STOR-AGE PROPERTY REIT LIMITED - Acquisition of Managed Portfolio

Release Date: 10/09/2018 11:35
Code(s): SSS
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Acquisition of Managed Portfolio

Stor-Age Property REIT Limited
Incorporated in the Republic of South Africa

Registration number 2015/168454/06
Share code: SSS ISIN ZAE000208963
(Approved as a REIT by the JSE)

(“Stor-Age” or the “Company”)



  The board of directors of Stor-Age (the “Board”) is pleased to announce that Stor-Age has entered
  into sales of shares agreements for the acquisition of 100% of the issued share capital of both
  Roeland Street Investments 2 (RF) Proprietary Limited (“RSI 2”) and Roeland Street Investments 3
  (RF) Proprietary Limited (“RSI 3”) (collectively, the “Acquisition”) for an aggregate purchase
  consideration of R58.0 million (the “Purchase Consideration”) as follows:

   Entity          Sellers                                                                    Purchase

   RSI 2           Acucap Investments Proprietary Limited (“Acucap”) (being a            R43.5 million
                   wholly owned subsidiary of Growthpoint Properties Limited),
                   Stor-Age Property Holdings Proprietary Limited (“SPH”), and
                   The Fairstore Trust (collectively the “RSI 2 Sellers”)

   RSI 3           Acucap and SPH (collectively the “RSI 3 Sellers”)                      R14.5 million

   Total                                                                                  R58.0 million

  RSI 2 and RSI 3 collectively own 12 purpose-built self storage properties located in Cape Town,
  Johannesburg, Durban, Port Elizabeth and Pretoria which are currently operated and managed by
  Stor-Age (the “Managed Portfolio”).


  Stor-Age listed on the JSE in November 2015. The objective of the founders and promoters at the
  time of the listing was to bring to market a highly specialised, low-risk, income paying self storage

  The development of new self storage properties is subject to both development risk and lease-up
  risk. The lease-up risk in the self storage sector is the result of no pre-letting of space prior to
  completion of a development. Once a new self storage property is developed and ready to start
  trading, the period of time to reach a stabilised mature occupancy is significant with lead times
  ranging from three to five years. In the short to medium term, properties in the lease-up phase would
  have a dilutionary impact on distributions.

  In preparation for the listing, eight properties which were still in the lease-up phase with an average
  portfolio occupancy of approximately 40%, were transferred to RSI 2. On listing, these properties
  had not yet achieved occupancy levels which would have met Stor-Age’s objective of delivering an
  attractive, stable income return to shareholders. A further three properties were developed in RSI 2
  in 2016 and another one property was developed in RSI 3 in 2017. The properties in RSI 2 and RSI
  3 were both branded and managed as Stor-Age properties. Stor-Age also had a pre-emptive right
  to acquire the properties from both RSI 2 and RSI 3.

  The Managed Portfolio comprises –

      -   gross lettable area (“GLA”) of c. 86 300m², increasing to c. 88 000m² on a fully fitted-out
      -   an aggregated fair value of R1.12 billion (based on the Effective Date as set out below);
      -   current occupancy of 73% on a full fitted-out basis; and
      -   an average rental rate of R103/m²

  The Acquisition is in line with Stor-Age’s stated intention of acquiring the Managed Portfolio and its
  strategy of further consolidating its market leading position in the South African market.

  Post conclusion of the Acquisition, the value of Stor-Age’s investment property portfolio will increase
  to approximately R5.0 billion with a c. 70:30 geographical percentage split, by value, between South
  Africa and the United Kingdom. The GLA in the South African portfolio will increase to 353 000m²
  with an overall occupancy level of 83% and an average rental rate of R95/m².


  3.1 The effective date of the Acquisition will be the fifth business day after the date on which the
      conditions precedent, as set out in paragraph 4 below, are fulfilled or waived, as the case may
      be, which is expected to occur on or about 1 October 2018 (the “Effective Date”).

  3.2 The Acquisition constitutes a single indivisible transaction.

  3.3 The RSI 2 Sellers and RSI 3 Sellers will, in aggregate, pay an upfront rental amount of
      R44.5 million to be held in an escrow account (“Rental Escrow Amount”) on the Effective
      Date. For a period of 36 months post the Effective Date (“Rental Escrow Period”), with the first
      period ending 31 March 2019 and thereafter for every six month period, Stor-Age shall be
      entitled to an amount calculated as the difference between the agreed lease rental, as set out
      in the sales of shares agreements, and the actual rental received in respect of the Acquisition,
      subject to a maximum aggregate amount of the Rental Escrow Amount.

  3.4 Any balance of the Rental Escrow Amount that remains in escrow after the expiry of the Rental
      Escrow Period shall be paid to the RSI 2 Sellers and the RSI 3 Sellers, pro rata to their
      respective contributions.

