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EQUITES PROPERTY FUND LIMITED - Development of a distribution centre for Hermes Parcelnet in Hoyland, England

Release Date: 10/11/2020 14:02
Code(s): EQU EQT002 EQT003 EQT005 EQT004 EQT006     PDF:  
Wrap Text
Development of a distribution centre for Hermes Parcelnet in Hoyland, England

(Incorporated in the Republic of South Africa)
(Registration number 2013/080877/06)
JSE share code: EQU ISIN: ZAE000188843
JSE alpha code: EQUI
(Approved as a REIT by the JSE)
(“Equites” or “the company”)



      Shareholders are advised that Equites, through its Isle of Man based wholly-owned subsidiary, Equites
      International Limited (“Equites International”), has concluded a development agreement (“development
      agreement”) with Hermes Parcelnet Limited (“tenant” or “Hermes”) in terms of which Equites International
      will be funding the development of a 31 570 square metre distribution centre ( “distribution centre”), to be let
      to Hermes, situated on a property at Hoyland Common, Barnsley, England (“property”), (“the transaction”).
      This development will serve as the latest “super-hub” for Hermes and will handle 1.3 million parcels a day,
      making it the largest of its kind in Europe.

      The total estimated cost of the development is £72 326 428 (ZAR 1 518 854 988) (“total development cost”),
      with £8 500 000 (ZAR 178 500 000) attributable to the acquisition of the land. The agreement provides that
      Equites Newlands Group Limited (“ENGL”), a company in which Equites International owns 60% of the shares
      with Newlands Property Development LLP (“Newlands”) owning the remaining 40%, will act as the developer
      of the property.

      Based on the initial annual rent of £ 3 853 570 (ZAR 80 924 790) the total estimated development cost reflects
      an initial yield of 5.33%.


      This is the first signed development deal to arise from the company’s strategic partnership with Newlands and is
      consistent with Equites’ growth and investment strategy of:

      -   diversification into the United Kingdom (“UK”) to mitigate the risks of its emerging market focus and access
          the advanced know-how and technology in respect of logistics facilities in the UK;
      -   demand in the UK for prime logistics assets has compressed open market yields to unprecedented levels; the
          partnership with Newlands has allowed Equites to unlock brand new prime facilities at higher yields than
          would otherwise be achievable on the open market;
      -   focusing on premium “big-box” or “last-mile” distribution centres, let to investment grade tenants on long-
          dated “triple net leases”, in proven logistics nodes and built to institutional specifications. In the UK, the
          locations of preference are the central Midlands and “last-mile” fulfilment centres near major metropolitan
          areas; and
      -   building a high-quality logistics portfolio, consisting of properties with predictable rental growth profiles,
          that promotes capital growth and increasing income returns in the medium to long term.

      Equites views the property and development as evidencing the following sound investment fundamentals:

       -     The property is located in the well-established Hoyland Common, which affords excellent road links, and is
             strategically located immediately adjacent to the J36, M1 road networks providing excellent access to the
             national motorway network. The area also provides the tenant with access to a large labour pool.
       -     The distribution centre is 31 570 square metres and will be situated on an overall area of 18.54 hectares which
             translates into a low site coverage of 16.3%. The facility will provide the tenant with a newly constructed,
             high specification, steel portal frame distribution warehouse with 163 dock-level loading doors and four level-
             access loading doors. Moreover, the warehouse will have a floor load capacity of 37.50 kn/m² and a clear
             working height of 12.5m to underside of the eaves.
       -     Hermes has signed a 20-year triple net, fully repairing and insuring lease which will commence on the
             completion date of the development in February 2022 (“the lease”). Hermes, an associate of Hermes Europe
             GmbH which is based in Germany, specialises in parcel delivery and courier services. In the UK it delivers
             more than 240 million parcels a year on behalf of 40% of the UK’s top 100 retailers, including Next Directory,
             ASOS, Tesco, John Lewis, Debenhams and Arcadia Group. myHermes, the consumer business of Hermes,
             continues to develop its industry-leading range of convenient delivery solutions, whilst adding to its network
             of 4,500 ParcelShops.


