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EQUITES PROPERTY FUND LIMITED - Acquisition of land and development of logistics warehouse facility for Pepkor in Hammarsdale, Kwazulu Natal

Release Date: 20/01/2020 17:12
Code(s): EQU     PDF:  
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Acquisition of land and development of logistics warehouse facility for Pepkor in Hammarsdale, Kwazulu Natal

EQUITES PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2013/080877/06)
JSE share code: EQU ISIN: ZAE000188843
(Approved as a REIT by the JSE)
("Equites" or the "company")


ACQUISITION OF LAND AND DEVELOPMENT OF LOGISTICS WAREHOUSE FACILITY FOR PEPKOR IN HAMMARSDALE, KWAZULU-NATAL


1.    INTRODUCTION

      Equites has concluded binding heads of agreement ("Heads of Agreement") with Pepkor Trading Proprietary Limited,
      a wholly-owned subsidiary of Pepkor Holdings Limited ("Pepkor" or the "Tenant"). Pepkor is a JSE listed company
      with a market capitalisation of c. R61 billion. In terms of the Heads of Agreement, inter alia -

      1.1       Equites has been appointed by the Tenant to develop a 122 734 square metre logistics warehouse facility (the
                "Development") on land situated in Hammarsdale, KwaZulu-Natal ("KZN") (comprising erven 238, 239, 240,
                262, 263 and 264, Cliffdale, Registration Division FT, KZN) (the "Property") at an indicative total cost of
                development of R1.3 billion (exclusive of VAT) ("Purchase Consideration"), which includes an amount of
                R281 million payable for the land; and

      1.2       Equites will enter into a development and "triple net" lease agreement in respect of the Property with the
                Tenant (the "Development Lease Agreement"),

      (the "Transaction").

2.    RATIONALE

      Equites is the only specialist logistics REIT on the JSE and maintains its focus on acquiring and developing a
      high-quality logistics portfolio.
      Equites has established clear, well-defined investment criteria and a transaction of this nature contributes to its key
      strategic objectives of:
            -   continuing to cement itself as a developer of choice to the largest logistics, retail and e-commerce participants
                in the South African market;
            -   creating value through tenant-driven developments which meet their exacting requirements;
            -   focusing on an asset class which has proven to outperform over time;
            -   increasing its footprint in the key logistics node of KZN which it continues to explore as an avenue for future
                growth; and
            -   creating further scale in its high-quality logistics portfolio, comprising properties with predictable rental
                growth profiles, which promotes capital growth and increasing income returns over the medium to long-term.
      Equites views the Property and the Development as evidencing the following sound investment fundamentals:
            -   it is situated in Hammarsdale which is a prime logistics node as a result of its location along the N3, its
                proximity to the rail network linking Gauteng to the Durban port and the inland container terminal at Cato
                Ridge which is expected to change the logistics landscape in KZN;
            -   other prominent South African retailers, such as Mr Price and Ackermans, have logistics warehouse facilities
                close to the Property, evidencing the suitability of the node;
            -   the Development will be a modern, state-of-the-art logistics facility that meets the Tenant’s specifications and
                operational requirements;
            -   the Property is to be let to the Tenant on a 15-year lease, with a right to renew for three additional five-year
                periods, which substantially increases the weighted average lease expiry period of the portfolio; and
            -   the Tenant is one of Africa’s leading retailers of significant size and scale, focused on the discount, value and
                specialist value retail market.


3.   DETAILS OF THE PROPERTY

     The developed Property will exhibit the characteristics which are expected of a prime logistics facility suitable for a
     multinational occupier, including:
                                                                                      
                                                                                     
                                                                                           Average net
                           Geographical                          Gross lettable      rental per square      Indicative cost of 
      Property name        location             Sector              area (m2) *                 metre*            development*
      Pepkor               Hammarsdale,         Logistics               122 734                 R67.10          R1 251 million
      Hammarsdale          KwaZulu-Natal

     *These values are indicative and are subject to change and will be finalised upon practical completion of the
     Development.

