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SA CORPORATE REAL ESTATE FUND - The acquisition by SA Corporate of Afhco Holdings Proprietary Limited (Afhco) and cautionary announcement

Release Date: 03/03/2014 09:03
Code(s): SAC     PDF:  
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The acquisition by SA Corporate of Afhco Holdings Proprietary Limited (“Afhco”) and cautionary announcement

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




THE ACQUISITION BY SA CORPORATE OF AFHCO HOLDINGS PROPRIETARY LIMITED (“AFHCO”) AND CAUTIONARY ANNOUNCEMENT


1.   INTRODUCTION


     SA Corporate is pleased to announce the conclusion of a conditional agreement (“Sale Agreement”)
     on 3 March 2014 (“Signature Date”) whereby SA Corporate, through its wholly owned subsidiary -
     SA Retail Properties Proprietary Limited (“SA Retail”), will acquire the entire issued share capital of
     Afhco (“Afhco Shares”) from the shareholders of the Afhco Group comprising of the IDEAS
     Managed Fund, a policy product of Old Mutual Life Assurance Company (South Africa) Limited
     (50%) (“OMLACSA”), Wayne Plit (35.5%) and Renney Plit (14.5%) (the “Sellers”) (the “Proposed
     Transaction”).


2.   BACKGROUND TO AFHCO


     Afhco was founded in 1996 by Wayne Plit. Afhco’s initial strategy was to partner with property
     owners in distressed areas to refurbish existing residential buildings, increase the number of units in
     a sectional title format and finally sell units to tenants or prospective buyers.


     In 2000, Afhco acquired Castle Mansions, South African Breweries’ previous offices for a
     consideration of R800,000. Until then urban developers had merely retrofitted and condensed
     existing residential space. This was the first office to residential conversion of this scale in South
     Africa and resulted in the construction of 142 residential apartments. This was the turning point in
     Afhco’s strategy, casting a much wider net over possible residential conversion opportunities.
     In 2001, Wayne’s brother, Renney Plit joined the business and in 2006, OMLACSA purchased 50%
     of the equity of Afhco and provided a capital injection into the Afhco business, which has served as a
     major catalyst in Afhco’s growth and development track record to date.


     Today Afhco is the leader in driving the creation of improvement districts within the Johannesburg
     inner-city central business district (“JHB Inner City CBD”).


     Part of Afhco’s strategy in growing its portfolio, which has grown to over 5,000 residential
     apartments, has been and continues to be the upliftment of precincts and communities around its
     buildings..


3.   RATIONALE FOR THE PROPOSED TRANSACTION


     The Proposed Transaction offers SA Corporate the opportunity to acquire an established platform
     and experienced management team in the residential property sector. The Afhco platform is
     arguably the most attractive JHB Inner City CBD residential portfolio offering scale, quality and
     diversity. SA Corporate believes affordable housing as an asset class presents a compelling
     investment opportunity for the following reasons:

     -       differentiated opportunity;
     -       attractive contractual rental escalations compared to the commercial property sector;
     -       diversification of underlying tenants with robust non-discretionary spend;
     -       history of low vacancies due to the significant shortage of supply of product;
     -       under represented asset class in South Africa compared to other developing and developed
             markets; and
     -       sector which enjoys concessional support from governments and global FDI’s through grants,
             incentives and attractive funding terms.



4.   THE PROPOSED TRANSACTION


4.1 The Proposed Transaction involves the acquisition of the Afhco Shares, the underlying assets of
          which are comprised of:


 4.1.1     The Property Portfolio


The Afhco property portfolio (“Property Portfolio”) is located in the general improvement areas
of JHB Inner City CBD consisting of 33 buildings with an approximate value of R1.47 billion
(“Portfolio Value”) equating to a 12 month forward capitalisation rate of approximately 10%
(“Transaction Cap Rate”). The majority of the Property Portfolio consists of office buildings
which have been revamped and converted into residential apartments with a retail element of
approximately 20% (by GLA) that trades on the ground floors. The residential apartments
include a mix of studios, bachelors, 1 bedroom and 2 bedroom units ranging from 18m² to 80m².
The Property Portfolio also includes 20 461 m² of undeveloped bulk with a value of R29 million.


The profile of the tenants occupying the residential apartments are predominantly individuals
(aged 20 – 40 years) in the LSM band 6 – 8 with a gross income of between R10,000 - R15,000
per month.


The Property Portfolio is held through a combination of wholly owned (“Afhco Subsidiaries”)
and jointly owned subsidiaries (“Joint Subsidiaries”) of the Afhco Group. Approximately R542
million (consisting of 16 properties and 2,040 residential apartments) of the Property Portfolio
value is owned by the Afhco Subsidiaries. The balance of approximately R934 million (17
properties and 3,104 residential apartments) is held by the Joint Subsidiaries together with the
various co-minority shareholders (“Minority Shareholders”).


As mentioned in paragraph 3.4 below, the Proposed Transaction contemplates Afhco entering
into sale and purchase agreements (“Minority Agreements”) with Minority Shareholders to
acquire their shareholding in the Joint Subsidiaries, the extent of which shareholding is to be
acceptable to SA Corporate and the Sellers. Afhco is currently in discussions with the respective
Minority Shareholders.


 4.1.2       Property Management Business


Afhco Property Management Proprietary Limited (“Prop Manco”), a wholly owned subsidiary of
Afhco, is the contracted property manager for the Property Portfolio. The Prop Manco is staffed
with 80 full time employees who have specific expertise in the management of inner-city
properties. This expertise is focused on tenant profiling, credit vetting, rental collections and
physical management of the Property Portfolio.
4.2 Purchase Consideration


   Assuming the Proposed Transaction includes 100% of the Joint Subsidiaries through the
   successful conclusion of the Minority Agreements, the purchase consideration for the Afhco
   Shares would be approximately R439 million (“Purchase Consideration”), which is determined
   based on a Portfolio value of R1.476 billion and Afhco Group debt of R1.037 billion (“Afhco
   Group Debt”) as at the Signature Date.


