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Proposed internalisation of the management of SA Corporate, increase in the borrowing limits and withdrawal of cauti
SA Corporate Real Estate Fund
A Collective Investment Scheme in Property registered in terms of the Collective
Investment Schemes Control Act, No. 45 of 2002 ("the Act") and managed by SA Corporate
Real Estate Fund Managers Limited (Registration number 1994/009895/06)("the Manager")
Share Code: SAC ISIN Code: ZAE000083614
(“SA Corporate” or "the Fund")
Registered as a REIT with effect from 1 January 2014
PROPOSED INTERNALISATION OF THE MANAGEMENT OF SA CORPORATE, INCREASE IN THE
BORROWING LIMITS AND WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
1. INTRODUCTION
Participatory interest holders ("Unitholders") in the Fund are informed that the Manager intends to ballot
Unitholders to obtain their approval to certain amendments to the trust deed (the “Deed”) of SA Corporate
Real Estate Trust Scheme (the “Scheme”), in terms of which:
1.1 the existing service charge arrangement in respect of the Fund will be changed from a monthly
charge based on a value of 0.4% of the aggregate market capitalisation of the Fund plus
borrowings, to a monthly charge equal to the actual operating costs incurred by the Manager in
administering the Fund as well as the scrapping of the initial charge of 5% on the value of any
new participatory interests ("units") issued (“Amendment 1”); and
1.2 the borrowing limits of the Fund, will be increased from 30% to 60% of the value of its underlying
assets (“Amendment 2”),
which amendments will be incorporated in a supplemental deed (the “Supplemental Deed”) to the
Deed.
This announcement sets out the salient details of a detailed memorandum ("the Circular") that will be
mailed to Unitholders together with a ballot form in due course to obtain Unitholder approval to
Amendment 1 and Amendment 2 (‘the Amendments”) as outlined in paragraph 4 below.
2. AMENDMENT 1
2.1 MANAGEMENT INTERNALISATION
Unitholders are referred to the cautionary announcements released on SENS on 22 February 2013,
10 April 2013, 23 May 2013, 4 July 2013, 26 August 2013 and 30 September 2013, which
communicated the Manager's intention to internalise the management of the Fund.
Unitholders are advised that the boards of the Manager, Old Mutual Property Proprietary Limited
(“OMP”) and Marriot Property Services Proprietary Limited ("MPS"), a wholly owned subsidiary of
OMP and the holder of 95% of the issued shares in the Manager ("the Parties"), have agreed the
terms of a transaction that, if implemented, would have the economic effect of internalising the
management of the Scheme (the “Proposed Transaction”) in a manner that would better align the
interests of the Scheme’s management and investors.
The Proposed Transaction, which is subject to the fulfilment or waiver of the conditions precedent
set out in clause 2.5 below ("the Conditions Precedent"), entails the amendment of the Deed to
change the basis of the Manager's fees to a cost recovery as detailed in paragraph 1.1 above.
The Parties have also concluded a Relationship Agreement ("the Relationship Agreement") which
provides (amongst other things) that the board of the Manager (the “Board”) will in future constitute
an OMP/MPS representative, the Managing Director and the Financial Director, as ex officio
directors and with a majority of non-executive directors approved by Unitholders, of which a majority
will comprise independent directors. Unitholders will have the opportunity to vote on such nominees
at the annual general meeting of Unitholders, whereafter MPS will elect such nominees to the Board.
MPS will only deviate from this arrangement in certain circumstances such as when the Manager
has failed, or it reasonably appears that the Manager will fail, to comply with the Deed or any
applicable law, or in the reasonable opinion of MPS the Manager’s actions have or are reasonably
likely to have a materially negative impact on the reputation of MPS or OMP or any member of the
group of companies to which MPS or OMP belong.
OMP is to terminate its asset management and financial services agreements with the Manager and
is to sell and transfer the business relating thereto ("the Business"), to the Manager, together with
the staff members, once the Proposed Transaction becomes unconditional. This will give the
Manager the necessary capacity to manage the Scheme and the Fund itself. The property
management agreement with OMP was not renewed in June 2013 and Broll Property Group has
been appointed to carry out the property management of the Fund.
