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Acquisition of DHL distribution centre in Reading, England
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 DHL DISTRIBUTION CENTRE IN READING, ENGLAND
1. INTRODUCTION
Shareholders are advised that Equites, through its Isle of Man based wholly-owned subsidiary, Equites International
Limited (“Equites International”), has concluded the following agreements:
- an agreement of sale of land with Exton Estates Three Limited (“the seller”), in terms of which Equites
International will acquire 7.96 acres of vacant land (“the property”) for £9 722 526 (ZAR 175 005 468)
(“purchase consideration”) (“sale agreement”); and
- a development and funding agreement with Exton Estates Limited (“the developer”) (“development funding
agreement” or “DFA”), in terms of which Equites International will fund the development of a 9 325 square
metre ‘last mile’ distribution warehouse to be let to DHL International (UK) Limited (“DHL”) for an amount up
to £15 909 588 (ZAR 286 372 584) (“total development costs”),
(“the transaction”).
2. RATIONALE
The transaction is consistent with Equites’ stated growth and investment strategy of:
- diversification into the United Kingdom (“UK”) in order 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;
- focusing on premium “big-box” 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;
- forging strategic partnerships with reputable UK developers with the view to funding selected development
opportunities which meet its investment criteria; and
- building a high quality logistics portfolio, consisting of properties with predictable rental growth profiles, that
promotes capital growth and increasing income returns over the medium to long-term.
Equites views the property and development as evidencing the following sound investment fundamentals:
- the property is located in Reading which is a major administrative, commercial and industrial town in the
Thames valley in close proximity to London;
- this 9 325 square metres modern logistics facility will provide the tenant with a newly constructed, high
specification, steel portal frame distribution warehouse with 6 dock-level loading doors, 4 on-grade and 2 double
height dock-level doors, a reinforced concrete slab providing a maximum 50 kilo newton per square metre floor
loading and two storey offices;
- DHL, the UK subsidiary of the German logistic company Deutsche Post AG, and the seller have concluded a
15 year fully repairing and insuring lease (“DHL lease”). DHL is a leading global brand in the transport and
logistics industry and the group offers an unrivalled portfolio of logistics services ranging from national and
international parcel delivery, e-commerce shipping and fulfilment solutions, international express, road, air and
ocean transport to industrial supply chain management; and
- the DHL lease will be subject to upward only rental reviews in years 5 and 10 linked to the open market value.
Independent expert advice has been that the current estimated rental value for the distribution warehouse is
higher than the base rent of £11.25 (approximately R202.50) per square foot as per the DHL lease, which
confirms the rental growth profile of the facility.
The newly developed logistics facility will therefore add to the quality, defensiveness and income predictability of
Equites.
1
3. DETAILS OF THE PROPERTY
The total consideration payable (the purchase price plus total development costs) of £25 632 114 (ZAR 461 378 052)
(“total consideration payable”) is based on the first year’s rental income of £1 129 163 (ZAR 20 324 934) and
constitutes an initial yield of 4,41%, reflecting the impeccable property fundamentals of the asset.
Weighted
Gross Weighted average rental
Lettable average rental per square Total
Property Geographical Area per square foot metre (per consideration
name location Sector (m2 ) (per annum) annum) payable
DHL Island Road Logistics 9325 £11.25 £121.09 £25 632 114
West, (ZAR 202.50) (ZAR 2 179.62) (ZAR 461 378 052)
Reading, RE2
0RP England
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
4.1. The transaction is subject to 1) the seller obtaining the requisite planning permission in respect of the
development and the expiry of the six week judicial review period during which interested and affected
parties may raise objections and 2) the granting of a long leasehold interest in the property from
Reading Borough Council to the seller. The property will be held by way of a long leasehold from
Reading Borough Council. The term of the lease is until 24 July 2264, with an option to renew the lease
for a further 60 years at no extra cost. The rental is a peppercorn (being a notional sum).
4.2. The effective date of the transaction will be 5 days after the fulfilment of the last condition precedent
which is expected to be during December 2017, on which date the property (and all risk and benefits in
respect of the property) will transfer from the seller to Equites International.
4.3. On 26 October 2017, Equites International paid a deposit in respect of the purchase consideration for
the property in the amount of £425 000, with the balance of the purchase consideration being due and
payable against transfer.
4.4. The development funding agreement provides that the developer will be responsible for delivering the
developed distribution warehouse (as defined in the DHL lease) and associated infrastructure against
the payment of the total development costs in accordance with the agreed timetable in order to achieve
practical completion (“PC”).
4.5. A full suite of fully assignable warranties will be provided to Equites International by the construction
and professional team.
4.6. Equites International will appoint its own development monitoring surveyor to oversee and represent
Equites International during the development of the facility, the cost of which will form part of the total
development costs.
4.7. The developer will submit monthly development cost invoices, with the building contract payments to
be certified by the principal agent, to Equites International for payment. Any such invoices will not
include the agreed retention amounts and any profit due to the developer, which amounts will only be
payable after PC, save for a further retention amount which will be withheld at PC until the satisfactory
sign off of any snagging items at the end of the defects period.
4.8. In the event that the developer defaults on its obligations under the DFA or suffers an “event of
insolvency” (as defined in the DHL lease) Equites will have the right to take over and complete the
development without the obligation to make any further payments to the developer.
5. FINANCIAL INFORMATION
Set out below is the forecast for the transaction (“the forecast”) for the two months ending 28 February 2019 and
year ending 29 February 2020 (“the forecast period”).
The forecast has been prepared on the assumption that the development will be completed, and rental income in
terms of the DHL lease received, from 1 January 2019 and on the basis that the forecast includes forecast results for
the duration of the forecast period.
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.
Forecast for the Forecast for the
2 months ending year ending
28 February 2019 29 February
ZAR 2020
ZAR
Revenue (excluding straight lining) 3 285 399 20 324 925
Net property income/net operating profit 3 285 399 20 324 925
Less: finance costs -2 237 368 -13 841 342
Net operating profit after tax 1 048 031 6 483 583
Profit available for distribution 1 048 031 6 483 583
The forecast incorporates the following material assumptions in respect of revenue and expenses:
1. The forecast has been prepared in £ and translated at an exchange rate of ZAR18/£.
2. Revenue comprises contracted rental income based on the terms of the DHL lease, which is assumed to
be valid and enforceable. No rental escalations are provided for during the forecast period. The effects
of straight lining rental income is not material and no adjustment has been made.
3. The DHL lease is a fully repairing and insuring lease and no property operating expenses are accounted
for.
4. The property and asset management functions will be performed internally.
5. Initially, the transaction will be financed from available cash resources in South Africa which will be
hedged through a currency derivative. The intention is to subsequently refinance up to 50% with UK
debt. The all-in fixed cost of funding for both sources of funding has been estimated at 3%.
6. Borrowing costs incurred are directly attributable to the acquisition of the property and development
and are capitalised to the cost of the asset until such time as it is substantially ready for its intended use,
which is assumed to be 1 January 2019. The transaction therefore has no effect on the statement of
comprehensive income prior to 1 January 2019.
7. No fair value adjustment is recognised.
8. There will be no unforeseen economic factors that will affect the tenant's ability to meet its commitment
in terms of the DHL 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.
27 October 2017
Corporate advisor and sponsor to Equites
Java Capital
Date: 27/10/2017 10:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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