FINANCIAL DIRECTOR’S REVIEW

Growthpoint’s distributions are based on sustainable income generated from rentals. The company does not distribute capital profits. Effectively, all rental income received by the company and its 65.0% held subsidiary, Growthpoint Properties Australia (GOZ), less operating costs and interest on debt, including interest received and the 50% portion of the distributable income received from our equity-accounted investments, are distributed to shareholders bi-annually. Growthpoint is the largest South African-listed REIT with a quality portfolio of 471 directly owned properties in South Africa valued at R71,6 billion, as well as six equity-accounted investments, with our share of properties valued at R7,4 billion, of which the V&A Waterfront is by far the largest. In addition, Growthpoint has a 65.0% interest in GOZ, which owns 53 properties in Australia valued at R22,0 billion. Through the acquisition of the shares not already owned in the listed investments Acucap Properties Limited (Acucap) and Sycom Property Fund (Sycom), these entities became subsidiaries of the Group on 1 April 2015. The remaining listed investment with a value of R380 million relates to a 22.9% investment in Stenham European Shopping Centre Fund, a company listed on the Channel Island Stock Exchange as a closed fund and acquired as part of the Acucap and Sycom business combination. Growthpoint delivered growth in distributions per share for FY15 of 7.5%. This growth is at the upper end of the guidance given to the market in the FY14 results of between 7.0% and 7.5%. Distribution growth was impacted by the payment of the special interim dividend of 44,5 cents per share (R1 058 million in aggregate) which was paid to shareholders five months earlier than it would have been in the normal course.

Taking the interest benefit of this early payment, of approximately 1,4 cents per share, into account, shareholders effectively received growth in distributions per share equal to 8.3%.

Distribution growth has been impacted by a solid performance from the South African portfolio, especially the V&A Waterfront, and also includes the results of Acucap and Sycom for nine months as an investment and three months, being April to June, as a subsidiary.

The increase in distributions was further enhanced by the investment in GOZ, where an effective hedging strategy led to distributions from GOZ being received at an average rate of R9.92:AUD1 compared to R9.57:AUD1 for FY14. Distribution per unit from GOZ grew by 5.3% in Rand terms on a like-for-like basis.

Acucap and Sycom acquisition consistent with Growthpoint’s growth and investment strategy

ACQUISITION OF ACUCAP AND SYCOM

At the announcement of Growthpoint’s FY14 result on 27 August 2014, Growthpoint held 34.7% of Acucap and retained 15.0% of Sycom. Acucap had acquired 82.7% of Sycom. Acucap successfully acquired a further 1.3% in Sycom. On 1 April 2015, Growthpoint acquired the remaining shares and voting interests in Acucap by issuing 317 370 060 Growthpoint shares. The acquisition is consistent with Growthpoint’s growth and investment strategy to build a diversified property portfolio and offer long-term distribution and capital growth underpinned by strong underlying contractual cash flows.

Equity of R11,7 billion raised in FY15

EQUITY RAISED

During the year, Growthpoint issued 426,1 million shares and raised R11,7 billion. Details thereof are as follows: In September 2014 R1 006 million, in March 2015 R1 199 million and in April 2015 R442 million was raised through DRIP programmes, where 42,2 million, 46,4 million and 16,3 million shares were issued at R24.20, R26.25 and R27.25 per share respectively. The equity raised from the DRIPs was utilised to finance Growthpoint’s investment activities.

Growthpoint issued 3,8 million shares for the acquisition of the remaining 50% interest in Truzen 75 Trust, as well as the remaining 50% share in Erven 99 and 100 Parktown Township Share Block Proprietary Limited.

Growthpoint issued 317,4 million shares in April 2015 for the purchase of the Acucap shares it did not already own.

The company has 2,7 billion shares in issue at FY15 and the authorised capital is 4,0 billion shares. Growthpoint held 30 631 827 treasury shares at FY15 (FY14: 32 406 635).

SIMPLIFIED FINANCIAL STATEMENTS

We have included a simplified income statement and balance sheet in this report. This has been done in order to make the financial statements easier to understand, to reflect the cash-based operating results as used by management and the Board, and to eliminate fair value and other non-cash flow adjustments required in the statutory financial statements in terms of International Financial Reporting Standards (IFRS). The management figures have been reconciled to the figures as reported in terms of IFRS. We have referred to the Statement of Profit or Loss and Other Comprehensive Income as the income statement and the Statement of Financial Position as the balance sheet for ease of understanding.

The Group’s accounting policies as set out in the audited financial statements for the year ended 30 June 2014 have been consistently applied in the current year and some new standards have been adopted.

Significant movements in the income statement and balance sheet are explained below.

