GEMGROW PROPERTIES LIMITED - Acquisition of an interest in a company owning 26 properties and voluntary trading update

Release Date: 27/08/2018 15:00
Code(s): GPA GPB
 
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Acquisition of an interest in a company owning 26 properties and voluntary trading update

GEMGROW PROPERTIES LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2007/032604/06)
JSE share code: GPA ISIN: ZAE000223269
JSE share code: GPB ISIN: ZAE000223277
(Granted REIT status with the JSE)
("Gemgrow" or "the company")


ACQUISITION OF AN INTEREST IN A COMPANY OWNING 26 PROPERTIES AND VOLUNTARY TRADING UPDATE


1.    Introduction

      The board of directors of Gemgrow is pleased to announce that Gemgrow and Cumulative
      Properties Limited ("Cumulative Properties"), a wholly-owned subsidiary of Gemgrow, have,
      subject to the fulfilment of certain conditions precedent, entered into a subscription agreement
      ("subscription agreement") with entities in the Moolman Group of companies, being Luvon
      Investments Proprietary Limited ("Luvon"), East and West Investments Proprietary Limited
      ("East and West"), Louis Trichardt Bousentrum Proprietary Limited ("Louis Trichardt") and
      Moolgem Proprietary Limited ("Moolgem") in terms of which Cumulative Properties will
      subscribe for 31 010 A ordinary shares in Moolgem ("subscription shares"), valued at
      R628 565 200 ("the transaction"). Post the implementation of the transaction, Cumulative
      Properties will own 75.62% of the total issued share capital in Moolgem by virtue of its holding
      of the subscription shares which subscription shares will have the rights and preferences as set
      out in paragraphs 3.5 to 3.7 below giving Cumulative Properties direct control of Moolgem,
      which will own the 26 properties detailed in paragraph 5 below, and the rental enterprises
      conducted thereon ("properties"). Luvon and East and West will constitute the other co-
      shareholders in Moolgem.

2.    Rationale

      The transaction is in line with the company's stated objective of growing the value of its portfolio
      of high-yielding, niche properties by concluding transactions that are earnings-enhancing.

3.    Terms of the transaction

      3.1.    The effective date of the transaction is 1 November 2018.

      3.2.    The consideration payable by Cumulative Properties for the subscription shares will be
              equal to 95% of the agreed value of the properties as at the effective date ("subscription
              consideration"). The subscription consideration will be settled as follows:

              3.2.1.        by way of the allotment and issue by Gemgrow of 10 264 434 fully paid
                            up Gemgrow A shares at an issue price of R9.74 to Moolgem ("Gemgrow
                            consideration shares"); and

              3.2.2.        the balance in the amount of R528 565 200, in cash.

      3.3.    Cumulative Properties may, at its election, pay the entire subscription consideration in
              cash, in which case, the Gemgrow consideration shares will not be issued.

      3.4.    Upon ultimate completion of the transaction, Cumulative Properties will own 100% of
              the issued A ordinary shares of Moolgem, with 100% of the issued ordinary shares in
              Moolgem held by Luvon and East and West.

      3.5.    The A ordinary shares and ordinary shares rank pari passu in all respects, save for their
              entitlement to distributions and upon liquidation which shall entitle the shareholders
              thereof to 95% of the distributions and a preferential dividend in the circumstances
              contemplated in paragraph 3.6 below.

      3.6.    In the event that there is a net property income shortfall for the 12-month period from
              the effective date ("preferential period") against the projected net property income for
              the preferential period resulting in the distribution actually made in respect of the
              A ordinary shares being less than 95% of R76 418 482 (being R72 597 557)
              ("A distribution shortfall amount") then Luvon and East and West will pay to
              Cumulative Properties an amount equal to the A distribution shortfall amount limited to
              95% of R76 418 482.

      3.7.    Upon liquidation, 95% of the net assets will be distributed to the A ordinary shareholders
              and the remainder will be distributed to the ordinary shareholders.

      3.8.    The transaction will be implemented as follows:

              3.8.1.       Pursuant to the conclusion and implementation of various agreements
                           ("various transaction agreements"), Moolgem will acquire the properties
                           from the vendors, in consideration for which Moolgem will issue 10 000
                           ordinary shares ("existing shares") to the vendors.

