CITY CAPITAL SA PROPERTY HOLDINGS LTD ANNUAL GENERAL MEETING OF - - PDF document

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CITY CAPITAL SA PROPERTY HOLDINGS LTD ANNUAL GENERAL MEETING OF SHAREHOLDERS: 19 MARCH 2015

Good morning ladies and gentlemen It is heartening to see so many shareholders of City Capital here today in person and participating in proxy at the Annual General Meeting of City Capital. I thank each and every one for taking the time to attend and participate in this important decision-making process of the company. I know that the City Capital investment has been an extremely painful one for investors, but I can assure every investor here today that your investment is improving, albeit slowly. While preparing for this important meeting of shareholders, the board has been able to reflect on the successes and failures that we have achieved and suffered over the past 5 years (can you believe that we have struggled with City Capital for over 5 years now ?) and I must say that I am extremely grateful to still be standing here before you with City Capital intact and growing with news that is better than it has ever been thus far. To-date, my report-backs to shareholders have reflected steady improvement but they have always been shrouded in warnings of danger and threats of possible liquidation, for various reasons. Today is the first time that I am able, with a clear conscience, to state here before you that the worst days for City Capital are over and the best have begun. We have a number of items of extremely good news to report back on today and only 1 item of bad news and I will deal with these in turn and elaborate on them as I proceed.

• 1. Net asset value

As of 28 February 2015 the net asset value of City Capital is R 222 million, equivalent to 103 cents per

• share. [ SHARE VALUATION AT 28 FEBRUARY 2015 ]

This amount does not yet take into account the property valuations that are now being performed by

• ur property valuers. When these valuations come in, it is possible that the estimated share price at 28

February 2015 will reach 110 cents per share. We are expecting good increases in valuation for the Perspex factory and Tyger Valley Chambers 5 properties. If we compare the current net asset value to the amount we expected in December 2009, we can see exactly where we have gained and lost as we made decisions to reduce debt. [ SHARE PRICE GRAPH ] It is interesting to note on the graph of our share price on the screen that our estimated share price has quite closely matched the net asset value of the group, according to the audited annual financial statements, except for the period February 2010 to February 2011 when we experienced the most uncertainty, especially with regard to the future of Tyger Valley Chambers 5 and the Dividend loans and share investments. Overall, the graph reflects a nice upturn with steady, constant growth in net asset value. The board is confident that growth in net asset value will accelerate from now onwards, for reasons that will shortly become clear.

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• 2. Property portfolio

The next bit of good news concerns our property portfolio. [ LEASE SCHEDULE ] For the first time in the history of City Capital, our property portfolio is fully let. Zero % vacancy. For this I am grateful to Safcom Properties, our property portfolio managers (Elton Faber and Michael Wylie) and the other property brokers that have sourced tenants for us. I am also extremely grateful to

• ur non-executive directors, Andrew Herweg, Elna Visagie and Steyn Boshoff, for their guidance,

encouragement and attention to detail in making it possible to achieve this result. It wouldn’t have been possible to achieve 0% vacancy without spending funds on renovations at Tyger Valley Chambers 5 and The Estuaries. [ PICTURES OF TYGER VALLEY CHAMBERS ] At Tyger Valley Chambers, we invested over R 2 million putting in ceilings, lights, partitioning, carpets and airconditioners to lease premises to 4 tenants, Confiance Accountants and Tax Consultants (5 year lease), RON SA(2 year lease), Creative Performance (2 year lease) and Urban Dynamics (3 year lease). [ PICTURES OF THE ESTUARIES ] At the Estuaries, we invested in waterproofing and painting of the buildings, basement security gates, a camera-based security system and partitioning for new tenants. [ LEASE SCHEDULE ] This good news, however, will only be there until 30 April 2014, when 2 tenants at The Estuaries, UAS and TUV Rheinland will be vacating the premises as their leases terminate. This is normal for a property portfolio and what makes our property investment model so sustainable. When we have a situation like this, it does not create a crisis for the property. Rental income from our other properties compensate and assist where a particular property is experiencing vacancies. This was especially true for our property in Malmesbury that was vacant for 2 years before we found a new tenant in November 2014. This tenant, Leader Tyre Response 247 is also interested in purchasing the property for R 5,5 million at the end of October 2015. Obviously, the immediate impact of a fully let portfolio is the immediate cash flow improvement. You will see that our property portfolio is now generating net cash flow, after paying mortgage bonds and all property and head office expenses, of R 454 848 per month, about R 5 million per annum. I know that this creates the possibility to start paying dividends and we will address this very important issue a bit later on.