NET PROPERTY INCOME

The increase in gross revenue of 20.7% for FY15 compared to FY14, was due to the acquisitions of Acucap and Sycom, as well as the revenue from GOZ (14.0%), resulting from property acquisitions made and a favourable increase in the average exchange rate applied. Disposals amounting to R651 million were made in the RSA portfolio in FY14 and impacted negatively on revenue growth in the current period.

The ratio of property expenses to revenue for the Group has decreased slightly from 21.6% to 21.1% at FY15. For RSA the ratio reduced marginally to 24.0%.

FINANCE AND OTHER INVESTMENT INCOME

Finance income increased by 4.8% from R545 million to R571 million. Including other income for dividends, total income increased by 68.1% to
R916 million due to distributions received from Acucap and Sycom.

INTEREST PAID

Interest costs increased by 19.3% from R1 748 million to R2 086 million as a result of the further investments made in GOZ, loans advanced to the V&A Waterfront as well as the special dividend paid in April 2015 relating to the Acucap and Sycom acquisition. These outflows were somewhat negated by the proceeds from the DRIPs offered by Growthpoint. The weighted average interest rate for RSA borrowings was 8.9% (FY14: 9.4%).

Finance costs for GOZ decreased by 9.4% from R467 million in FY14 to R423 million in FY15. The additional equity raised by GOZ was used for the acquisition of properties and to settle debt, resulting in the decrease.

The interest cover ratio, whereby the income from the equity-accounted investments and listed investments is included in the operating profit, increased from 3.3 at FY14 to 3.4 at FY15.

PROPERTY ASSETS

Acquisitions: In addition to the acquisition of the Acucap and Sycom portfolios, on 1 September 2014 Growthpoint acquired the remaining 50% interest in the properties owned by Truzen 75 Trust from the remaining beneficiaries, as well as the remaining shares in Erven 99 and 100 Parktown Township Share Block Proprietary Limited from Zenprop. Growthpoint also acquired one industrial property for R21 million and two other office properties for R95 million during the year. Development and capital expenditure for RSA amounting to R1,9 billion (FY14: R1,0 billion) relates to various projects undertaken during the year, of which the Discovery Head Office (owned 55%) and Bridgeway Park Office Block accounted for R420 million and R83 million, respectively.

GOZ acquired land for an office property development situated at 211 Wellington Road, Mulgrave, Victoria for R67 million (AUD7 million) and incurred development expenditure in respect of this land amounting to R252 million (AUD27 million) during the year. Three industrial properties were acquired by GOZ for R571 million (AUD60 million).

Development and capital expenditure at the V&A Waterfront amounted to R309 million (FY14: R276 million) for the year.

Disposals: Growthpoint RSA disposed of 18 properties in the current year (FY14: 14) for R621 million (FY14: R651 million) with a collective R205 million (FY14: R132 million) profit on cost achieved.

At 30 June 2015, five RSA properties (FY14: eight) valued at R539 million (FY14: R265 million) were classified as held for sale assets.

Fair value adjustments: The revaluation of properties resulted in an upward revision of R3,4 billion (3.8%) to R93,6 billion for investment property (including investment properties reclassified as held for sale). This was mainly due to an increase in future contractual rental. Interest-bearing borrowings and derivatives were fair valued using the swap curve at FY15, resulting in a decrease of R272 million in the overall liability. In addition a loss of R116 million was realised on the settlement of an interest rate swap by GOZ.

These fair value adjustments, together with the other non-distributable items such as capital items, non-cash charges, deferred taxation and the net effect of the non-controlling interest’s portion of the nondistributable items, were transferred to the non-distributable reserve.

EQUITY-ACCOUNTED INVESTMENTS: V&A WATERFRONT AND OTHER

The investments in the V&A Waterfront and the other joint ventures have been accounted for in terms of IFRS 11, Joint Arrangements. The equity-accounting method was used, whereby the Group’s share of the Profit or Loss and Other Comprehensive Income of these investments was accounted for.

Included in the FY15 finance income is R368 million of distributable income from the V&A Waterfront, compared to distributable income for FY14 of
R332 million.

The investment in the V&A Waterfront and the other joint ventures, have been accounted for in the Statement of Financial Position as the fair value of Growthpoint’s 50% interest in the net asset value amounting to R6,0 billion (FY14: R5,6 billion) for the V&A Waterfront and R417 million
(FY14: R148 million) for the other joint ventures.

INVESTMENT IN GOZ

Growthpoint increased its investment in GOZ from R5,3 billion at FY14 to R5,9 billion at FY15. This further investment of R607 million related to Distribution Reinvestment Plans (DRIPs), where Growthpoint elected not to receive the distributions in August 2014 and February 2015, but to reinvest the distributions in GOZ.