              3.8.2.       Moolgem will declare and capitalise a distribution (which will remain
                           outstanding) to the vendors, the sole shareholders of Moolgem, in respect
                           of the existing shares held by the vendors, in an amount equal to the
                           subscription consideration ("distribution loans").

              3.8.3.       Cumulative Properties will subscribe for the subscription shares for the
                           subscription consideration.

              3.8.4.       The subscription consideration and the distribution loans will be increased
                           by an amount equal to R6 367 726 compounded monthly at an interest rate
                           of 5.5% per month calculated from the effective date up to 3 days before
                           the date on which the subscription shares are issued and allotted to
                           Cumulative Properties ("applicable date"). In the event that the
                           unconditional date, being the date on which the subscription agreement
                           becomes unconditional and of full force and effect, occurs after
                           1 December 2018, the subscription consideration and the distribution loan
                           will be escalated at a rate of 6% per annum compounded annually from
                           1 January 2019, until the applicable date.

              3.8.5.       Upon receipt, Moolgem will use the subscription consideration to settle the
                           distribution loans owing to the vendors in full.

      3.9.    With respect to the Gemgrow consideration shares, the vendors will refund Gemgrow a
              pro rata portion of any distributions received in respect of the period from the
              commencement of the relevant distribution period of Gemgrow until the date of receipt
              by the vendors of the Gemgrow consideration shares.

      3.10.   Until such time as the subscription shares are issued to Cumulative Properties, the
              existing shares, the Gemgrow consideration shares and the distribution loans will be
              ceded to Cumulative Properties as security for the due and proper performance of the
              obligations of Luvon, East and West and Louis Trichardt in terms of the subscription
              agreement.

      3.11.   The subscription agreement provides for undertakings, warranties and indemnities which
              are normal for transactions of this nature.

4.    CONDITIONS PRECEDENT

      The transaction is subject to the fulfilment or waiver, as the case may be, of the following
      conditions precedent:

      4.1.    by not later than 31 August 2018, Gemgrow has, to the extent required, obtained the
              requisite regulatory approvals for the implementation of the transaction;

      4.2.    by not later than 3 September 2018, the boards of directors of the companies that are
              party to the subscription agreement have authorised the entering into of the subscription
              agreement and all other agreements and transactions contemplated therein;

      4.3.    by not later than 3 September 2018, –

              4.3.1.       the board of directors of Moolgem has resolved (i) to issue the subscription
                           shares for the subscription consideration and (ii) that the subscription
                           consideration constitutes adequate consideration for the issue of the
                           subscription shares, as contemplated in section 40(1)(a) of the Companies
                           Act, No. 71 of 2008 ("Companies Act"); and

              4.3.2.       the shareholders of Moolgem have, to the extent required, adopted a
                           resolution as contemplated in section 41(3) of the Companies Act,
                           authorising the issue of the subscription shares;

      4.4.    by not later than 3 September 2018, each of the various transaction agreements have been
              concluded in the agreed form;

      4.5.    by not later than 1 October 2018, Cumulative Properties has informed East and West,
              Louis Trichardt and Luvon, in writing, that it has secured such equity funding and/or
              debt funding as it may require in order to fund the payment by Cumulative Properties of
              that portion of the subscription consideration which is payable in cash;

      4.6.    by not later than 1 October 2018, any third-party consents or waivers, to the extent
              required, have been provided in writing;

      4.7.    by not later than 1 October 2018, (and only if applicable) the Takeover Regulation Panel
              has granted an exemption in terms of the provisions of section 119(6) of the Companies
              Act from compliance with Parts B and C of Chapter 5 of the Companies Act and the
              Takeover Regulations of the Companies Act in respect of the subscription and the
              transactions contemplated in terms of the subscription agreement;

      4.8.    by not later than 1 October 2018, certain transaction agreements specifically detailed in
              the subscription agreement have become unconditional and of full force and effect in
              accordance with its terms or have been implemented in accordance with its terms, save
              for any condition that the subscription agreement must become unconditional;

      4.9.    by not later than 14 days after various transaction agreements have become
              unconditional, the shareholders of Moolgem have passed such special resolution/s as
              may be necessary to adopt the new memorandum of incorporation of Moolgem;

      4.10.   by not later than 3 December 2018, the registration of transfer of ownership of such
              number of properties that have a value of not less than R530 000 000 into the name of
              Moolgem has taken place; and

      4.11.   by no later than 3 December 2018, the subscription and various transaction agreements
              have been approved by the Competition Authorities in terms of the Competition Act, No
              89 of 1998.

