TOWER PROPERTY FUND Limited consolidated Annual Financial Statements

Transcription

1 TPF CROATIA for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements

2 PROPERTY FUND LIMITED Consolidated Annual Financial Statements The reports and statements set out below comprise the consolidated annual financial statements presented to the shareholders: 1 Directors responsibilities and approval 2 Independent auditors report 3 Certificate by the company secretary 4 Directors report 6 Consolidated statement of financial position 7 Consolidated statement of profit or loss and other comprehensive income 8 Consolidated statement of changes in equity 9 Consolidated statement of cash flows 10 Accounting policies 17 Notes to the annual financial statements 43 Property portfolio information 50 Audit and risk committee report 52 General information Tower aims to generate competitive investment performance by adding value through property asset management and the cost-effective greening of properties in the portfolio The consolidated annual financial statements of the Group have been audited in compliance with the Companies Act of South Africa and prepared under the supervision of Mrs. J Mabin CA(SA), Chief Financial Officer. Published: 4 August

3 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Directors responsibility and approval The directors are required by the Companies Act of South Africa to maintain adequate accounting records and are responsible for the content and integrity of the consolidated annual financial statements and related financial information included in this report. It is their responsibility to ensure that the consolidated annual financial statements satisfy International Financial Reporting Standards as to form and content and present fairly the financial position, results of operations and business of the Group, and explain the transactions and financial position of the business of the Group at the end of the financial year. The consolidated annual financial statements are based upon appropriate accounting policies consistently applied and supported by reasonable and prudent judgements and estimates. The directors acknowledge that they are ultimately responsible for the system of internal financial control established by the Group and place considerable importance on maintaining a strong control environment. To enable the directors to meet these responsibilities, the board sets standards for internal control aimed at reducing the risk of error or loss in a cost-effective manner. The standards include the proper delegation of responsibilities within a clearly defined framework, effective accounting procedures and adequate segregation of duties to ensure an acceptable level of risk. These controls are monitored throughout the Group and all employees are required to maintain the highest ethical standards in ensuring the Group s business is conducted in a manner that in all reasonable circumstances is above reproach. systems and ethical behaviour are applied and managed within predetermined procedures and constraints. The directors are of the opinion, based on the information and explanations given by management, that the system of internal control provides reasonable assurance that the financial records may be relied on for the preparation of the annual financial statements. However, any system of internal financial control can provide only reasonable, and not absolute, assurance against material misstatement or loss. The going concern basis has been adopted in preparing the financial statements. Based on forecasts and available cash resources the directors have no reason to believe that the Group will not be a going concern in the foreseeable future. The financial statements support the viability of the Group. The financial statements have been audited by the independent auditing firm, Mazars, who have been given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. The directors believe that all representations made to the independent auditor during the audit were valid and appropriate. The external auditor s unqualified audit report is presented on page 2. The annual financial statements as set out on pages 4 to 51 were approved and signed by the directors on 4 August : The focus of risk management in the Group is on identifying, assessing, managing and monitoring all known forms of risk. While operating risk cannot be fully eliminated, the Group endeavours to minimise it by ensuring that appropriate infrastructure, controls, A Dalling Independent, Non-Executive Chairman M Edwards Chief Executive Officer 1 CROATIA TPF

4 Independent auditors report To the shareholders of Tower Property Fund Limited Report on the Financial Statements We have audited the consolidated annual financial statements of Tower Property Fund Limited set out on pages 6 to 39, which comprise the statement of financial position as at 31 May, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the notes, comprising a summary of significant accounting policies and other explanatory information. Directors responsibility for the consolidated annual financial statements The company s directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the annual financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these consolidated annual financial statements present fairly, in all material respects, the consolidated financial position of Tower Property Fund Limited as at 31 May, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards, and the requirements of the Companies Act of South Africa. Other matter Without qualifying our opinion, we draw attention to the fact that the supplementary information set out on pages 40 to 51 do not form part of the consolidated annual financial statements and is presented as additional information. We have not audited this information and accordingly do not express an opinion thereon. Other reports required by the Companies Act As part of our audit of the consolidated annual financial statements for the year ended 31 May, we have read the Directors Report, the Audit Committee s Report and the Company Secretary s Certificate for the purpose of identifying whether there are material inconsistencies between these reports and the audited consolidated financial statements. These reports are the responsibility of the respective preparers. Based on reading these reports we have not identified material inconsistencies between these reports and the audited consolidated financial statements. However, we have not audited these reports and accordingly do not express an opinion on these reports. Report on Other Legal and Regulatory Requirements In terms of the IRBA Rule published in Government Gazette Number dated 4 December, we report that Mazars has been the auditor of Tower Property Fund Limited for 3 years. Mazars Registered Auditor Partner: Yolandie Ferreira Registered Auditor Date: 4 August Cape Town TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 2

5 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Certificate by the company secretary In terms of section 88(2) (e) of the Companies Act of South Africa. I confirm that, to the best of my knowledge and belief, for the year ended 31 May Tower Property Fund Limited has lodged with the Companies and Intellectual Property Commission all such returns and notices as are required of a public company in terms of the Companies Act of South Africa, and that all such returns and notices appear to be true, correct and up to date. F Jenkings On behalf of Ovland Management Services Proprietary Limited Company Secretary Cape Town 4 August 3 CROATIA TPF

6 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements DIRECTORS REPORT 1. Review of activities Main business and operations Tower Property Fund Limited carries on the business of a property investment company. There were no major changes herein during the year. The operating results and 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 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 are disclosed in notes 19 and 20 of these consolidated annual 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 (: ) ordinary shares were issued shares were issued through an accelerated bookbuild. The funds raised were used for the acquisition of properties and to reduce debt. The balance of ordinary shares were issued to vendors for properties purchased. Refer to note 8. During the year under review the Group bought back (: ) shares at an average repurchase price of R8.47 (: R8.42) per share. Refer to note Borrowing limitations In terms of the Memorandum of Incorporation of the company, the directors may exercise all the powers of the company to borrow money, as they consider appropriate. 6. Dividends An interim dividend of cents per share was declared for the six-month period ending 30 November. The distribution was paid on 29 February. Shareholders were given notice of the final dividend declaration of cents for the year ended 31 May. 7. Directors The directors of the company 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. CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 4

7 9. Directors shareholding As at the reporting date the following shares were held by directors of the company: No financial assistance was provided by the company 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 beneficial Indirect beneficial Nonbeneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill Direct beneficial Indirect beneficial Nonbeneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill Direct beneficial Indirect beneficial Nonbeneficial J Bester K Craddock A Dalling M Edwards M Evans B Kerswill Directors interest in contracts Tower Property Fund is managed, in an exclusive asset management contract, by Tower Asset Managers Proprietary Limited (TAM). All the executive directors of the Group are employed by TAM. TAM has 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 Proprietary Limited. 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 Proprietary Limited, which is liable for the fees. Also refer to note 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 of South Africa 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 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 the office as auditors. A resolution to appoint them as auditors will be proposed at the annual general meeting scheduled to take place on 19 October. 5