• 3. Cash flow

[ CASH FLOW SCHEDULES ] There is a saying that “Revenue is vanity, margin is sanity, but cash is king”. There is also a saying that “Profit is an illusion, cashflow is fact”. Until our rental income reaches our bank account, it is only an illusion. We have worked very hard over the past 5 years to ensure that every cent of rental income and cost recoveries is safely banked in our bank account. I thank Carine van der Westhuizen, our rentroll administrator and bookkeeper, for her

3 efforts, attention to detail and perseverance in ensuring that our tenants pay their rentals on-time when they are due. She is a loyal and supportive person to work with and I rely on her tremendously to cost- effectively issue rental invoices each month and ensure that rental income is received on time. I use the cash flow schedule on the screen every day to control and to forecast over a two to three month period our cash in and outflows. You will see that although City Capital has been cash flow positive, from a property portfolio point-of-view, since April 2014, the months of January, February and March 2015 all reflect negative cash flows. This is because of cash outflows, not in the normal course of business, on tenant installation costs at Tyger Valley Chambers, legal costs, annual audit fees, letting commission and provisional tax payments. These types of payments would obviously have an impact on the ability of the company to pay dividends to shareholders. The important point is that our property portfolio is delivering positive cash flow, all major property renovations have been completed, our portfolio is fully let and a large portion of our audits have been finalised. Funds will however continue to be spent on legal costs for the recovery of the Dividend loans and this creates a level of uncertainty regarding dividend payments. This will be discussed in more detail shortly.

• 4. Dividend loan recovery

Good progress has been made with regard to the recovery of loans that were previously made to the Dividend property companies. [ LOANS TO DIVIDEND COMPANIES ] The schedule on screen reflects that we have recovered almost R 17 million in loan repayments from the Dividend property companies over the past 5 years. There is still over R 42 million outstanding and

• wing to City Capital, although we currently only reflect an amount of R 19 million in our financial

records, the amount that is covered by our mortgage bonds. [ DIVIDEND LOAN SUMMARY 201502 ] To be prudent, the unsecured portion of our loans have been provided for. We have been very successful in ongoing litigation against those companies that refuse to acknowledge

• ur loans and repay them. As you know we received a Western Cape High Court judgement in our favour
• n December 2013 in the Midnight Storm 150 matter (the KPMG building). The opposing director,

Ferreira, then instructed his attorney to take the judgement to the Supreme Court of Appeal. On 24 February 2015 the SCA heard the appeal and the excellent news is that on Monday this week, 16 March 2015, the SCA dismissed the appeal with costs of our two counsel. [ JUDGEMENT OF THE SUPREME COURT OF APPEAL ] All thanks go to Walid Brown of Werksmans Attorneys and Advocates Rod Howie and Andre’ Oosthuizen for the professional legal services that they have provided us. This team has fought tooth and nail for us,

• f course for a substantial fee.

This judgement has destroyed every argument that Ferreira, Matthews and Blaauw have used to deny payment to City Capital for loans that have legitimately been made. That was the good news, now comes the 1 item of bad news for this AGM.

4 [ COURT ORDER TO ESTABLISH DIS ] In July 2014, the liquidators of Div-Prop 11 and 12 and the Business Rescue Practiitioner of Div-Hold 11 and 12 and Blue Beacon Investments arranged between themselves, without notifying any investors or City Capital, a court order to pierce the corporate veil of the companies and create the liquidated entity, Dividend Investment Scheme “DIS”. The liquidator of the DIS is now applying to liquidate all the Dividend property and holding companies and add them into the DIS. [ APPLICATION BY DIS ] The consequences for CCSAPH if they are successful in their attempt will be serious. It goes without saying that CCSAPH will be opposing this latest application and the directors of at least 70 Dividend property and holding companies will also be doing so. Unfortunately, this latest effort by liquidators, business rescue practitioners and their attorney is going to again incur legal costs for City Capital. [ DIVIDEND SYNDICATION ANALYSIS ] This latest attack is the main reason that City Capital is unable at this stage to start to pay dividends to its

• shareholders. There is too much uncertainty regarding the financial impact that a successful application

would have on the financial affairs of City Capital. It is clear that the financial impact would be devastating.

• 5. Stellenbosch land

Here we have another piece of good news. We have always emphasized that there have been 2 major issues that are holding City Capital back from prospering. One is the recovery of the Dividend loans. The second is the disputes that we have had with the Stellenbosch land. I am happy to advise that we have reached a successful outcome with the Stellenbosch land. [ JUDGEMENT HUIS PIRON ] On 30 January 2015, after a trial in the Western Cape High Court, we obtained a court order that Huis Piron Stellenbosch (Pty) Ltd provide consent to cancel the R 120 million bond and a guarantee for payment of R 23,25 million within 10 business days. We duly received the consent and the mortgage bond was cancelled on 4 February 2015. We continued to demand the guarantee and did not receive it as Huis Piron has no funds to provide it. [ LETTER OF CANCELLATION ] The sale agreement was then cancelled on 2 March 2015. Our property is at last ours and it is bond-free, available for sale, development or co-development with a developer. We at last have options to explore. My thanks go to Bennie Marx, our attorney, and Advocates Adam Brink and Gavin Woodland in facilitating the above after many years of struggle. We have appointed a town planner to investigate the status of the property and its development potential with the Stellenbosch Municipality. Three potential developers have expressed interest in developing the property with us in a co-development. Shareholders will, of course, be kept informed of developments as they transpire.