5.    PROPERTY SPECIFIC INFORMATION

      Details of the properties, including the property name, geographical location, sector, GLA,
      weighted average rental per square metre, the agreed value and the valuation, are set out in the
      table below:

                                                                Weighted
                                                                 average                   Valuation as
                                                                  rental         Agreed              at
             Property name and                          GLA       per m2          value     1 July 2018
      No     geographical location      Sector         (m2)       (R/m2)            (R)             (R)
      Property owned by Orion

      1      Jane Furse Crossing,       Retail       10 766       150.04    153 200 000     158 200 000
             Limpopo

      Property owned by Luvon

      2      Game Centre,               Retail        7 934       155.32    122 100 000     122 100 000
             Thohoyandou, Limpopo

      Properties owned by East and West

      3      Trador, Limpopo            Industrial   15 001        36.99     43 200 000      45 100 000
      4      Thohoyandou CBD,           Retail        2 723       150.14     38 990 000      39 500 000
             Limpopo
      5      Thompsons Building,        Retail        3 727        97.72     32 800 000      31 500 000
             Makhado, Limpopo
      6      20 Trichardt, Makhado,     Retail        2 017       152.91     27 900 000      28 900 000
             Limpopo
      7      FNB Building, Limpopo      Retail        2 370       128.31     27 700 000      31 400 000
      8      68 Hans van Rensburg,      Retail/       2 697        93.34     17 000 000      23 500 000
             Polokwane, Limpopo         Office
      9      70 Landdros Mare,          Retail        2 232        87.73     15 000 000      20 500 000
             Polokwane, Limpopo
      10     79 Market, Polokwane,      Retail        1 322       146.29     18 200 000      18 800 000
             Limpopo
      11     The Crossing,              Retail        1 393       140.30     18 000 000      18 720 000
             Polokwane
      12     Geen & Richards,           Retail        1 776       103.21     16 626 000      16 600 000
             Tzaneen, Limpopo
      13     31 Nikkel, Polokwane,      Industrial    2 100        53.80      8 500 000       9 800 000
             Limpopo
      14     79 Hans van Rensburg,      Offices         875       109.07      8 400 000       8 400 000
             Polokwane, Limpopo
      15     41 Emerald, Polokwane,     Industrial    1 362        63.11      7 200 000       7 500 000
             Limpopo
                                                                Weighted
                                                                 average                   Valuation as
                                                                  rental         Agreed              at
             Property name and                          GLA       per m2          value     1 July 2018
      No     geographical location      Sector         (m2)       (R/m2)            (R)             (R)
      16     85 Kruger, Makhado,        Retail          715       109.19      6 400 000       6 600 000
             Limpopo
      17     99 Agatha, Tzaneen,        Retail        1 417        60.59      5 900 000       7 700 000
             Limpopo
      18     71 Biccard, Polokwane,     Retail          877        79.02      5 900 000       5 950 000
             Limpopo
      19     54 Jones, Kimberly,        Retail          469       129.15      5 600 000       5 500 000
             Northern Cape
      20     65 Silikon, Polokwane,     Industrial    1 040        53.08      4 500 000       4 500 000
             Limpopo
      21     5 Sapphire, Polokwane      Industrial    1 840        32.85      3 800 000       4 090 000
             Limpopo

      Properties owned by Louis Trichardt

      22     18 Thabo Mbeki,            Retail/       4 288       113.49     34 900 000      39 980 000
             Polokwane, Limpopo         Offices
      23     55 Voortrekker,            Retail        1 408       123.32     21 800 000      21 000 000
             Mokopane, Limpopo
      24     54 Schoeman,               Retail/       2 001        77.92     11 400 000      14 560 000
             Polokwane, Limpopo         Offices
      25     54 Agatha, Tzaneen,        Retail        1 405        72.34      7 600 000       7 830 000
             Limpopo
      26     908 Hoofweg, Marble        Retail        2 027        27.56      3 000 000       6 390 000
             Hall, Limpopo

      Total                                          75 782        98.54    665 616 000     704 620 000

     Notes:
     The properties were valued as at 1 July 2018, by Theuns Behrens and Johan Liebenberg of Real
     Insight Proprietary Limited, who are independent professional valuers, registered in accordance
     with the Property Valuers Profession Act, No. 47 of 2000.