  3.5 The Purchase Consideration is based on the estimated net asset value of RSI 2 and RSI 3 at
      the Effective Date (which includes, inter alia, investment property of approximately R1.12 billion,
      debt funding of approximately R1.07 billion and the net present value of the Rental Escrow

  3.6 The Purchase Consideration will be settled in cash, being funded from Stor-Age’s existing debt
      facilities on the Effective Date. Stor-Age will also consider refinancing all, or a part there, of the
      existing debt funding of RSI 2 and RSI 3 from Stor-Age’s existing debt facilities and / or through
      the issue of new equity capital should market conditions and timing be favourable.

  3.7 The RSI 2 Sellers and RSI 3 Sellers have provided warranties and indemnities to Stor-Age that
      are standard for a transaction of this nature.

  3.8 In accordance with paragraph 10.21 to Schedule 10 of the JSE Listings Requirements, Stor-
      Age will ensure that no provisions contained in the Memorandum of Incorporation of either
      RSI 2 or RSI 3 will frustrate the Company in any way from compliance with its obligations in
      terms of the JSE Listings Requirements.


  The Acquisition remains subject to the fulfilment or waiver, as the case may be, of the following
  conditions by no later than 30 September 2018:

  4.1 the RSI 2 Sellers and RSI 3 Sellers obtaining all necessary approvals and consents as may be
      required, including but not limited to the approval of the board of directors and trustees, as the
      case may be;

  4.2 the RSI 2 Sellers and RSI 3 Sellers having been released from the existing guarantees and
      sureties provided in respect of the RSI 2 and RSI 3 debt funding facilities; and

  4.3 Stor-Age obtaining approval from the Competition Authorities.


  Details of the Managed Portfolio are set out in the tables below:

   RSI 2

   Property        Physical address                                       GLA      Weighted     Valuation at
   name                                                                   (m²)      average       31 March
                                                                                  rental rate          2018
                                                                                      (R/m²)     (R million)

   Berea           23 Calder Road, Berea, Durban                          8 160         98.6           90.0

   Brooklyn        Corner Jan Shoba and Justice Mahomed, Pretoria         7 450        116.0           89.3

   Claremont       Corner of Main Road and Brooke Street,                 8 214        147.4          154.0
                   Claremont, Cape Town
   Edenvale        60 Civin Drive, Germiston, Johannesburg                8 637        119.0          121.0

   Irene           Corner of 24th Street and 40th Ave, Irene, Pretoria    5 033         53.0           31.0

   Mooikloof       738 Blesbok Street, Pretoria East                      5 525         62.3           36.0

   Mount           33 Flanders Drive, Blackburn, Durban                   8 947        104.2          105.1

   Silver Lakes    Six Fountains Boulevard, off Solomon Mahlangu          8 687         91.6           89.2
                   Drive, Pretoria

   Somerset        Corner Forsyth Road and De Beers Avenue,               5 507        103.8           47.0
   West            Somerset West, Cape Town

   Sunninghill     4 Kikuyu Road, Sunninghill, Johannesburg               7 816        122.2          114.5

   Westering       85 Warbler Road, Westering, Port Elizabeth             6 826         78.3           58.2

   Total                                                                 80 802        102.4          935.3
   RSI 3

   Property        Physical address                                        GLA     Weighted     Valuation at
   name                                                                    (m²)     average       31 March
                                                                                  rental rate          2018
                                                                                      (R/m²)     (R million)

   Randburg        225 Braam Fisher Drive, Randburg, Johannesburg         7 214       110.00            93.2

  1.   The GLA reflected in the above tables is based on the fully fitted-out GLA of 88 016m² for RSI
       2 and RSI 3. The current fitted-out GLA of RSI 2 and RSI 3 is 86 294m². The remaining GLA of
       1 722m² will be fitted out once pre-determined occupancy hurdles have been achieved at the
       relevant properties.

  2.   All properties comprising the Managed Portfolio are classified as self storage and are held on
       a freehold basis with the exception of the Somerset West property, which is a long leasehold
       property with 20 years remaining on the lease.

  3.   All properties comprising the Managed Portfolio were independently valued by Mills Fitchet
       Magnus Penny Proprietary Limited (the “Independent Property Valuer”) as at 31 March 2018
       (the “Independent Property Valuation”), who are registered as professional valuers in terms
       of the Property Valuers Profession Act, No 47 of 2000. The valuation methodology adopted for
       the properties comprising the Managed Portfolio is consistent with the methodology used for
       the valuation of Stor-Age’s properties as at 31 March 2018. As Stor-Age is acquiring all of the
       issued share capital of both RSI 2 and RSI 3, no purchase price per property can be ascribed.

  4.   The Board (excluding the Related Directors noted in paragraph 7 below) have attributed a
       property valuation of R1.12 billion to the Managed Portfolio at the Effective Date (“Effective
       Date Valuation”). The difference between the Independent Property Valuation and the
       Effective Date Valuation is as a result of, inter alia, a fair value adjustment to the Managed
       Portfolio equating to 4.0% from 31 March 2018 to the Effective Date, and the inclusion of the
       net present value of the Rental Escrow Amount. With respect to the valuation of the Managed
       Portfolio by the Board, it is noted that the Board is neither independent nor registered as
       professional valuers or as professional associate valuers in terms of the Property Valuers
       Profession Act, No.47 of 2000.