8 Consolidated statement of financial position Group Group Figures in Rand Notes 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 9 (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 TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 6

9 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Group Group Figures in Rand Notes 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 4 (10 604) Fair value adjustments on interest rate derivatives (7 533) 762 Profit from operations Finance income Finance costs 16 ( ) (78 776) Indirect capital raising expenses (894) (206) Profit before taxation Taxation 17 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) TPF 7 CROATIA

10 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Figures in R Stated capital Treasury capital Foreign currency translation reserve Retained earnings Shareholders' interest Noncontrolling interest Total equity 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) Notes 8 9 TPF CROATIA TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 8

11 CONSOLIDATED STATEMENT OF CASH FLOWS Group Group Figures in Rand Notes Cash flows from operating activities Profit for the year before taxation Adjustments for: Finance costs Finance income (2 635) (2 093) Change in fair value of investment property ( ) Change in fair value of interest rate derivatives (762) Straight-line rental income adjustment (20 765) (16 792) Other non-cash items (10 377) (2 913) Foreign exchange loss Operating cash flow before working capital changes 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

12 Accounting Policies 1. Basis of preparation The consolidated annual financial statements of Tower Property Fund Limited and its subsidiary ( the Group ) have been prepared in accordance with International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee, the requirements of the South African Companies Act and the JSE Listings Requirements. The consolidated annual financial statements were approved by the board of directors on 4 August. The consolidated annual financial statements are prepared on the historical cost basis, except for investment properties and derivative financial instruments which are measured at fair value. A summary of significant accounting policies is set out below. The accounting policies have been applied consistently and there was no change from the accounting policies applied in the previous year. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these Group annual financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Changes in accounting policies and disclosures (Adoption of new and revised pronouncements) 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. At the reporting date, the following IFRSs were adopted: Amendment to IAS 40 Investment Property. The effective date of the amendment is for years beginning on or after 1 July Amendment to IFRS 3 Business Combinations. The effective date of the amendment is for years beginning on or after 1 July Amendment to IFRS 8 Operating Segments. The effective date of the amendment is for years beginning on or after 1 July The adoption of the above standards has not had a material impact on the annual financial statements. New standards and interpretations not yet adopted The Group has not applied the following new, revised or amended pronouncements that have been issued by the IASB as they are not yet effective for the financial year beginning 1 June. The board anticipates that the new standards, amendments and interpretations will be adopted in the Group s consolidated financial statements when they become effective. The directors are currently in the process of determining the impact of the following new standards: IFRS 9 Financial instruments. The effective date of the amendment is for years beginning on or after 1 January IFRS 15 Revenue from contracts with customers. The effective date of the standard is for years beginning on or after 1 January IFRS 16 Leases. The effective date of the standard is for years beginning on or after 1 January The following amendments are not expected to have a material impact in the year in which they become effective: Amendment to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The effective date of the amendment is for years beginning on or after 1 January. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 10

13 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Amendment to IAS 1 Presentation of Financial Statements. The effective date of the amendment is for years beginning on or after 1 January. Amendment to IAS 7 Statement of Cash Flows. The effective date of the amendment is for years beginning on or after 1 January Consolidation and business combinations Consolidation The consolidated annual financial statements include the financial statements of the company and its subsidiaries Business combinations A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses. In circumstances where the Group acquires another entity, the acquisition is not considered a business combination if at the date of acquisition the integrated activities are not capable of being conducted and managed as a business by a market participant. In these circumstances the acquisition is accounted for as the acquisition of an asset. 2.3 Investment property Investment property is recognised as an asset when, and only when, it is probable that the future economic benefits associated with the investment property will flow to the enterprise, and the cost of the investment property can be reliably measured. Investment property is initially recognised at cost, including transaction costs. Fair value Subsequent to initial measurement investment property is measured at fair value. 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. 11 CROATIA TPF

14 Accounting Policies (continued) 2. Summary of significant accounting policies (continued) 2.3 Investment property (continued) The property valuation reflects, when appropriate: the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, and the market s general perception of their creditworthiness; the allocation of maintenance and insurance responsibilities between the company and the lessee; and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices, and when appropriate counter-notices, have been served validly and within the appropriate time. 2.4 Investment property held for sale Investment property are classified as held for sale if their carrying amounts are expected to be recovered primarily through sale rather than through continuing use. Investment property are only classified as held for sale when the investment property are available for immediate sale in their present condition, the company is committed to a plan to sell the investment property, an active plan has been launched to locate a buyer and complete the sale, the investment property are being actively marketed at a sale price that is reasonable in relation to the current fair value of the investment property and the sale is expected to qualify for recognition as a completed sale within one year from the date of classification. Investment property held for sale are measured at fair value in accordance with the Group s accounting policy for investment property. 2.5 Leases Payments made under operating leases are charged to the profit or loss on a straight-line basis over the period of the lease after taking into account any fixed escalation clauses. 2.6 Financial instruments Financial assets Classification The Group has classified its financial assets as loans and receivables. Loans and receivables are initially measured at fair value and, after initial recognition, at amortised cost using the effective interest method. Financial assets classified as loans and receivables are: trade and other receivables; cash and cash equivalents; and amounts receivable for the sale of investment property. Cash and cash equivalents Cash and cash equivalents comprises cash on hand and at bank and demand deposits with bank. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 12

15 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Financial liabilities Financial liabilities at amortised cost are initially measured at fair value and, after initial recognition, at amortised cost using the effective interest method. Financial liabilities at amortised cost include: trade and other payables; borrowings; loan payable to non-controlling interest; and amounts owing for the acquisition of investment property. Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Derivative financial instruments Derivative financial instruments are initially recognised at fair value and the fair value is remeasured at each reporting date. Derivative financial instruments comprise interest rate swaps and caps, which are classified as at fair value through profit or loss held for trading financial instruments. Gain or loss on the fair value changes recognised in profit or loss. 2.7 Stated capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Capital raising expenses Expenses incurred in the raising of capital are written off against equity if directly related to the equity raised. Indirect expenses relating to the raising of equity are expensed through profit and loss. 13 CROATIA TPF