6.   FINANCIAL INFORMATION

     Set out below is the forecast for the properties (the "forecast"), for the 11 months ending
     30 September 2019 and the year ending 30 September 2020 (the "forecast period").

     The forecast has been prepared on the assumption that the transaction will be implemented on
     1 November 2018 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
     and in accordance with the Listings Requirements.

                                            Forecast for the 11          Forecast for the year
                                                  months ending                         ending
                                              30 September 2019              30 September 2020
                                                            (R)                            (R)
   Revenue                                           96 992 472                    112 411 663
   Property operating expenses                     (27 090 649)                   (30 870 313)
   Net operating income                              69 901 823                     81 541 350
   Finance costs                                   (49 663 105)                   (54 177 933)
   Net profit after tax                              20 238 718                     27 363 417
   Net profit attributable to:
   Non-controlling interests                          3 495 091                      4 077 068
   Equity holders of Gemgrow                         16 743 627                     23 286 349

Notes:
The forecast incorporates the following material assumptions in respect of revenue and expenses:
1.    The forecast is based on information derived from the management accounts, budgets, and
      rental contracts provided by the vendors.
2.    Rental revenue is derived from the forecasts provided to the company by the vendors.
3.    Contracted revenue is based on existing lease agreements including stipulated increases,
      all of which are valid and enforceable.
4.    Leases expiring during the forecast period have been forecast on a lease-by-lease basis and
      have been assumed to renew at current market rates unless the lessee has indicated its
      intention to terminate the lease. For the 11 months ending 30 September 2019, 85% of
      rental revenue is contracted, 12% is near contracted and 3% uncontracted. For the year
      ending 30 September 2020, 69% of rental revenue is contracted rental, 27% is near
      contracted and 4% is uncontracted.
5.    Property operating expenditure has been forecast by the property manager on a line-by-
      line basis for each property based on management's review of historical expenditure,
      where available, and discussion with the property manager.
6     Transaction costs of R7 000 000 are incurred in relation to loan initiation costs, property
      transfer and bond registration costs, regulatory and advisory costs. Acquisition related
      costs are capitalised to investment property in accordance with IAS 40 Investment
      Property, while loan initiation costs are capitalised and amortised over the period of the
      loan.
7.    A finance cost has been recognised for additional interest-bearing liabilities raised of
      R535 565 200 (R528 565 200 being the cash portion of the subscription consideration and
      R7 000 000 of transaction costs), based on the current cost of debt of the company of
      10.25%.
8.    The balance of the subscription consideration is settled by issuing 10 264 434 Gemgrow
      A shares at an issue price of R9.74. The dividend on the 10 264 434 Gemgrow A shares is
      estimated at R10 590 000 in respect of the 11 months ending 30 September 2019 and
      R12 110 000 in respect of the year ending 30 September 2020. This is based on the
      Gemgrow A share dividend of 101.87c for the year ending 30 September 2017, assuming
      escalations of 5% per annum.
9.    No fair value adjustment is assumed in the forecast period.
10.   There will be no unforeseen economic factors that will affect the lessee's ability to meet
      their commitments in terms of existing lease agreements.
11.   Forecast net property income of the A ordinary shares in respect of the 12 months ending
      31 October 2019, being the preferential period, approximates R72 597 557 and it is
      assumed that the A distribution shortfall amount equates to zero.

7.    CATEGORISATION OF THE TRANSACTION

      The transaction is classified as a category 2 transaction in terms of the JSE Listings Requirements
      and accordingly is not subject to the approval of Gemgrow's shareholders.

8.    VOLUNTARY TRADING UPDATE

      The company reaffirms its guidance as contained in its results announcement released on
      15 November 2017, namely that it is positioned to deliver on its guidance of 7% to 9% growth
      on its B shares for the year ended 30 September 2018 while the A shares will grow at the lower
      of 5% and the consumer price index. The assumptions on which this guidance has been based
      remain as set out in the results announcement released on 15 November 2017.

27 August 2018


Corporate advisor and sponsor
Java Capital

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