  Set out below is the forecast revenue, operating profit, net profit after tax and earnings available for
  distribution in respect of the Acquisition (the “Forecast”) for the 6 months ending 31 March 2019
  and the year ending 31 March 2020 (the “Forecast Period”).

  The Forecast has been prepared on the assumption that the Acquisition is effective on 1 October

  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 6 months           Forecast for the year
                                                 ended 31 March 2019            ending 31 March 2020
                                                               R’000                           R’000
   Revenue                                                    62 844                         133 694

   Operating profit                                           43 939                          94 237

   Finance costs                                             (33 370)                        (66 689)

   Earnings available for distribution                        10 569                          27 548

  The Forecast incorporates the following material assumptions in respect of revenue and operating

  1. The Forecast is based on information derived from management accounts, budgets and lease
     agreements of the Managed Portfolio.
  2. Analysis of contractual nature of rental income and the Rental Escrow Amount:

                                                          Forecast for the 6     Forecast for the year
                                                             months ended 31           ending 31 March
                                                                  March 2019                      2020
      % contracted rental income                                        16.7                        -
      % near contracted rental income                                   71.6                     54.6
      % uncontracted rental income                                      11.7                     45.4
      Total                                                            100.0                    100.0

      Rental Escrow Amount utilised (R’000)                            8 213                   22 303

  3. The lease agreements are month-to-month and may be terminated by a tenant on providing two
     weeks’ notice. In determining the Forecast, management has assumed that the properties exhibit
     similar levels of tenant churn and has made an estimate of the forecast lease-up period based on
     historical performance and experience from similar properties.
  4. No fair value adjustment is recognised in the Forecast Period.
  5. There are no unforeseen economic factors that will affect the ability of tenants to meet their
     commitments in terms of existing lease agreements. The Forecast assumes bad debts of 0.5%
     of rental income, consistent with the current levels of bad debt write offs.
  6. The Forecast assumes a loan-to-value ratio of 30.0% throughout the Forecast Period. The
     effective interest rate on debt funding assumed in the Forecast is 9.10%, being the Company’s
     current effective interest rate on its South African debt funding.


  In terms of the JSE Listings Requirements, the following parties are classified as related parties
  (collectively, the “Related Parties”) in respect of the Acquisition –

      -    SPH is 100% owned by Stor-Age Property Holdings Trust (“SPH Trust”). Gavin Lucas,
           Stephen Lucas and Steven Horton (being executive directors of Stor-Age) are directors of
           SPH and trustees and ultimate beneficiaries of the SPH Trust; and
      -    Graham Blackshaw (being a non-executive director of Stor-Age) is a trustee and
           beneficiary of The Fairstore Trust.
   Each of Gavin Lucas, Stephen Lucas, Steven Horton and Graham Blackshaw (collectively, the
   “Related Directors”) recused themselves from the deliberations of the Board in determining
   whether or not to proceed with the Acquisition and were not involved in any aspects of obtaining
   the fairness opinion prepared by PSG Capital as set out below.

   The Purchase Consideration comprises 1.56% of Stor-Age’s market capitalisation as at
   6 September 2018 and as such, the Acquisition is classified as a small related party transaction in
   terms of section 10.7 of the JSE Listings Requirements. On the basis set out above, the Acquisition
   does not require the approval of Stor-Age shareholders.

   PSG Capital, an independent expert acceptable to the JSE, has concluded that the terms of the
   Acquisition are fair insofar as shareholders of Stor-Age, other than the Related Parties and their
   associates, are concerned.

   Based on the Independent Property Valuation and having had regard to the fairness opinion
   prepared by PSG Capital, the Board (excluding the Related Directors) is of the opinion that the
   Acquisition is fair insofar as Stor-Age shareholders, other than the Related Parties and their
   associates, are concerned.

   The JSE has been provided with a summary of the sworn valuation of the Managed Portfolio by the
   Independent Property Valuer, as well as the fairness opinion prepared by PSG Capital. Copies of
   the valuation report prepared by the Independent Property Valuer, as well as the fairness opinion
   prepared by PSG capital, are available for inspection at the registered office of Stor-Age during
   normal business hours for a period of 28 days from the date of this announcement.


   The dividend guidance for the year ending 31 March 2019 provided in the Provisional Summarised
   Consolidated Annual Financial Results for the year ended 31 March 2018, published on SENS on
   12 June 2018, remains unchanged.

10 September 2018

Financial Advisor and Transaction Sponsor
Investec Bank Limited

JSE Sponsor
Questco Corporate Advisory Proprietary Limited

Transaction Attorneys to Stor-Age
Cliffe Dekker Hofmeyr

Transaction Attorneys to Growthpoint
Glyn Marais

Competition Attorneys
Baker McKenzie LLP

Independent Expert
PSG Capital

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