3.1.       Equites International has agreed to fund the development of a delivery distribution warehouse and ancillary
           accommodation on the property. The development, when complete, has been independently valued at £85 424
           000 (ZAR 1 793 904 000) on the assumptions that the development works have been completed with a weighted
           average rental per square foot of £11.33 (ZAR 237.93), calculated from a rental of £5.25 (ZAR 110.25) per sq
           ft multiplied by 2.16 to take the low site coverage into account. The property is being purpose-built by ENGL
           for Hermes’ requirements.

3.2.       The lease provides that the first year’s annual rental income will be £3 853 570 (ZAR 80 924 790).

           Property    Geographical       Sector      GLA              Weighted         Weighted            Annual rental
           name        location                      (sq. ft. /sq.     average          average rental      income
                                                           m)          rental per       per square
                                                                       square foot      meter per
                                                                       per annum        annum
            Hermes       Hoyland        Logistics    339 821 sq. ft.   £11.33           £122.06             £3 853 570
           Parcelnet     Common,                     / 31 570 sq. m.   (ZAR 237.93)     (ZAR 2 563.26)      (ZAR 80 924 970)


4.1.       Hermes has signed a 20-year triple net, fully repairing and insuring lease which will commence on the
           completion date of the development in February 2022.

4.2.       The Hermes lease is subject to an upward only rental review to the higher of the initial rent (£5.25 per sq ft
           modified to compensate for the low site coverage by a factor of 2.16) multiplied by the Retail Price Index
           (“RPI”) compounded annually and reviewed every 5 years (subject to a collar of 2% and a cap of 4% in respect
           of the RPI movement) or the open market rent of the hypothetical building (as defined in the lease).

4.3.       The transaction is subject to the fulfilment or waiver (as the case may be) of the following conditions precedent:

       -     receipt of an acceptable planning permission for the development;
       -     practical completion of the development and delivery to Hermes of the Certificate of Practical Completion
             and snagging list (if any); and
       -     receipt of warranties in favour of Hermes from the building contractor and each professional team member.

4.4.    ENGL, through Newlands who will act as the development manager, is obliged to deliver the development in
        line with the agreed plans and specifications.


       The independent valuation of the property was undertaken by Savills, an independent external valuer, in
       accordance with the “RICS Valuation – Professional Standards, the 2012 Edition (the “Red Book”). This is an
       internationally accepted basis of valuation.

       The independent valuation provides that the market value of the property when the development is completed
       will reflect a net initial yield of 4.5% on the first-year rental income of £ 3 853 570 (ZAR 80 924 790).


       Set out below is the forecast for the transaction (“the forecast”) for the 12 months ending 28 February 2023 and
       the 12 months ending 29 February 2024 (“the forecast period”).

       The forecast has been prepared on the assumption that the development will be completed, and rental income in
       terms of the lease received, from 1 March 2022.

       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.

       The forecast presented in the table below has been prepared in accordance with the company’s accounting
       policies, which are in compliance with International Financial Reporting Standards.

         ZAR’000                                                            Forecast for the         Forecast for the
                                                                            year ending              year ending
                                                                            28 February 2023         29 February 2024

         Rental revenue                                                               81 968                   84 358
         Finance costs                                                              (16 945)                 (17 439)
         Net profit before tax                                                        65 023                   66 919
         Taxation expense/(income)                                                         -                        -
         Net profit for the period                                                    65 023                   66 919

       The forecast incorporates the following material assumptions in respect of revenue and expenses:
       1.   The forecast has been prepared in £ and translated at exchange rates of ZAR22.30/£ and ZAR22.95/£ in
            respect of the financial periods ending 28 February 2023 and 29 February 2024, respectively. These rates
            are reflective of the forward rates for the forecast periods.
       2.   Rental income is derived from the agreement for lease which is agreed with Hermes.
       3.   The lease is a fully repairing and insuring lease and normal property operating expenses are assumed to be
            recoverable from the tenant.
       4.   Initially, the transaction will be financed from available cash resources both in South Africa and the UK.
            The intention is, upon completion, to subsequently refinance up to 50% with UK debt. The all-in fixed cost
            of debt funding has been estimated at 2.2%.
       5.   There is no current taxation assumed in the forecast as the group will have sufficient capital allowances
            which may be applied against the taxable income for the forecasted period.
       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 commitment in
            terms of the lease.


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

10 November 2020

Corporate advisor and sponsor to Equites
Java Capital

Debt sponsor
Nedbank Corporate and Investment Banking

Date: 10-11-2020 02:02:00
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