16 Accounting Policies (continued) 2. Summary of significant accounting policies (continued) 2.8 Treasury capital Shares bought back by the Group are classified as treasury shares. The cost prices of these shares are deducted from equity but disclosed separately in the statement of changes in equity. The issued number of shares is reduced by the treasury shares for the purpose of the distribution per share calculation. 2.9 Foreign currency translation reserve (FCTR) Foreign currency differences on translation of the financial position and results of a foreign operation into the Group s presentation currency are recognised in other comprehensive income and accumulated in the translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit and loss as part of the profit or loss on disposal Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are recognised in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction Taxation The Group is not liable for income tax as it qualifies as a REIT in terms of the appropriate tax legislation and all its distributable profits are distributed as dividends Revenue recognition Revenue comprises rental income and recovery of expenses where appropriate, excluding value added tax (VAT). Rental income from investment property is recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. Recovery of expenses is recognised in profit or loss when the right to the recovery of the expense arises, which is generally when the contractually stipulated expense has been incurred. Where the entity makes a payment on behalf of the lessee, the payment and recovery thereof are not recognised, except to the extent that it results in an increase in equity Interest income Interest income is recognised using the effective interest method. When a loan and receivable is impaired, the Group reduces the carrying amount to its net present value, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loan and receivables is recognised using the original effective interest rate. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 14

17 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements 2.14 Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All non-qualifying borrowing costs are recognised in profit or loss in the period in which they are incurred Distributions The Group having achieved a REIT status will distribute at least 75% of its total distributable profits as a distribution to its shareholders subject to the relevant solvency and liquidity test as required by the Companies Act of South Africa. Distributable profit in respect of a financial year is defined as gross income (as defined in terms of the Income Tax Act) less deductions and allowances that are permitted to be deducted by a REIT in terms of the Income Tax Act. Distributable profit is determined after adjusting for unrealised fair value adjustments on investment property and interest rate derivatives, straight-line lease accrual and antecedent dividends Antecedent dividends Where shares are issued between distribution dates and the shareholder agrees to contribute the dividend portion from the previous distribution date to the date of issue to the entity, the amount of the dividend is recognised in stated capital as part of the equity contribution. 3. Critical accounting judgements and key sources of estimation uncertainty The Group s management makes assumptions, estimates and judgements in the process of applying the Group s accounting policies that affect the assets, liabilities, income and expenses in the annual financial statements prepared in accordance with IFRSs. The assumptions, estimates and judgements are based on historical experience and other factors that are believed to be reasonable under the circumstances. While management reviews their judgements, estimates and assumptions continuously, the actual results will seldom be equal to the estimates. The estimates and the underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision policy affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Impairment of financial assets Financial assets are assessed at each reporting date to determine whether there is objective evidence that it is impaired. Objective evidence that financial assets are impaired includes default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter into bankruptcy, adverse changes in the payment status of borrowers or issuers, economic conditions that correlate with defaults. 15 CROATIA TPF

18 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Accounting Policies (continued) 3. Critical accounting judgements and key sources of estimation uncertainty (continued) The Group considers evidence of impairment for financial assets measured at amortised cost (loans and receivables) at both a specific asset and collective level. All individually significant assets are assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends related to probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss is recognised in profit or loss and reflected in an allowance account against loans and receivables. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Investment property Judgements are made in the valuation of investment properties fair value. Management make use of the capitalisation of net income valuation method and discounted cash flow analysis and changes in market conditions may result in capitalisation rates being revised and the fair value of the investment properties being adjusted significantly. Judgements are made on a per property basis. Refer to notes 4 and 24. One of the requirements of determining when to recognise investment property is to establish the date on which it becomes probable that future economic benefits that are associated with the investment property will flow to the entity. Factors that are considered include: the date on which the Group is entitled to the net income of the property, the date the Group holds the right to enter into or cancel lease agreements related to the property and consideration of whether or not the purchase agreement is irrevocable. Allowance for credit losses on trade receivables An estimate is made for credit losses based on a review of all outstanding amounts at the reporting date. The Group considers changes in the credit quality of trade receivables from the date credit was initially granted until the reporting date. Changes include changing rates of repayment compared to historic repayment rates as well as changes in credit ratings, where applicable. An allowance is written off against the debtor when the debtor is assessed as irrecoverable. Business combination or asset acquisition The Group determines whether a transaction involving the acquisition of properties or shares and/or loan accounts is a business combination, or if the assets acquired do not constitute a business, the Group accounts for the transaction as an asset acquisition. The decision as to what constitutes a business requires significant judgements, which include consideration of whether the integrated activities deemed necessary to generate a business are capable of being conducted and managed as a business by a market participant and whether it has employees who are required to follow policies and processes related to relevant activities. Financial liability or equity The Group applies judgement when its own equity instruments are issued for the purchase of investment property. When the monetary value of the obligation is a fixed monetary amount known at the inception of the agreement and the Group will settle the obligation by issuing a variable number of its equity shares, the obligation will be treated as a financial liability. CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 16

19 notes to the annual financial statements Figures in Rand 4. Investment property 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 Operating lease receivables Non-cancellable operating rentals are receivable as follows: Less than one year Between one and five years More than five years Less straight-line portion ( ) ( ) Straight-lining asset

20 notes to the annual financial statements (continued) Figures in Rand 4. Investment property (continued) Approximately one third, by value, of investment property was independently valued by Mills Fitchet Magnus Penny Proprietary Limited, a professional valuer with valuation experience in the location and category of the properties and who is registered with the South African Institute of Valuers, the balance being valued by the directors. The valuation process 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 going forward into perpetuity. Once the capitalisation value has been calculated further adjustments are made to the valuations relating to projected costs and values. The valuation process also makes use of the discounted cash flow method. 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. A yield that reflects the specific risks inherent in the net cash flows is then applied to the net annual cash flows to arrive at the property valuation. During the year Waterfall Office Park was sold for a total purchase consideration of R The property transferred to the new owner on 11 February. 73 Hertzog Boulevard was sold for a total purchase consideration of R The effective date of the sale was 25 May and the property is expected to transfer to the new owner during August. 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. At the reporting date investment properties with a fair value of R (: R ) are encumbered. The total operating expenses arising from investment property which generates rental income is R (: R ). For contractual commitments to purchase investment properties refer to note 19. For contractual commitments to repair or enhance investment properties refer to note Trade and other receivables Trade receivables Impairments (1 885) (1 776) Sundry receivables Prepaid expenses Deposits Recovery accruals Accrued rental income TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 18

21 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand Sundry receivables comprise amounts receivable in terms of adjustment accounts as well as rates receivable from municipality. Trade and other receivables past due but not impaired Trade and other receivables are impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event(s) had an impact on the estimated future cash flows of that asset that can be estimated reliably. Trade receivables neither impaired nor past due: The ageing of amounts past due not impaired is as follows: One month past due Two months past due Three months past due More than three months past due Trade and other receivables impaired As of 31 May, trade and other receivables of R (: R ) were impaired and provided for. Ageing of debtors past due and impaired One month past due Two months past due Three months past due More than three months past due Reconciliation of allowance for credit losses Opening balance Provision for impairment Provision utilised during the year (309) Reversal of impairment (1 776) (996) Closing balance CROATIA TPF