2.2 CONSIDERATION
In terms of the Proposed Transaction, a consideration (“Consideration”) of R185 million net of VAT
will be paid by the Fund to the Manager, to be settled by existing cash resources within the Fund.
This amount equates to a 5.2x multiple of historic gross asset management fees. The intention is for
the Manager to be adequately capitalised for its further operations and for additional working and
other capital requirements of the Manager to be funded through bank finance. Provision for the
following will be retained by the Manager:
1. Associated transaction costs;
2. Appropriate tax;
3. Working capital requirements in addition to those to be funded through bank finance; and
4. Approximately R6.59 million of additional regulatory capital requirements as required in
terms of the Act (“Regulated Capital”).
The balance of the Consideration and accumulated reserves will be distributed to the shareholders of
the Manager.
The Manager will purchase the Business for the tax value of the movable assets to be transferred to
it and will assume the obligations related to the staff.
2.3 RATIONALE FOR THE PROPOSED TRANSACTION
The rationale for the Proposed Transaction is that:
- Investors tend to favour internally managed property funds over externally managed property
funds as there is perceived to be better alignment of staff and management’s interests with
Unitholders and the removal of perceived conflicts of interest between the interests of the
Manager and the Unitholders;
- The removal of the annual service charge of 0.4% of enterprise value of the Fund paid by the
Fund to the Manager and the introduction of a cost recovery based mechanism (“New Service
Charge Arrangement”), will enhance distributions to Unitholders and allow the Fund to be more
competitive in pricing new acquisitions;
- The potential increase in cost savings and the achievement of economies of scale from the
Manager employing its own staff versus paying a management fee will benefit Unitholders; and
- Unitholders will have greater say in the composition of the Board.
Furthermore, the Proposed Transaction is intended to be a first step along the road to "converting"
the Scheme and the Fund from a collective investment scheme in property regulated by the
Registrar of Collective Investment Schemes (“the Registrar”) and the Trustee, into a company Real
Estate Investment Trust ("Company REIT"), which the Manager believes will have substantial
benefits for Unitholders. The SA REIT Association, of which the Manager and Scheme are
members, has engaged the Registrar to formulate a framework within which such conversions can
be effected, as cost effectively as possible.
However, it is a critical first step in regard to the "conversion" that the New Service Charge
Arrangement be implemented and the shareholders of the Manager be compensated for this.
Unitholders are advised that post the “conversion”, the Company REIT will no longer be required to
hold the Regulated Capital, therefore the Regulated Capital will be made available for the benefit of
Unitholders. A number of provisions have been incorporated into the Relationship Agreement to
facilitate the “conversion” if and when it occurs. Unitholders will be informed as and when
appropriate of developments in this regard.
2.4 PRO FORMA FINANCIAL EFFECTS OF THE PROPOSED TRANSACTION
Although the Proposed Transaction will be earnings accretive for the Fund, it would not have had a
significant effect (as defined in the Listings Requirements) on the Fund's net asset value per unit, net
tangible asset value per unit, earnings per unit, headline earnings per unit and distribution per unit
for the six months ended 30 June 2013 had the Proposed Transaction been implemented at the
beginning of that financial period for statement of comprehensive income purposes and at the end of
that financial period for statement of financial position purposes.
2.5 CONDITIONS PRECEDENT FOR AMENDMENT 1
The implementation of Amendment 1 and payment of the Consideration is subject, inter alia, to the
following conditions precedent:
2.5.1 Approval by the Unitholders holding a majority of the total number of units held by
Unitholders, excluding the Manager and any related parties to the Manager, who participate
in the ballot process, in which ballot replies of the Unitholders holding not less than 25% of
the total number of Units in issue, have been received in writing 30 business days after the
dispatch of the Circular and ballot form to all Unitholders registered on the Record Date to
be announced;
2.5.2 Notice from the Competition Authorities that they have been informed of the Proposed
Transaction and that they have no objection thereto; and
2.5.3 Regulatory approvals including the approval by the Registrar and the Trustee to the Circular,
ballot form, ballot process and the Supplemental Deed.
