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Abil collapse bites Synergy Income Fund

Operational performance impacted by the bank’s demise.

Synergy Income Fund (Synergy) continues to take consumer drag in its stride and the collapse of African Bank Investments Limited (Abil), as it declared growth in earnings for the six months to December 2014.

Synergy, a specialist retail property fund which owns medium-sized community and small regional shopping centres, reported a distribution of 44.45 cents per A-linked unit and 28.19 cents for the B-link units.

The property counter’s operational performance took a hit from Abil’s furniture subsidiary Ellerine Holdings going into business rescue. Synergy’s total exposure to Abil was 2.4% of monthly income and 1.65% of its gross lettable area.

“A number of the Ellerine premises were vacated during November and December 2014, which has impacted the December 2014 vacancy and tenant retention ratios,” Synergy says.

These are largely Bears and Geen & Richards stores which have vacated Synergy’s retail assets.

Synergy – with retail assets including Gugulethu Square Shopping Centre in the Western Cape, Mpumalanga’s Highland Mews Shopping Centre and Ruimsig Shopping Centre in Johannesburg – saw the vacancy rate reach 6.3% from 4% in June 2014. About 1.8% of the overall vacancy rate is attributable to business rescue proceedings which are still pending.

Synergy says it anticipates that the current vacancy ratio will reduce to approximately 4% “in the next few months”.

Rental reversions of 7.4% across Synergy’s 15 retail centres valued at R2.4 billion have been achieved; with the tenant retention ratio reaching 68%. The weighted average lease expiry period for the property portfolio during the period was 3.58 years, up from 3.22 years in June 2014.

Capital expenditure

The health of consumers in the midst of slow economic growth, indebtedness and rising interest rates is anticipated to slow the retail sector and in particular, counters like Synergy with a bias towards the sector. 

Synergy’s retail assets are located in areas occupied by consumers in the lower LSM groups – who are said to be under pressure and vulnerable to economic headwinds. However, Synergy believes that its investment strategy is sustainable given the growing middle class and the lack of quality retail assets supply.

The company has embarked on refurbishments at its two assets; the Ruimsig Shopping Centre in Roodepoort, Gauteng and Richdens Village Shopping Centre in Hillcrest, KwaZulu-Natal. Synergy also took transfer of an adjacent property to the Ermelo Game Shopping Centre in Ermelo, Mpumalanga.

Its total borrowings rose to R938 million, with 50% of its debt hedge. Synergy’s loan to value ratio in relation to its property portfolio now stands at 38%.

Synergy and Vukile

Synergy is now a listed subsidiary of Vukile Property Fund (Vukile) after months of corporate action between the two JSE-listed funds. Vukile now holds 87.62% of Synergy B-linked units and 11.88% of Synergy A-linked units. This effectively means that Vukile has a combined stake and voting rights into Synergy of 64.2%.

The deal affords Vukile exposure to Synergy’s retail assets, as it looks to beef up its retail exposure to 60% of its portfolio mix.

Quarters of the listed property sector welcomed the conclusion of the deal, citing that drawn out deals had the potential to lead to fatigue. The deal between the two listed counters signals fresh consolidation for the property sector.

Synergy says its advisory costs in the deal will amount to R2.6 million, which R1 million has been incurred to date.

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