22 notes to the annual financial statements (continued) Figures in Rand 5. Trade and other receivables (continued) The credit quality of trade receivables not past due and not impaired: Category A Category B Category C Category 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. Category 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.). Category C: Other 6. Cash and cash equivalents Favourable cash balances Bank balances Credit quality of cash and cash equivalents Bank balances and short-term deposits are held with financial institutes of high credit standing. 7. 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 and the property is expected to transfer to the new owner during August. 8. Stated capital Authorised ordinary shares with no par value Issued Ordinary shares ordinary no par value shares in issue at 1 June Issue of shares at R8.12 per share effective 1 July Issue of shares at R8.55 per share effective 1 September Issue of shares at R9.59 per share effective 9 February Issue of shares at R9.50 per share effective 20 February Antecedent dividends Share issue expenses (13) ordinary no par value shares in issue at reporting date TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 20

23 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand ordinary no par value shares in issue at 1 June Issue of shares at R9.50 per share effective 1 June Issue of shares at R9.10 per share effective 31 July Issue of shares at R9.84 per share effective 7 August Issue of shares at R9.70 per share effective 14 August Antecedent dividends Share issue expenses (7 500) ordinary no par value shares in issue at reporting date The unissued shares are under the control of the directors until the next general meeting. Shares were issued for cash and acquisitions of investment properties. All shares issued for cash are fully paid for. 9. Treasury capital Opening balance (: ) shares acquired during the year by the company itself at an average repurchase price of R8.47 (: R8.42) per share Closing balance CROATIA TPF

24 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements notes to the annual financial statements (continued) Interest rate at 31 May Interest rate at 31 May Expiry date R R 10. Other financial liabilities 10.1 Borrowings 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 TPF CROATIA TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 22

25 Figures in Rand 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 interest rate of 4.35%. Security The abovementioned loans are secured by mortgage bonds over all the Group s investment property as detailed in note 4 and in the property portfolio schedule Interest rate derivatives At fair value through profit or loss Interest rate swap Interest rate caps (3 184) 679 (9 331) (3 184) (8 652) Total other financial assets (3 184) Total other financial liabilities At 31 May, 40% (: 60%) of the Groups interest rate exposure was managed with interest rate swaps with expiry dates ranging from May 2019 to August On 31 May 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 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 was 8.03% (: 7.73%). Interest rate swaps The interest rate has been fixed via the following interest rate swaps: 1. On 7 million of borrowings fixed at 4.10%. 2. On 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

26 notes to the annual financial statements (continued) Figures in Rand 11. Loan payable to non-controlling interest VMD Grupa d.o.o The loan bears interest at a rate of 7% per annum and is repayable on 31 December The loan is for 1.78 million, converted at an exchange rate of 1 = R Trade and other payables Accrued liabilities Trade payables Tenants deposits Value added tax Other payables 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. 14. Revenue Consist of the following: Rent received Straight-lining rental income accrual Contingent rent included in rent received: Lease periods vary in accordance with the sector and in accordance with the type, size and profile of the tenant. In the office sector, the average tenant will sign for two to five years while the larger tenants will commit for longer periods. In the retail sector the large national tenants normally commit for five to ten years while the smaller tenants sign for three years. In the industrial sector tenants commit for three to five years. 15. Operating profit Operating profit is arrived at after taking into account the following items: Directors' emoluments Non-executive Services as directors Executive directors are remunerated by the Group's asset managers, refer to note 18. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 24

27 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand 16. Finance costs Borrowings Other Taxation Reconciliation of rate of taxation % % South African normal taxation rate Adjusted for: Exempt income (28.00) (28.00) Net reduction (28.00) (28.00) Effective rate of taxation 18. Directors' emoluments Non-executive directors Name Fees paid to directors for services A Dalling 205 J Bester 204 M Evans 172 A Magwentshu 172 N Milne 172 R Naidoo TPF 25 CROATIA

28 notes to the annual financial statements (continued) 18. Directors' emoluments (continued) Non-executive directors (continued) Name Fees paid to directors for services A Dalling 189 J Bester 189 M Evans 158 A Magwentshu 158 N Milne 158 R Naidoo Executive directors Executive directors are remunerated from fees paid to Tower Asset Managers Proprietary Limited. Refer to the directors report for details of directors interest in contracts. Name Short-term employee benefits Postemployment benefits Other long-term employee benefits Termination benefits Total M Edwards K Craddock B Kerswill J Mabin J Malherbe (prescribed officer) B Rogerson (prescribed officer) M Edwards F Jenkings (Resigned 31 December 2014) K Craddock B Kerswill J Mabin (Appointed 1 January ) J Malherbe (prescribed officer) B Rogerson (prescribed officer) TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 26

29 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements 19. 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 in Croatia with no assets and no liabilities and at this point the Group became the sole founding shareholder. Tower Europe Retail acquired the Gra ani property in Zagreb, Croatia for the purchase price of R262 million ( 15.7 million)* which was settled using proceeds from the capital raise. The acquisition of the Gra ani 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. 2. Tower Europe Retail 2 d.o.o. was incorporated in May 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 ( 13.2 million)* and R147 million ( 8.8 million)* respectively. Vukovarska was settled through using R88 million debt and R131 million proceeds from the capiital 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. 3. Sub Dubrovnik d.o.o. in Dubrovnik, Croatia, for a total purchase consideration of R217.3 million ( 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 20. 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 20. A final dividend of cents were declared to shareholders after year-end. * 1 = R CROATIA TPF

30 notes to the annual financial statements (continued) 20. 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. 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. 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. Tower Asset Sub Dubrovnik Managers R R The assets and liabilities arising from the acquisition are as follows: Investment properties PPE 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. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 28

31 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand 21. 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 Property 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 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 CROATIA TPF

32 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements notes to the annual financial statements (continued) 22. Financial instruments The Group has classified its financial assets in the following categories: Fair value through profit and loss (held for trading) Loans and receivables Trade and other receivables Cash and cash equivalents Amount receivable for sale of investment property Other financial assets Total Trade and other receivables Cash and cash equivalents Total The Group has classified its financial liabilities in the following categories: Fair value through profit Financial and loss (held liabilities at for trading) amortised cost Trade and other payables Borrowings Loan from non-controlling interest Total Trade and other payables Borrowings Interest rate derivatives (8 652) Amounts owing for the acquisition of investment property Total (8 652) CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 30

