice of annual general meeting to which this form of proxy is attached and forms part of bear the same meanings in this form of proxy. For use only by certificated shareholders and dematerialised shareholders with "own name" registration, nominee companies of Central Securities Depository Participant s (CSDP) and brokers nominee companies, registered as such at the close of business on Friday, 14 October 2016 (the voting record date) at the annual general meeting to be held at the Belmont Conference Centre, Belmont Road, Rondebosch, on Wednesday 19 October 2016 at 10:00 (the annual general meeting) or any postponement or adjournment thereof. If you are a dematerialised shareholder, other than with "own name" registration, do not use this form. Dematerialised shareholders, other than with "own name" registration, should provide instructions to their appointed CSDP or broker in the form as stipulated in the agreement entered into between the shareholder and the CSDP or broker. I/We (block letters) Of (address) being the registered holder/s of ordinary shares hereby appoint 1. or, failing him/her 2. or, failing him/her 3. the chairman of the annual general meeting as my/our proxy to attend and speak and to vote for me/us and on my/our behalf at the annual general meeting and at any adjournment or postponement thereof, for the considering and, if deemed fit, passing, with or without modification, the resolutions to be proposed at the annual general meeting, and to vote on the resolutions in respect of the ordinary shares registered in my/our name(s), in the following manner: Number of shares In favour of Against Abstain Ordinary Resolution 1 Adoption of the annual financial statements Ordinary Resolution 2 Re-appointment of auditors Ordinary Resolution 3 Re-election of Mr A Magwetshu Ordinary Resolution 4 Re-election of Mrs N Milne Ordinary Resolution 5.1 Re-election of Mr J Bester as chairman and member of the Audit and Risk Committee Ordinary Resolution 5.2 Re-election of Mrs N Milne as member of the Audit and Risk Committee Ordinary Resolution 5.3 Re-election of Mr R Naidoo as member of the Audit and Risk Committee Ordinary Resolution 6 Control over unissued shares Ordinary Resolution 7 General authority to issue shares for cash Special Resolution 1 Approval of non-executive directors remuneration Special Resolution 2 General authority to repurchase shares Special Resolution 3 Financial Assistance to related and inter-related parties Ordinary Resolution 8 Issue of shares in terms of reinvestment option Ordinary Resolution 9 Implementation of resolutions Please indicate with an "X" in the appropriate spaces above how you wish your votes to be cast. Unless otherwise instructed, my/our proxy may vote as he/she thinks fit. Signed at (place) on (date) 2016 Shareholder s signature Assisted by me (where applicable) (State capacity and full name) A shareholder entitled to attend and vote at the annual general meeting is entitled to appoint a proxy to attend, speak and vote in his/her stead. A proxy need not be a member of the group. A shareholder may insert the name of a proxy or the name of two alternative proxies of the shareholder s choice in the space/s provided, with or without deleting "the chairman of the annual general meeting". The person whose name appears first on the form of proxy and who is present at the annual general meeting will be entitled to act as proxy to the exclusion of those whose names follow. Registered office and postal address Transfer secretaries Spire House Link Market Services South Africa Proprietary Limited 23 Belmont Road PO Box 155 PO Box 844 Rondebosch 7700 Rondebosch 7701 Johannesburg 2000

82 NOTES TO THE FORM OF PROXY A shareholder entitled to attend and vote at the above-mentioned meeting is entitled to appoint a proxy to attend, speak and vote in his/her stead. The proxy need not be a member of the group. 1. A shareholder may insert the name of a proxy or the name of two alternative proxies of the shareholder s choice in the space/s provided, with or without deleting "the chairman of the annual general meeting". The person whose name appears first on the form of proxy and who is present at the annual general meeting will be entitled to act as proxy to the exclusion of those whose names follow. 2. Certificated shareholders wishing to attend the annual general meeting have to ensure beforehand with the transfer secretaries of the group (being Link Market Services South Africa Proprietary Limited) that their shares are registered in their name. 3. This form of proxy is only to be completed by those ordinary shareholders who are: - holding ordinary shares in certificated form; or - recorded in the sub-register in electronic form in their "own name". on the date on which shareholders must be recorded as such in the register maintained by the transfer secretaries, Link Market Services South Africa Proprietary Limited, in order to vote at the annual general meeting being Friday, 14 October 2016, and who wish to appoint another person to represent them at the annual general meeting. 