• 6. Audited annual financial statements

5 My thanks go to Pierre Retief, and his audit manager, Johan Lindveldt, for their professionalism in finalising the audits for City Capital and its subsidiary companies for the 2009 to 2013 financial years. Financial information for the audits for 2014 and 2015 is being finalised and will shortly be sent to the auditors for audit. We expect these audits to be finalised by the end of August 2015 and another AGM will thereafter be called for shareholders to inspect and approve the annual financial statements. [ AFS SUMMARY ] The summary of financial results from 2007 to 2015 has been updated for the year ended 28 February 2015 and these confirm the current net asset value of 103 cents per share. Income tax returns are submitted for each company as the audited financial statements become available and income taxes are paid on assessment. Provisional taxes have been paid on 31 August 2014 and 28 February 2015 for those companies that require payment.

• 7. Dividend to shareholders

The directors of City Capital are fully aware that the long-suffering shareholders of City Capital have been very patient for the past 5 years while the company has recovered from imminent liquidation. They are thankful for the support of shareholders and the confidence that shareholders have shown in the board. Shareholders can be assured that it is a priority of the board to make a proposal regarding the payment

• f dividends to shareholders as soon as the company is able to.

The new Companies Act, however, makes it mandatory for the board to satisfy itself that the company will pass the solvency and liquidity test set out in section 4 of the act before a dividend can be paid. [ SOLVENCY AND LIQUIDITY TEST ] This test requires the board to ensure that the company is first solvent before proposing the payment of a dividend. This is an easy requirement to pass as City Capital has always carried on business in a solvent state. The second test of liquidity is more difficult to pass as here the board has to ensure that the company will be able to pay all its expenses and liabilities as they present themselves for payment for a period of 12 months after the payment of a dividend. The board has to take into consideration possible threats to the companies cash flows and make an informed and considered opinion. The threat that the Dividend Investment Scheme poses to the future cash flows of City Capital is serious enough to prevent the company from passing the liquidity part of the test and, for this reason, the board is not able at this time to consider a dividend payment. We hope that our attorneys and advocates will be successful in opposing the application by the liquidators of the DIS so that the directors will be able to provide a dividend proposal at the next AGM.

• 8. Issue of share options to directors

The directors of City Capital can be proud of the fact that this group is the only property investment scheme that has survived the great recession of 2008/9, the greed and mismanagement of former directors and attacks by the Reserve Bank. Although shareholders have suffered, we are all better off than those who invested in Sharemax, Blue Zone, PIC and Realcor.

6 This has been achieved by keeping costs to a minimum, leasing all available property, reducing debt (especially high-cost threatening debt) and maximising cash inflows. Shareholders of City Capital can rest assured that no major decision is made in this company without a discussion and the approval of the non-executive directors on the board. In this way shareholders are protected on a continuous and on- going basis. I can say that I am honoured to have been able to work with the directors of this company and to have been able to play a part in the recovery of this group. The proposed compensation of members of the board of directors in the form of share options is the most cost-effective method of remunerating the directors for the time and effort that they have provided to save the group from liquidation, stabilise the group in a sustainable manner and grow the asset base and reduce the liabilities to what they are today. There is no expense or cash outflow to City Capital and the share options are an incentive to retain the skills and knowledge that have been developed by the board over the past 5 years. The needs and desires of shareholders are perfectly aligned with the needs and desires of the directors. The directors are incentivised to facilitate the increase in the share price of City Capital in the shortest possible time, without unnecessary risk to the company (as share options only become valuable if shares can be sold) the exact desire of shareholders. The cost to shareholders is a minimal reduction of 2 cents per share in the share price. The decision with regard to the issue of the share options is of course in the hands of the shareholders.

• 9. Future prospects

The board of City Capital is focussed on the following:

• 1. Oppose the application of DIS and destroy all remaining attempts by the directors to deny repayment
• f the loans owing to City Capital.
• 2. Recover loans owing to City Capital as properties of the Dividend companies are sold.
• 3. Consider options for the sale or co-development of the Stellenbosch land.
• 4. Consider the possibility of making bi-annual dividend payments to shareholders.
• 5. Reinvest surplus funds in good-quality commercial property to enhance the attractiveness of the

property portfolio to a listed property fund.

• 6. Invite the takeover of City Capital by a listed property fund in exchange for shares in the fund. In this

way, shareholders and directors through their share options (if approved by shareholders) will be able to realise their investments in City Capital for the best value. I thank you for your time and attention. Are there any questions ?