33 Figures in Rand 23. Risk management 23.1 Capital risk management The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The capital structure of the Group consists of debt, which includes the borrowings excluding derivative financial liabilities, cash and cash equivalents, and equity as disclosed in the statement of financial position. The Group aims to keep gearing levels, loan to value, between 30% and 40% over the long run. At 31 May, the nominal value of borrowings was equal to 44% (: 36%) of investment property. Total debt Total equity Total capital Debt equity ratio (%) 72% 69% Management plans to sell some of the smaller properties in the portfolio and use the proceeds to reduce the debt. Externally imposed capital requirements: Financial covenants The following covenants apply to borrowings: Maximum loan to value ratio not to exceed 50%. The ratio of EBITDA to gross interest payable shall not be less than two times. The ratio of available cash flow before debt service to all the debt service payments shall not be less than two times. No financial covenants were breached during the year. To maintain the Group s REIT status the Group must: (a) distribute at least 75% of its income; (b) maintain a borrowing ratio of not more than 60% of the value of its investment property; and (c) derive at least 75% of its income from properties or property related investments. Management is satisfied that the REIT requirements were met throughout the year. 31

34 notes to the annual financial statements (continued) Figures in Rand 23. Risk management (continued) 23.2 Credit Risk Credit risk consists mainly of cash and cash equivalents, trade and other receivables and amounts receivable for the sale of investment property. The Group only deposits cash with major banks with high quality credit standing and limits exposure to any one counterparty. Summary of quantitive data Trade and other receivables Deposits with banks At 31 May, the Group had no concentration of risk and the maximum exposure to credit risk is represented by the carrying amount of each financial asset Liquidity Risk The Group is exposed to liquidity risk on financial liabilities. It manages its funds conservatively by maintaining a comfortable level of cash and cash equivalents in order to meet continuous operational need. Various banking facilities and credit lines have also been arranged with different banks in order to fund any emergency liquidity requirements. Summary of quantitative data Less than one year Between one and five years More than five years Trade and other payables Borrowings Loan from non-controlling interest Trade and other payables Borrowings Interest rate derivatives 818 (8 703) Amounts owing for the acquisition of investment property Interest rate risk The Group is exposed to cash flow interest rate risk related to its variable rate borrowings and the Group adopts a policy of managing its exposure to movement in interest rates on borrowings through the use of pay-fixed/receive-floating interest rate swaps and caps. Interest rates swaps and interest rate caps have been entered into to achieve an appropriate mix of fixed and floating rate exposure. The Group adopts a policy of managing its exposure to movements in interest rates on borrowings. The total cash payments relating to interest rate swaps for the year amounted to R (: R ) and relating to interest rate caps amounted to Rnil (: R ). On 31 May the Group cancelled its rand denominated swap and caps totalling R790 million, which expired within one to two years. These fixes were significantly in the money. The profit made on the cancellation thereof was used to purchase a R500 million swap at 7.70%, expiring on 31 May TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 32

35 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand 23. Risk management (continued) 23.4 Interest rate risk (continued) At the reporting date the Group had the following open interest rate derivatives Notional amount Interest rate swaps ZAR denominated swaps: Contract 1: 7.20% maturing 8 April This swap was cancelled at year-end Contract 2: 7.70% maturing 31 May EUR denominated swaps: Contract 1: 4.10% maturing 3 August 2020 ( 7 million at a rate of 1 = R17.40) Contract 2: 3.70% maturing 18 March 2021 ( 2.5 million at a rate of 1 = R17.40) Interest rate caps 1. Two-year cap with a rate of 8.63% for a premium of R This cap was cancelled at year-end Three-year cap with a rate of 9.01% for a premium of R This cap was cancelled at year-end Total Sensitivity analysis Interest rate risks are presented by way of sensitivity analyses in accordance with IFRS 7. These show the effect of changes in the market interest rates on the interest payments, interest income and expenses, other income components and, if appropriate, shareholders equity. The Group measures sensitivity to interest rates as the effect of a change in the Reserve Bank repo rate, Jibar rate and Euribor rate on the profit after tax based on the Group s exposure at 31 May. The Group regards a 50 basis points change in the Reserve Bank repo rate, Jibar rate and Euribor rate as being reasonably possible at the reporting dates. TPF 33 CROATIA

36 notes to the annual financial statements (continued) Movement in basis points Effect on profit after tax 23. Risk management (continued) 23.4 Interest rate risk (continued) Cash and cash equivalents (50) (198) Long-term borrowings 50 (7 106) (50) Cash and cash equivalents (50) (56) Long-term borrowings 50 (4 774) (50) Foreign exchange risk The Group has an investment in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies and interest rate swaps. The Group is mainly exposed to the Euro currency. The carrying amounts of the Group s foreign currency denominated assets and liabilities at the end of the reporting period are as follows: Non-current liability Interest bearing borrowings, 21.2 million (: nil) at a spot rate of R The weighted average interest rate for the Euro loans is 3.93% Loan payable to non-controlling interest, 1.78 million (: nil) at a spot rate of R The loan bears interest at a rate of 7% per annum Foreign currency sensitivity analysis The following table details the Group s sensitivity to a 5% increase and decrease in the Rand against the Euro. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated items and adjusts their translation at the year-end for a 5% change in foreign currency rates. A positive number below indicates an increase in profit or equity where the Rand strengthens 5% against the Euro. For a 5% weakening of the Rand against the Euro, there would be a comparable impact on the profit or equity, and the balances below would be negative. The Group reviews its foreign currency exposure, including commitments on an ongoing basis. The Group expects its foreign exchange rate contracts to hedge foreign exchange exposure. Profit or loss Foreign currency translation reserve (2 148) TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 34

37 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements 24. Fair value measurement Fair value measurement of financial instruments Fair value of financial instruments recognised in the statement of financial position. 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 is equal to R ( 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 consist of interest rate cap contracts. 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 non-financial assets (investment properties) The Group s property portfolio is valued at R3.90 billion as at 31 May (: R3.14 billion). Approximately one third, by value, of investment property was valued by Mills Fitchet Magnus Penny Proprietary Limited, the balance being valued by directors. The fair value of buildings are estimated using a net income valuation approach which capitalises the estimated rental income stream, net of projected operating costs, using a discount rate derived from market yields and discounted cash flow method analysis which considers the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows then is applied to the net annual cash flows to arrive at the property valuation. The estimated rental stream takes into account current occupancy levels, estimates of future vacancy levels, the terms of in-place leases and expectations of rentals from future leases into perpetuity. 35 CROATIA TPF