2.6 CATEGORISATION OF THE PROPOSED TRANSACTION,RELATED PARTY
CONSIDERATIONS AND INDEPENDENT OPINION
The Proposed Transaction is a related party transaction for the Scheme under the Listings
Requirements. The Proposed Transaction, however will result in the percentage ratio referred to in
paragraph 9.6 of the Listing Requirements being less than 5%, and therefore the Proposed
Transaction will be defined as a small related party transaction in terms of paragraph 10.7 of the
Listing Requirements. Accordingly, the JSE has been informed in writing of the Proposed
Transaction and has been provided with written confirmation from Grant Thornton Advisory Services
Proprietary Limited, the independent adviser, that it has considered the terms and conditions of the
Proposed Transaction and is of the opinion that they are fair and reasonable to Unitholders
(“Fairness Opinion”).
The Fairness Opinion will lie for inspection at the Manager's office until the closing of the ballot.
3. AMENDMENT 2
3.1 BACKGROUND AND RATIONALE
In addition to the Proposed Transaction, the Manager proposes that the borrowing limits of the
Scheme and consequently the Fund be increased from 30% to 60% of the fair market value of the
underlying assets of the Fund, to align the Deed to the debt limits allowed by the Registrar.
The rationale for the amendment to the Fund’s existing maximum indebtedness limits is the
following:
? As an asset class, property is conducive to debt financing. The permanent nature of the physical
asset, as well as the long-term, escalating leases are ideal for long-term debt financing,
especially where the debt costs can be fixed for extended periods. Through such prudent
financing, returns to Unitholders can be significantly enhanced without incurring unnecessary
risk.
? An increased gearing ability will benefit Unitholders in that the Manager will have greater
flexibility to ensure that the Fund can obtain increased levels of funding to take advantage of
opportunities as and when they arise, which will assist in increasing the return on investments to
Unitholders. The increase in the borrowing limits will therefore provide greater flexibility to the
Manager in raising finance, improve the potential growth in distributions and yet still keep the
Fund’s gearing within prudent limits.
Unitholders are advised that the long-term strategy of the Board will be to generally maintain the
borrowing limits at a level below 40% of the underlying value of the assets of the Fund and to only
exceed this level in exceptional circumstances (which may arise from specific transactional activity)
and which are deemed by the Board to be particularly attractive, and that certain of the funding for
which can in due course be raised by issuing additional units.
The interests of the Unitholders will continue to be protected in that the Trustee will still be required
to approve all borrowings in terms of the Deed. Both the Trustee and the Manager will furthermore
remain obliged, at all times, to act in the best interests of the Unitholders.
3.2 CONDITIONS PRECEDENT TO AMENDMENT 2
The change in the borrowing limits of the Scheme and the Fund are conditional on the approvals of
Unitholders in terms of a ballot on the same basis as the ballot for the approval of Amendment 1
referred to in paragraph 2.5.1 and 2.5.3 above.
4. REGULATORY APPROVALS, FURTHER ANNOUNCEMENTS AND DOCUMENTATION
The Registrar and Trustee have indicated that they have no objection in principal either to the Proposed
Transaction or the increase in borrowing limits.
The Manager will finalise the Circular and ballot form and the Supplemental Deed with the Registrar and
Trustee and will then publish on SENS and in the press, an announcement of a Last Date to Trade and a
Record Date for Unitholders to register to participate in the ballot process. The Circular and ballot form
will then be posted within approximately a week of the Record Date, and Unitholders who were registered
as such on the Record Date will have 30 business days to respond to the ballot. The Circular will provide
detailed instructions in this regard.
The results of the ballot will be announced once the Registrar has given his formal approval to the
process and the Supplemental Deed.
5. RECOMMENDATION
The Manager (including the independent directors of the Board) recommends that Unitholders vote in
favour of the Amendments in the ballot.
6. WITHDRAWAL OF CAUTIONARY ANNOUNCEMENT
Following the release of this announcement, the cautionary announcements originally published are
hereby withdrawn and caution is no longer required to be exercised by Unitholders when dealing in their
Units.
Sandton
31 October 2013
Investment Bank to the Fund
Investec Corporate Finance (A division of Investec Specialist Bank)
Sponsor
Nedbank Capital
Attorneys to the Fund
DLA Cliffe Dekker Hofmeyr
Investment Bank to OMP
Nedbank Capital
Attorneys to OMP
Bowman Gilfillan
Date: 31/10/2013 05:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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