4. Beneficial shareholders whose shares are not registered in their "own name", but in the name of another, for example, a nominee, may not complete a proxy form, unless a form of proxy is issued to them by a registered shareholder and they should contact the registered shareholder for assistance in issuing instruction on voting their shares, or obtaining a proxy to attend, speak and, on a poll, vote at the annual general meeting. 5. A shareholder s instructions to the proxy must be indicated by means of a tick or a cross in the appropriate box provided. However if you wish to cast your votes in respect of a lesser number of shares than you own in the group, insert the number of shares in respect of which you desire to vote. If: (i) a shareholder fails to comply with the above; or (ii) gives contrary instructions in relation to any matter; or any additional resolution(s) which are properly put before the meeting; or (iii) the resolution listed in the proxy form is modified or amended, the shareholder will be deemed to authorise the chairman of the annual general meeting, if the chairman is the authorised proxy, to vote in favour of the resolutions at the annual general meeting, or any other proxy to vote or to abstain from voting at the annual general meeting as he/she deems fit, in respect of all the shareholder s votes exercisable thereat. If however the shareholder has provided further written instructions which accompany this form of proxy and which indicate how the proxy should vote or abstain from voting in any of the circumstances referred to in (i) to (iii) above, then the proxy shall comply with those instructions. 6. The chairman of the annual general meeting may reject or accept any form of proxy which is completed and/or received, other than in compliance with these notes provided that, in respect of acceptances, he is satisfied as to the manner in which the shareholder(s) concerned wish(es) to vote. 7. A minor must be assisted by his/her parent or guardian unless the relevant documents establishing his/her legal capacity are produced or have been registered by Link Market Services South Africa Proprietary Limited. 8. A shareholder or his/her proxy is not obliged to use all the votes exercisable by the shareholder or his/her proxy, but the total of votes cast and in respect of which any abstention is recorded may not exceed the total votes exercisable by the shareholder or his/her proxy. 9. Any deletion, alteration or correction to this form of proxy must be initialed by the signatory/ies. 10. Documentary evidence establishing the authority of a person signing this form of proxy in a representative capacity must be attached to this form of proxy unless previously recorded by the group. 11. Forms of proxy must be lodged at or posted to the transfer secretaries or registered office of the group at the addresses reflected on this form of proxy, to be received no later than 10:00 on Monday, 17 October Alternatively, the form of proxy may be handed to the transfer secretaries or chairman of the annual general meeting at the annual general meeting or any time prior to the commencement of the annual general meeting. 12. Where there are joint holders of shares: - any one holder may sign the form of proxy; and - the vote of the senior (for that purpose seniority will be determined by the order in which the names of shareholders appear in the register of members) who tenders a vote (whether in person or by proxy) will be accepted to the exclusion of the vote/s of the other joint holder/s of shares. 13. The completion and lodgment of this form of proxy by certificated shareholders and dematerialised shareholders with "own name" registration will not preclude the shareholder from attending the annual general meeting and speaking and voting thereat to the exclusion of any proxy appointed in terms hereof, should such shareholder wish to do so. In addition to the aforegoing, a shareholder may revoke the proxy appointment by (i) canceling it in writing, or making a later inconsistent appointment of a proxy; and (ii) delivering a copy of the revocation instrument to the proxy, and to the group. The revocation of a proxy appointment constitutes a complete and final cancellation of the proxy s authority to act on behalf of the shareholder as at the later of the date state in the revocation instrument, if any; or the date on which the revocation instrument was delivered in the required manner. 14. Dematerialised shareholders, other than with "own name" registration, must advise their Central Securities Depository Participant (CSDP) or broker of their voting instructions if they are unable to attend the annual general meeting, but wish to be represented thereat. This should be done by the cut-off time stipulated by their CSDP or broker. If, however, such shareholders wish to attend the annual general meeting in person, then they will need to request their CSDP or broker to provide them with the necessary letter of representation in terms of the custody agreement entered into between the dematerialised shareholder and the CSDP or broker. 