38 notes to the annual financial statements (continued) 24. Fair value measurement (continued) Unobservable inputs, are the future estimated rental value, discount and capitalisation rates, assumptions regarding vacancy levels, the terms of in place leases and expectations of rentals from future leases into perpetuity. The overall valuations are sensitive to all four assumptions. Management considers the range of reasonable possible alternative assumptions is greatest for reversionary capitalisation rate rental values and vacancy levels and that there is also an interrelationship between these inputs. The inputs used in the valuation at 31 May were: The range of the reversionary capitalisation rates applied to the portfolio are between 8.75% and 9.75% with weighted average being 9.23%. The discount rates applied range between 13.25% and 14.50% with the weighted average being 13.83%. For multi-tenant buildings, three to six months vacancy periods on expiry and 1.50% to 3.00% vacancy. Changes in discount rates attributable to changes in market conditions can have a significant inverse impact on property valuations. An increase in the discount rate will decrease the value of the investment property. A decrease in the capitalisation rate will increase the value of investment property. An increase in the vacancy levels will decrease the value of the investment property and a decrease in vacancy levels will increase the value. In determining future cash flows for valuation purposes, vacancies are forecast for each property based on estimated demand. Fair value hierarchy The following table reflects the levels within the hierarchy of financial liabilities and non-financial assets measured at fair value: Level 1 Level 2* Level 3 # Total ASSETS Derivative financial instruments Investment properties Total LIABILITIES Derivative financial instruments (8 652) (8 652) Total (8 652) (8 652) ASSETS Investment properties Total There have been no transfers between levels 1, 2 and 3 in the reporting period under review. * Level 2 Fair values are determined by third parties using observable inputs. # Level 3 Fair values are determined by valuation techniques using significant unobservable inputs. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 36

39 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements Figures in Rand 25. Capital commitments At 31 May the Group had the following capital commitments relating to the development at 32 Napier Street, and alterations and improvements to Cape Quarter, Sunclare, De Ville, 382 Jan Smuts Avenue, 6 8 Sturdee Avenue, Clifton Place, Nampak and 308 Kent Road: approved and committed approved and not yet committed The above amounts include contractual obligations to repair or enhance investment property. 26. Segment information An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. The operating results are reviewed regularly by executive management to make decisions about and to assess the performance of the segment. Factors used to determine the segments of the Group are the zoning of the property and the business activities of the tenants. For the year ended 31 May (R) 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 CROATIA TPF

40 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements notes to the annual financial statements (continued) For the year ended 31 May (R) 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 * 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 R Croatia R Statement of profit or loss and other comprehensive income extracts for the year ended 31 May Contractual rental income Straight-line lease accrual Statement of financial position extracts as at 31 May Investment property Straight-line lease accrual CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 38

41 Figures in Rand 27. 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 net of non-controlling interest ( ) 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 Distributable income Taxable dividend (declared on 4 August ) Taxable dividend (declared on 4 February ) Taxable dividend (declared on 24 August ) Taxable dividend (declared on 4 February ) Weighted average number of shares in issue () Number of shares issue at period end, including treasury shares () Number of shares in issue at period end, excluding treasury shares () Distribution per share Six months ended 31 May Six months ended 30 November Basic and diluted earnings per share (cents) Headline and diluted 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) * 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. 39

42 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements notes to the annual financial statements (continued) Figures in Rand 28. Shareholders Analysis 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 (: ) shares were issued during the year. Unissued shares At 31 May there were (: ) unissued shares. These shares are under the control of the directors until the AGM. 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 CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 40

43 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 % Number of shares % Number of shareholders shares shares shares shares shares shares and over Total Number of shareholders % Number of shares % Number of shareholders shares shares shares shares shares shares and over Total

44 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements notes to the annual financial statements (continued) 28. Shareholders Analysis (continued) Share prices and performance Monthly trades Month High (cents) Low (cents) Close (cents) Volume traded Value (R) June July August September October November December January February March April May CROATIA TPF TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 42

45 TOWER PROPERTY FUND PROPERTY PORTFOLIO at 31 May Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants 10 A Cleveland Road, Cleveland, JHB Remaining Extent of Erf 173, Cleveland Ext 5 B Industrial Oberthur Technologies 135 Musgrave Road, Berea, Durban Portion 12 (of 1) of Erf 2242, Portion 34 (of 33) of Erf and remaining extent of Erf 2 242, Durban, Ethekweni B Office Retail Basement Standard Bank, HIV Foundation 19 Section Street, Paarden Eiland, Cape Town Erf , Cape Town at Paarden Eiland B Industrial Expanda, Espresso Backery 3 River Road, Bedfordview, JHB* Holding 346, Geldenhuys Estate Small Holding and Erven 439 and 1804, Bedfordview Ext 62 and Erf 1312, Bedfordview Ext 279 B Office Pepkor Retail, Inter-Air, Factory & Industrial 308 Kent Road, Randburg, JHB Erf 954, Ferndale B Office Continuity SA (Internet Solutions) 31 Beacon Road, Florida North, JHB Erf 55, Florida North B Office Vodacom, Scorpion Legal, SA Blood Transfusion, Trifecta Capital 32 Napier Road, Green Point, Cape Town Erf , Cape Town B Office 400 Retail Under Construction 320 Kuit Street, Watloo, Pretoria Erf 60, Watloo B Industrial Omnigo, SAAB Grintek Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May % May % August % December % August % May % August % June % June

46 TOWER PROPERTY FUND PROPERTY PORTFOLIO (continued) at 31 May Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May 382 Jan Smuts Avenue, Craighall Park, JHB* Erf 5 Craighall Park and Erf 224 Craighall B Office MDM Technical Africa, CSIR, IMG % August Sturdee Avenue, Rosebank, JHB* Erven 195 and 196, Rosebank B Office Sasol, Netcare % August Stirrup Lane, Woodmead, JHB Erf 733, Woodmead Ext 14 B Office Vacant % June Industry Road, Kempton Park, Isando* Erf 235, 431 & 434, Isando B Industrial Vikela Investments, Tikaserve, Eco Logistics % May Arrowfield, 33 Hillclimb Road, Mahogany Ridge, Pinetown Erf 7 610, Pinetown Ext 72 B Industrial Vacant % May Cape Quarter Piazza, Dixon Street, Green Point, Cape Town Erf , Cape Town A Office Retail Lindt, Hilton Worldwide, Private Collections % June Cape Quarter Square, cor Somerset Road and Dixon Street, Green Point, Cape Town Erf , Cape Town A Office Retail Deloitte, Pernod Ricard, Spar, JWT % June Clearview Motor Village, Hendrick Potgieter Road, Florida Glen, JHB Erf 12 Florida Glen, Erf 478, Erf 454, Erf 15, 16 and 17, Florida Glen Ext 7 B Retail Yamaha, Auto Pedigree % July Clifton Place, Cor Hurst and Stephen Dlamini Streets, Berea, Durban Remainder of portion 49 of Erf 2 242, Durban A Office Retail Discovery Health, Momentum, Local Govt, JH Nicholson Inc % April TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 44