The total amount invested at year-end by Growthpoint for its 65.0% interest amounts to R5,9 billion, the market value of which was R10,9 billion at
30 June 2015.

Included in normal tax in the Statement of Profit or Loss and Other Comprehensive Income, is R73 million (FY14: R24 million) that relates to withholding tax paid on the distributions received from GOZ.

OTHER MATTERS

We remain aware of the possible impact of carbon tax on our RSA business. For Growthpoint’s direct emissions the cost is low, but we are cognisant of the possible impact on our tenants.

G Völkel
Financial Director

8 September 2015

SIMPLIFIED DISTRIBUTION INCOME STATEMENT

			Total Group	Total Group
For the year ended 30 June	Notes		FY15 Rm	FY14 Rm
Revenue	1		7 740	6 412
Property expenses			(1 630)	(1 384)
Net property income			6 110	5 028
Asset management costs			(238)	(167)
Other operating expenses			(65)	(100)
Finance and other investment income	6		986	845
Interest paid			(2 086)	(1 748)
Profit before taxation			4 707	3 858
Taxation	7		(72)	(28)
Profit before dividends and debenture interest			4 635	3 830
Minorities’ share of profit and realised foreign exchange loss			(403)	(333)
Dividends (including dividends on treasury shares)			(4 232)	(3 497)
Retained profit			–	–
Number of shares in issue (including treasury shares)			2 711 056 264	2 284 908 257
Dividend per share (cents)			173,4	161,3

SIMPLIFIED BALANCE SHEET

			Total Group	Total Group
	Notes		FY15 Rm	FY14 Rm
At 30 June
ASSETS
Property assets	8		93 574	69 913
Equity-accounted investments			6 464	5 722
Intangible assets	9		2 388	1 038
Derivative assets			105	12
Long-term loans granted			614	466
Listed investments			380	4 457
Equipment			9	10
Current assets			2 677	1 406
Cash and cash equivalents			505	375
Other current assets			2 172	1 031
Total assets			106 211	83 024
EQUITY AND LIABILITIES
Shareholders’ interest			63 369	49 895
Non-controlling interest			4 713	4 180
Nominal value of interest-bearing liabilities	10		33 811	25 045
Market adjustments on interest-bearing liabilities	10		874	1 089
Deferred taxation	11		1 425	1 205
Current liabilities	12		2 019	1 610
Total equity and liabilities			106 211	83 024

RECONCILIATION BETWEEN STATUTORY AND SIMPLIFIED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2015

NOTES		FY15 Rm	FY14 Rm
1	Revenue as stated	7 870	6 605
	Less: straight-line lease income adjustment	(130)	(193)
		7 740	6 412
2	Fair value adjustments as stated	3 562	2 396
	Less: fair value adjustments reversed	(3 562)	(2 396)
		–	–
3	Equity-accounted investment profit	484	91
	Less: equity-accounted investment profit reversed	(484)	(91)
		–	–
4	Non-cash charges as stated	1 723	(78)
	Less: non-cash charges reversed	(1 723)	78
		–	–
5	Capital items as stated	1 078	(23)
	Less: capital items reversed	(1 078)	23
		–	–
6	Finance and other investment income as stated	916	545
	Add: cash adjustment on business acquisition	4	110
	Add: dividends received on treasury shares	66	25
	Add: distribution received on listed investments	–	165
		986	845
7	Taxation as stated	(264)	(160)
	Add back: deferred taxation	192	132
		(72)	(28)
8	Property assets as stated	93 035	69 648
	Add back: investment property reclassified as held for sale (included in current assets)	539	265
		93 574	69 913
9	Intangible assets as stated	2 580	1 258
	Reversal of additional goodwill raised on deferred taxation liability*	(192)	(220)
		2 388	1 038
10	Non-current financial liabilities as stated	28 755	21 591
	Add: reclassification of current financial liabilities	5 930	4 543
	Less: nominal value of interest bearing long-term liabilities	(33 811)	(25 045)
	Market adjustments on interest bearing liabilities	874	1 089
11	Deferred taxation as stated	1 617	1 425
	Reversal of additional deferred tax liability on intangible asset	(192)	(220)
		1 425	1 205
12	Current liabilities as stated	7 949	6 153
	Less: reclassification of current portion of non-current financial liabilities	(5 930)	(4 543)
		2 019	1 610

*

In terms of IFRS 3, Business Combinations, goodwill was increased with the deferred tax liability that was raised on initial recognition of the intangible asset acquired in terms of the acquisition of the property services businesses. Applying the principle that the Group will recover the carrying value of the intangible asset through use rather than through sale, the tax base was determined to have no value, which gave rise to the deferred tax liability. The deferred tax liability will reverse over time as the intangible assets to which it relates are amortised over a 15-year period.