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EQUITES PROPERTY FUND LIMITED - Development of a Distribution Centre for Amazon in Peterborough, England

Release Date: 01/12/2020 13:01
Code(s): EQU EQT002 EQT003 EQT005 EQT004 EQT006     PDF:  
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Development of a Distribution Centre for Amazon in Peterborough, England

(Incorporated in the Republic of South Africa)
(Registration number 2013/080877/06)
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 Amazon UK Services Limited (“tenant” or “Amazon”) in terms of which Equites
      International will be funding the development of a 13 629 square metre distribution centre (“distribution
      centre”), to be let to Amazon, situated on a property at Peterborough Gateway, Peterborough, England
      (“property”), (“the transaction”).

      The total estimated cost of the development is £41 283 310 (ZAR 846 307 851) (“total development cost”), with
      £7 317 200 (ZAR 150 002 600) attributable to the acquisition of the land. Upon completion, this modern
      distribution facility will be wholly-owned by Equites. Based on the initial annual rent of £2 345 813 (ZAR 48 089
      167) the total development cost reflects an initial yield for Equites of 5.68%, after payment of all costs, fees, and
      profit shares.

      The development agreement provides that Equites Newlands Group Limited (“the developer”) will act as the
      developer of the property. Equites International owns 60% and Newlands Property Development LLP
      (“Newlands”) owns 40% of the issued shares in the developer.


      This is the second signed development deal to arise from the Company’s strategic partnership with Newlands and
      is consistent with the 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;
      -   unlocking brand new prime logistics facilities at yields significantly more attractive than would otherwise be
          achievable on the open market through its partnership with Newlands;
      -   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.
      -   investing in key logistics nodes, including the 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 the development as evidencing the following sound investment fundamentals:

      -     The property is located in the well-established Peterborough Gateway logistics park, which affords excellent
            road links, and is strategically located immediately adjacent to Junction 17 of the A1(M) 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 13 629 square metres and will be situated on an overall area of 16.77 hectares which
            translates into a low site coverage of 16%. The yard will accommodate a bespoke three-storey van deck (847
            spaces) for the electrical vehicle fleet. The warehouse will have 72 launch bays, 72 waiting bays, 11 loading
            dock doors, 1 loading door to waste platform and 7 level access doors. Moreover, there will be an extensive
            40 metre yard and clear height to eaves of 10 metres.
      -     Amazon has signed a 15-year triple net, fully repairing and insuring lease which will commence on the
            estimated development completion date in October 2021 (“the lease”). Amazon forms part of the American
            multinational technology company based in Seattle, Washington. Amazon is the world's largest online
            marketplace, AI assistant provider, live-streaming platform and cloud computing platform as measured by
            revenue and market capitalization, being the largest Internet company by revenue in the world. Amazon
            recently reported that they have invested over £18 billion in the UK economy since 2010 and intend to
            continue investing in the region.

      In addition to the property fundamentals, this investment decision is aligned with Equites’ focus on sustainability

      -     Amazon is investing significantly in its research and operations to be net-zero carbon by 2040, in support of
            its commitment to The Climate Pledge. Onboarding Amazon as a tenant therefore aligns with our strategic
            Environmental, Social, and Corporate Governance (ESG) objectives;
      -     Amazon is the first mover in the logistics space to embrace electrical fleets in line with the UK government’s
            ban on the sale of combustion engines by 2030;
      -     Amazon already ordered 100,000 fully electric delivery vehicles, which marks the largest order globally for
            electric delivery vehicles;
      -     the shift to electric delivery vehicles has created demand for a new type of logistics facility, which is
            incomparable to conventional warehousing due to having a stand-alone car deck that is fully equipped with
            electrical charging stations; and
      -     this property will form part of Amazon’s new sustainability strategy, and therefore concurs with Equites’
            focus on ESG initiatives, as it supports the structural shift to electromobility within logistics supply chains.


3.1.       Equites International has agreed to fund the development of a distribution warehouse and ancillary
           accommodation on the property.

3.2.       The property is being purpose-built for Amazons’ requirements.

3.3.       The lease provides that the first year’s annual rental income will be £2 345 813 (ZAR 48 089 167), which rental
           was calculated at 4.95% of the total development cost to reflect the additional costs associated with the bespoke
           facility, including the three-storey van deck.

           Property    Geographical      Sector      GLA (sq. ft.         Weighted             Weighted            Annual rental
           name        location                      /sq. m)               average        average rental           income
                                                                        rental per            per square
                                                                       square foot             metre per
                                                                         per annum                 annum
           Amazon      Peterborough     Logistics   146 705 sq ft           £15.99               £172.12             £2 345 813
                       Gateway,                     /13 629 sq m       (ZAR 327.80)        (ZAR 3 528.46)       (ZAR 48 089 167)


4.1.       Amazon has signed a 15-year triple net, fully repairing and insuring lease which will commence on the expected
           completion date of the development in October 2021.

4.2.       The Amazon lease is subject to the rent being reviewed five yearly (upward only) to CPI, subject to a collar and
           cap of 1.00% and 3.00%, compounded annually.

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

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

4.4.      The developer is obliged to deliver the development in line with the agreed plans and specifications.


       The directors expect 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 £2 345 813 (ZAR 48 089 167). This valuation was based
       on the input of several registered independent external valuers. The property will be independently valued upon
       completion in October 2021. The directors are not an independent valuer and are not registered as professional
       valuers in terms of the Property Valuers Professional Act 47 of 2000.


       Set out below is the forecast for the transaction (“the forecast”) for the 4 months ending 28 February 2022 and
       the 12 months ending 28 February 2023 (“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 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.

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

           ZAR’000                                                             Forecast for the          Forecast for the
                                                                          4-month period ending               year ending
                                                                               28 February 2022           28 February 2023

           Rental revenue                                                                16 929                    52 546
           Finance costs                                                                 (3 137)                   (9 736)
           Net profit before tax                                                         13 792                    42 810
           Taxation expense/(income)                                                          -                         -
           Net profit for the period                                                     13 792                    42 810

      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 ZAR21.65/£ and ZAR22.40/£ in
           respect of the financial periods ending 28 February 2022 and 28 February 2023, respectively. These rates
           are reflective of the forward rates for the forecast periods.
      2.   Rental income is derived from the lease and comprises contractual rental income only.
      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 Equites group of companies 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.

1 December 2020

Corporate advisor and sponsor to Equites
Java Capital

Debt sponsor
Nedbank Corporate and Investment Banking

Date: 01-12-2020 01:01:00
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