47 Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants Coachmans Crossing C, 4 Brian Street, Lyme Park, Bryanston, JHB Portion 1 of erf 20, Lyme Park A Office A La Maison, Nations Capital Coachmans Crossing D, 4 Brian Street, Lyme Park, Bryanston, JHB Sections 14, 15 and 16 SS, Coachmans Crossing, Phase 4 A Office K2 Capital, Central Edible Oil, Imago Constantia View Office Estate, 2 Hogsback Road, Quellerina, JHB Sections 1, 2, 4, 5 and 6 SS, Constantia View Office Estate, Portion 1 of Erf 458, Quellerina Ext 4 A Office Aztek Technologies, Monier Roofing, Sylvania De Ville Centre, cor Main and Wellington Streets, Durbanville, Cape Town* Remainder of Erf 2011, Durbanville A Office Retail Pick 'n Pay, Clicks, Virgin Active, Foschini, Wimpy Hanover Square, cor 8th Avenue and Hendrick Potgieter Street, Edenvale, JHB Portions 18 and 19 of Erf 77, Edenvale B Office Primeserv, Nampak, Antrim Meadowbrook Distribution Centre, 74 Lascelles Road, Edenvale Portion 467 (portion of portion 80), remaining extent portion 353 (a portion of portion 126), and portion 575 (a portion of portion 347) of the farm Rietfontein No 63, Gauteng B Industrial HBW, Prime Freight Medscheme, 38 Conrad Street, Florida North* Portion 107 (a portion of portion 27) of the farm Weltevreden 202 A Office Medscheme Holdings Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May % June % June % August % April % August % May % Sept

48 TOWER PROPERTY FUND PROPERTY PORTFOLIO (continued) at 31 May Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May Nampak, Waljon Industrial Estate, 7 Joule Street, Mariann Hill, Pinetown* Section 1, 2 and 3 of sectional plan no SS 31/1995 in the scheme known as Waljon Industrial Estate, Pinetown B Industrial Nampak % May Pick 'n Pay Distribution Centre, Goodwood Road, Mahogany Ridge, Pinetown* Erf , Pinetown Ext 107 B Industrial Pick 'n Pay % May Route 21, Prospect Close, 43 Regency Drive, Irene* Erf 925, Irene Ext 30 B Industrial Le Coq Sportiff, Hi Tech Polymers % May Shoprite Brits, 50 Pienaar Street, Brits* Erf 3 194, Brits B Retail Shoprite, Nedbank, Capitec, Pep, Clicks % Dec Shoprite Ennerdale, Marais Close, Ennerdale Ext 9, JHB Portion 1 of Erf 5 450, Ennerdale Ext 9 B Retail Shoprite, Cashbuild, KFC, OK Furnishers, Pep, Furniture City % Dec Shoprite Modimolle, Nelson Mandela Drive, Modimolle Erf 3 259, Nylstroom Ext 2 B Retail Shoprite, Cashbuild, OK Furnishers, Pep, Spur, Wimpy % Dec St Andrews Office Park, 39 Wordsworth Avenue, Bedfordview, JHB* Sections 5 to 12 SS, St Andrews Office Park A Office Voltex % June TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 46

49 Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May Sunclare, 15 Dreyer Street, Claremont, Cape Town* Sections 1, 2, 3, 4, 7, 8, 9 and 10 of SS Sunclare, Erf , Cape Town A Office Retail Redisa, Sell Direct, Globeleq SA, Perpetua, MSA % May The Braides, 115 Bowling Avenue, Gallo Manor, JHB Remaining Extent of Erf 792, Gallo Manor A Office Spectramed, Niche Back Office, Landynamix, Convista % August Upper Grayston Block B, Ann Crescent, Sandton, JHB* Sections 13 to 21 SS, Upper Grayston 1 P Office Mimecast % June Upper Grayston Block D, Ann Crescent, Sandton, JHB* Sections 3, 4, 5, 7, and 8 SS, Upper Grayston 2 P Office M&C Saatchi Abel % June Upper Grayston Block E, Ann Crescent, Sandton, JHB Upper Grayston 3 P Office African Exploration, National Energy Corp, Retroviral % June Upper Grayston Block F, Ann Crescent, Sandton, JHB Upper Grayston 4 P Office Infiniti Insurance, TLC Marketing, Renesola % June Viscount Road Office Park, 8 Viscount Road, Bedfordview, JHB* Sections 1, 6 to 9 and 15 to 20 SS, Viscount Road Office Park A Office Grohe Dawn Watertech, Bastillion, Pnet % June Waterford Office Park, Witkoppen Road, Fourways, JHB Erf 735 and 736, Maroeladal B Office Exposure Marketing, Infobib Africa % June

50 TOWER PROPERTY FUND PROPERTY PORTFOLIO (continued) at 31 May Property name Location Grade Rentable area (sqm) Total GLA (sqm) Site area (sqm) Major tenants Whitby Manor Office Estate, Unit 4, th Road, Midrand Erf and 2 670, Noordwyk Ext 61 A Office ESRI, Imvelo and Geo Systems Willowvale Office Park, Van Hoof Close, Ruimsig, JHB Erf 567, Willowbrook Ext 27 A Office Labournet, Volclay, Pro- Optima Woodlands Drive Office Park, Woodland Drive, Woodmead, JHB Sections 2, 3, 4 and 6 SS, Woodlands Drive Office Park A Office Fibreco, Seattle Coffee 15 Wellington Road, Parktown*, Retail 930 Erf 545, Parktown A Office Absa, Nando s, Transman Link Hills Shopping Centre*, Retail Erf A Office Pick n Pay, Mica, Ford Evagold Shopping Centre, Mc Donalds Erf , Evaton West, Extension 11 B Retail Cambridge Foods, Build Rite, OBC VMD Kart, Building B Condominium ownership of 15 of the 26 floors, situated at Strojarska Cesta 20, Zagreb P Office Croatian National Bank, Unilever, Swiss Embassy * These properties were externally valued. Refer to note 4. Weighted average gross rental (R/sqm) Percentage vacant Purchase price at cost Effective date of acquisition Market value at 31 May 124,65 0,0% Feb ,44 2,9% August ,45 0,0% June % July % July % June ,00 0,0% August TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 48