   The Purchase Consideration will be subject to the following adjustments (“Purchase Price
   Adjustments”) which will be determined either during the due diligence review by SA Corporate
   (the “Due Diligence”) or at the effective date of the Proposed Transaction (“Effective Date”)
   based on the preparation of Effective Date accounts:


       -         any material defects (latent or patent) in the immovable property;
       -         any movement in the Afhco Group Debt between the Signature Date and the Effective
                 Date; and
       -         the net working capital of the Afhco Group at the Effective Date.


    In addition to the above Purchase Price Adjustments, the Purchase Consideration will also be
    subject to an “earn out” based on the actual net property income (“Actual Income”) generated
    for the 12 month period subsequent to the Effective Date. To the extent the Actual Income is
    less than the forecast property income (“Forecast Income”) which was used as the basis to
    determine the Purchase Consideration, the Sellers shall pay an amount equal to the shortfall
    between the Actual Income and the Forecast Income capitalised at the Transaction Cap Rate
    escalated at SA Corporate’s weighted average cost of capital for the period of the “earn out”.
    The adjustment is subject to a maximum purchase price adjustment of 12.5% of the Portfolio
    Value equating to approximately R185 million. The earn out does not apply if the Actual Income
    exceeds the Forecast Income. The full benefit of any surplus will be for the benefit of SA
    Corporate.


    The Effective Date of the Proposed Transaction will be the first day of the month following the
    month in which the last of the suspensive conditions (as detailed in paragraph 3.4) have been
    fulfilled.

    To the extent that Afhco is unsuccessful in securing all of the respective Minority Shareholders,
    and SA Corporate and the Sellers elect to continue with the Proposed Transaction, the
    Purchase Consideration will be reduced accordingly.
4.3 Settlement of the Purchase Consideration


   The Purchase Consideration will be funded by SA Corporate as follows:

        -      30% through the issue of new SA Corporate participatory interests (“SA Corporate
               PI’s”) at an issue price of R3.80 per SA Corporate unit equating to approximately
               R132 million. The SA Corporate PI’s will be issued ex the entitlement to any
               distribution prior to the Effective Date; and
        -      70% from SA Corporate debt facilities amounting to approximately R308 million.


   In addition to the settlement of the Purchase Consideration, SA Corporate intends to substantially
   refinance the Afhco Group Debt through new SA Corporate debt facilities.


4.4 Suspensive conditions


The Proposed Transaction remains subject to the fulfillment of inter alia the following conditions:


    -       SA Corporate being satisfied with the results of the Due Diligence
    -       Approval of the SA Corporate Investment Committee, Board and Trustee approval;
    -       raising of the necessary debt funding on terms and conditions acceptable to SA
            Corporate;
    -       Approval of SA Corporate unitholders (“Unitholders”);
    -       Approval of the relevant regulatory authorities including, the Competition Authorities; and
    -       The conclusion of a sufficient number of Minority Agreements, to the satisfaction of SA
            Corporate and the Sellers, and such agreements becoming unconditional in accordance
            with their terms save for any condition requiring the Sale Agreement to be unconditional.



4.5 Development and Relationship agreement with Wayne and Renney Plit (“Plit Brothers”)


    SA Corporate has also entered into an agreement with Wayne and Renney Plit to retain the core
    competencies and skills of the Plit Brothers to ensure the seamless integration of Afhco into SA
    Corporate and to develop the bulk included in the Property Portfolio and explore further
    development opportunities. The Plit Brothers have been instrumental in the development of the
    JHB Inner City CBD improvement districts. SA Corporate believes that with its access to capital,
    the excessive demand for affordable inner city residential apartments and the Plit Brothers
    expertise, SA Corporate will be able pursue attractive opportunities in growing the Afhco
    platform on an accretive basis.


5.   CAUTIONARY AND FINANCIAL EFFECTS


     The Proposed Transaction is still subject to the completion of a Due Diligence to the satisfaction of
     SA Corporate. SA Corporate intends to announce the financial effects for the transaction subsequent
     to the completion of the Due Diligence.


     Accordingly, Unitholders are advised to exercise caution when dealing in SA Corporate’s securities
     until the Due Diligence is completed and a further announcement is made.


6.   SA CORPORATE CIRCULAR, UNITHOLDER APPROVAL AND FURTHER ANNOUNCEMENT,


     The SA Corporate Trust Deed requires Unitholders’ approval for the new issue of the SA Corporate
     PI’s.


     A further announcement will be made by SA Corporate upon completion of the Due Diligence, which
     will include further details of the Proposed Transaction, details of the Property Portfolio, financial
     effects and indicative timing for the posting of a circular to Unitholders and the general meeting
     thereof.


7.   CATEGORISATION OF THE PROPOSED TRANSACTION


     In terms of the Listings Requirements of the JSE Limited, the Proposed Transaction is a category 2
     transaction for SA Corporate and as such Unitholder approval is not required for the approval of the
     implementation of the Proposed Transaction (albeit for the approval required in terms of paragraph
     3.4 above).



Johannesburg

3 March 2014

Investment Bank and Advisor

Investec Bank Limited

Legal Advisors
Webber Wentzel

Sponsor

Nedbank Capital

Legal Advisors to the Sellers

DLA Cliffe Dekker Hofmeyr

Date: 03/03/2014 09:03:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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