     The total site area of the Property is 292 043 m2 which implies a very low site coverage of 36.8%. Furthermore, the
     Development boasts a clear height to eaves of 15.8 metres, yard depth in excess of 45 metres and has been designed
     with increased steel tolerances to accommodate the installation of photovoltaic panels.

     The total consideration payable is considered to be in line with fair market value, as determined by the directors of the
     company. The directors of the company are not independent and are not registered as professional valuers or as
     professional associate valuers in terms of the Property Valuers Profession Act No.47 of 2000.


4.   TERMS OF THE TRANSACTION

     Equites has agreed to purchase the Property, to undertake the Development and to conclude a comprehensive lease
     agreement between Equites as landlord and Pepkor as tenant in respect of the warehouse facility.

     The Transaction has been concluded at a net initial yield of 7.90% which is reflective of the impeccable investment
     fundamentals of the asset including, inter alia: its prime location, the longevity of the lease, the superior base build
     specifications of the Development and the strong quality covenant.

     The lease will be a triple net, fully repairing and insuring lease enduring for an initial period of fifteen years, with the
     right to renew for three additional five-year periods. The rental will be determined based on the contracted initial yield
     in accordance with the eventual actual development costs and will escalate at a rate of six percent annually.

     The effective date of the Transaction will be the date on which the last of the conditions contained in the Heads of
     Agreement has been fulfilled, which is expected to be during April 2020. On practical completion of the Development,
     expected to be 1 November 2021, the lease will commence.

     The Transaction is subject to certain conditions precedent, including –

         -    board approval of the Transaction by the boards of directors of both Equites and Pepkor;
         -    conclusion of a comprehensive Development Lease Agreement containing the salient terms and conditions set
              out in the Heads of Agreement;
         -    the successful completion of a due diligence investigation by Equites; and
         -    approval by the Competition Commission in accordance with the Competition Act.


5.    FINANCIAL INFORMATION

      The forecast for the transaction (the "forecast") for the four months ending 28 February 2022 and year ending 
      28 February 2023 (the "forecast period") is outlined below.

      The forecast has been prepared on the assumption that the Development will reach practical completion on 
      1 November 2021.

      The forecast, including the assumptions on which it is based and the financial information from which it has been
      prepared, is the responsibility of the directors of the company. The forecast has not been reviewed or reported on by
      independent reporting accountants.


                                                                    Forecast for the              Forecast for the
                                                                       period ending                   year ending
                                                                    28 February 2022              28 February 2023
                                                                            ZAR '000                      ZAR '000
        Contractual rental income                                             32 443                        99 275
        Straight-lining lease adjustment                                      20 080                        58 293
        Rental revenue                                                        52 523                       157 568
        Less: finance costs                                                   -8 867                       -26 602
        Net operating profit                                                  43 656                       130 966


      The forecast incorporates the following material assumptions:

      1. The lease is assumed to be valid and enforceable.
      2. The lease is a "triple net" lease and normal property operating expenses are therefore assumed to be recoverable
         from the tenant.
      3. The property and asset management functions will be performed internally.
      4. The forecast assumes a loan-to-value of 25% throughout the forecast period which is in line with the lower end of
         the group’s loan-to-value target range.
      5. The marginal cost of debt assumed in the forecast is 8.5%, which is in line with Equites’ current marginal cost of
         debt.
      6. No fair value adjustment is recognised.
      7. There will be no unforeseen economic factors that will affect the tenant's ability to meet its commitments in terms
         of the lease.


6.    CATEGORISATION

      The transaction is classified as a category 2 transaction in terms of the JSE Listings Requirements and accordingly
      does not require approval by Equites’ shareholders.

20 January 2020



Corporate advisor and sponsor to Equites
Java Capital

Date: 20-01-2020 05:12:00
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