51 Property portfolio information Tenant profile (GLA) % 4% (May ) GLA 33% 12% (May ) Revenue A B C 15% Croatia Gauteng KZN Cape Town 59% Geographic Spread Croatia Gauteng KZN Cape Town 13% 42% Geographic Spread Vacancy profile by sector by GLA Total Vacancy Office Retail Industrial 44% Industrial (May ) GLA Office Retail 24% 32% Sectoral Spread 56% (May ) Revenue Industrial Office 10% Retail 34% Sectoral Spread Lease expiry profile by Revenue per sector (Rmillion) Monthly <May <May <May <May <May Industrial Office Retail Lease expiry profile by GLA per sector <May 2022 >May 2023 Tenant grading 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 Vacant Monthly <May 2017 <May 2018 <May 2019 <May 2020 <May 2021 <May 2022 >May 2023 Industrial Office Retail Weighted average rental escalation by sector (percent) Office 8.19 Industrial 7.22 Retail 6.51 Weighted average rental per square metre by GLA (Rand) Office 124 Industrial 44 Retail 116 Average annualised property yield

52 Audit and risk committee report Introduction The Tower Property Fund audit and risk committee (the committee) is a statutory committee in terms of the Companies Act and also has an independent role with accountability to both the board and to shareholders. The committee operates within a documented charter which complies with all relevant legislation, regulation and governance codes. This report is presented to shareholders in compliance with the Companies Act and the King Code of Governance Principles (King lll). Role of the committee The committee seeks to provide the board with additional assurance regarding the efficacy and reliability of the financial information used by the directors, and to assist them in the discharge of their duties. In conducting its business the committee is authorised by the board to investigate any activity within its terms of reference, seek any information that it requires from any employee and obtain external legal or professional advice. The responsibilities of the committee are summarised as follows: Ensure that management has created and maintained an effective financial and operational control environment in the Group. Ensure that business, financial and other risks have been identified and are being suitably managed. Monitor standards of governance, reporting and compliance. Oversee integrated reporting and ensure the integrity of the integrated annual report. Review and comment on the financial statements and the disclosure of sustainability issues included in the integrated report. Review the content of the interim results. Maintain oversight of sustainability issues. Adopt and implement an appropriate risk management policy which is in accordance with industry practice and prohibits the Group from entering into any derivative transactions that are not in the normal course of business. Assess the independence of the auditors. Composition of the committee The committee comprises three suitably skilled independent non-executive directors. The chairman of the board does not serve on the committee but attends the audit committee meetings by invitation. The committee is elected by shareholders at the annual general meeting while the board appoints the chairman of the committee. The following directors served on the committee during the year under review and to the date of this report: John Bester (Chairman) B Com (Hons), CTA, CA(SA), CMS (Oxon) Raven Naidoo B Sc (Hons), M Sc, PhD, M Sc Nicola Milne B Com, PGDA Details of the committee members appear in the integrated report and the fees paid to the committee members are disclosed in note 18 of the annual financial statements. Management and the external audit partners and staff attend meetings at the invitation of the committee. The committee also meets separately with the external auditors without executive management being present. External audit The committee has assessed the independence, expertise and objectivity of Mazars as the external auditor, as well as approving the fees paid to Mazars. The committee has received confirmation from the external auditor that the partners and staff responsible for the audit comply with all legal and professional requirements with regard to rotation and independence, including the stipulation that they should not own shares in Tower Property Fund Limited. The committee is satisfied with the external auditor and recommends Mazars for reappointment as Group auditors and Yolandie Ferreira as the registered auditor responsible for the audit. Non-audit services The Group has a formal policy on non-audit services which can be provided by the appointed auditor or by other auditing firms. The total fee earned for non-audit services may not exceed 35% of the total annual fees for audit services without the approval of the board. The policy requires Mazars to satisfy the committee that the delivery of non-audit services does not compromise their independence. TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 50

53 for the year ended 31 May TOWER PROPERTY FUND Limited consolidated Annual Financial Statements During the year under review no fees relating to non-audit services were paid to Mazars. Internal audit The audit and risk committee can institute an internal audit function. The audit committee feels that it Is not necessary to have an internal audit function as the Group's operations are limited in terms of processes. The majority of the property management functions are outsourced to external property managers who are subjected to annual external audits Internal control Systems of internal control are designed to manage the risk of failure to achieve business objectives and to provide reasonable, but not absolute, assurance against misstatement or loss. No material matter has come to the attention of the board that has caused the directors to believe that the Group's system of internal controls and risk management is not effective and that the internal financial controls do not form a sound basis for the preparation of reliable financial statements. Activities of the committee The committee is required to meet at least three times each year, with meetings coinciding with the key dates in the financial reporting and audit cycle. Minutes of the meetings of the committee are circulated to all directors and supplemented by an update from the committee chairman at each board meeting. The chairman of the committee is required to attend all statutory shareholder meetings to answer any questions on the committee s activities. The committee confirms that it has performed the following activities during the year under review: Monitored and reviewed the effectiveness of the Group s internal audit functions. Reviewed and recommended to the board for approval the integrated annual report and annual financial statements. Monitored compliance with the Group's risk management policy and confirmed that the Group has complied, in all material respects, with the policy during the year. Reviewed the financial statements, accounting practices and the internal financial control of the Group and confirms that it is appropriate. Reviewed the JSE s report of the proactive monitoring process and where necessary, have taken appropriate action. Evaluation of the chief financial officer The committee satisfied itself as to the appropriateness of the expertise and experience of the Group s financial director and chief financial officer, Joanne Mabin. This is based on the qualifications, levels of experience, continuing professional development education and the board s assessment of the financial knowledge of the chief financial officer. The committee also satisfied itself as to the expertise, resources and experience of the Group s finance function. Approval of the committee report The committee confirms that it has functioned in accordance with its terms of reference for the financial year and that its report to shareholders has been approved by the board. John Bester Chairman Audit and risk committee 4 August Recommended to the board and shareholders the appointment of the external auditors, approved their terms of engagement and remuneration, and monitored their independence, objectivity and effectiveness. Determined the nature and extent of any non-audit services provided by the external auditor or other auditing firms. Reviewed the Group s internal financial control and financial risk management systems. 51 CROATIA TPF

54 General information COUNTRY OF INCORPORATION AND DOMICILE NATURE OF BUSINESS AND PRINCIPAL ACTIVITIES DIRECTORS REGISTERED OFFICE AUDITORS COMPANY SECRETARY BANKERS South Africa Property investment company JSE Listed company with REIT status A Dalling M Edwards J Bester K Craddock M Evans B Kerswill J Mabin A Magwentshu N Milne R Naidoo 2nd Floor, Spire House Tannery Park 23 Belmont Road Rondebosch 7700 Mazars Ovland Management Services Proprietary Limited First National Bank COMPANY REGISTRATION NUMBER 2012/066457/06 TOWER PROPERTY FUND LIMITED CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 52