15. A form of proxy shall be deemed to include the right to demand or join in demanding a poll. Extract from the Companies Act "58. Shareholder right to be represented by proxy (1) At any time, a shareholder of a company may appoint any individual, including an individual who is not a shareholder of that company, as a proxy to: (a) participate in, and speak and vote at, a shareholders meeting on behalf of the shareholder; or (b) give or withhold written consent on behalf of the shareholder to a decision contemplated in section 60. (2) A proxy appointment: (a) must be in writing, dated and signed by the shareholder; and (b) remains valid for (i) one year after the date on which it was signed; or (ii) any longer or shorter period expressly set out in the appointment, unless it is revoked in a manner contem plated in subsection (4)(c), or expires earlier as contemplated in subsection (8)(d). (3) Except to the extent that the Memorandum of Incorporation of a company provides otherwise (a) a shareholder of that company may appoint two or more persons concurrently as proxies, and may appoint more than one proxy to exercise voting rights attached to different securities held by the shareholder; (b) a proxy may delegate the proxy s authority to act on behalf of the shareholder to another person, subject to any restriction set out in the instrument appointing the proxy; and (c) a copy of the instrument appointing a proxy must be delivered to the company, or to any other person on behalf of the company, before the proxy exercises any rights of the shareholder at a shareholders meeting. (4) Irrespective of the form of instrument used to appoint a proxy: (a) the appointment is suspended at any time and to the extent that the shareholder chooses to act directly and in person in the exercise of any rights as a shareholder; (b) the appointment is revocable unless the proxy appointment expressly states otherwise; and (c) if the appointment is revocable, a shareholder may revoke the proxy appointment by: (i) canceling it in writing, or making a later inconsistent appointment of a proxy; and (ii) delivering a copy of the revocation instrument to the proxy, and to the company. (5) The revocation of a proxy appointment constitutes a complete and final cancellation of the proxy s authority to act on behalf of the shareholder as of the later of: (a) the date stated in the revocation instrument, if any; or (b) the date on which the revocation instrument was delivered as required in subsection (4)(c)(ii). (6) If the instrument appointing a proxy or proxies has been delivered to a company, as long as that appointment remains in effect, any notice that is required by this Act or the company s Memorandum of Incorporation to be delivered by the company to the shareholder must be delivered by the company to: (a) the shareholder; or (b) the proxy or proxies, if the shareholder has (i) directed the company to do so, in writing; and (ii) paid any reasonable fee charged by the company for doing so. (7) A proxy is entitled to exercise, or abstain from exercising, any voting right of the shareholder without direction, except to the extent that the Memorandum of Incorporation, or the instrument appointing the proxy, provides otherwise. (8) If a company issues an invitation to shareholders to appoint one or more persons named by the company as a proxy, or supplies a form of instrument for appointing a proxy: (a) the invitation must be sent to every shareholder who is entitled to notice of the meeting at which the proxy is intended to be exercised; (b) the invitation, or form of instrument supplied by the company for the purpose of appointing a proxy, must (i) bear a reasonably prominent summary of the rights established by this section; (ii) contain adequate blank space, immediately preceding the name or names of any person or persons named in it, to enable a shareholder to write in the name and, if so desired, an alternative name of a proxy chosen by the shareholder; and (iii) provide adequate space for the shareholder to indicate whether the appointed proxy is to vote in favour of or against any resolution or resolutions to be put at the meeting, or is to abstain from voting; (c) the company must not require that the proxy appointment be made irrevocable; and (d) the proxy appointment remains valid only until the end of the meeting at which it was intended to be used, subject to subsection (5). (9) Subsection (8)(b) and (d) do not apply if the company merely supplies a generally available standard form of proxy appointment on request by a shareholder."

83 CORPORATE INFORMATION Tower Property Fund Limited Incorporated in the Republic of South Africa Registration number: 2012/066457/06 Income tax number: JSE share code: TWR ISIN: ZAE Company secretary Ovland Management Services Proprietary Limited Independent auditor Mazars Registered address 2nd floor, Spire House, Tannery Park, 23 Belmont Road, Rondebosch, 7700 Postal address PO Box 155, Rondebosch, 7701 Contact details Telephone: +27 (0) JSE sponsor Java Capital Transfer secretaries Link Market Services South Africa Proprietary Limited 13th floor, Rennie House, 19 Ameshoff Street, Braamfontein PO Box 4844, Johannesburg, 2000 Telephone: +27 (0)

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