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BALWIN PROPERTIES LIMITED - Strategic Rental Model Initiative and Sale by Balwin of Residential Rental Apartments to Balwin Rentals Proprietary

Release Date: 05/12/2018 07:05
Code(s): BWN     PDF:  
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Strategic Rental Model Initiative and Sale by Balwin of Residential Rental Apartments to Balwin Rentals Proprietary

Balwin Properties Limited
(Incorporated in the Republic of South Africa)
Registration Number: 2003/028851/06
Share code: BWN
ISIN: ZAE000209532
(“Balwin”)



STRATEGIC RENTAL MODEL INITIATIVE AND SALE BY BALWIN OF RESIDENTIAL RENTAL
APARTMENTS TO BALWIN RENTALS PROPRIETARY LIMITED (“Rental Company”)


1. INTRODUCTION

At the time of listing, Balwin indicated that it had a strategic objective to develop and retain a rental
portfolio by 2020.

In order to achieve an optimal balance between holding a rental portfolio and the burden it would
have on immediate cash flow, Balwin has introduced a revised strategic objective.


2. REVISED STRATEGIC OBJECTIVE AND RATIONALE

Balwin has created a rental model that mirrors and complements its current build-to-sell model in
the way that it is developed and sold in phases.

The residential rental developments have their own unique design and are appropriately cost
engineered to target the rental market between approximately (R4 500 and R8 500 per month)
while retaining Balwin’s quality and signature lifestyle elements, including solar power and high
speed fibre connectivity.


Phases of these rental developments will be sold to the Rental Company at a margin, which in turn
derives income from leasing these apartments. The aim and objective is to build a strategic alliance
with the Rental Company and to create a smoothing effect on cash flow through the regular sale of
apartments in bulk and participation in annuity rental income over time.

These residential rental developments are distinctly different from Balwin’s build-to-sell model in
that it has its own aesthetic and technical specification. Balwin has earmarked specific
developments from its secured development pipeline to form part of its rental model. As the rental
developments do not compete with Balwin’s build-to-sell model, they can be built and sold
alongside each other, allowing Balwin to develop its existing land pipeline at a faster pace.

In addition, the rental model creates a hedge against rising interest rates given that potential
property buyers may decide to rent instead of buy a property in an upward interest rate cycle.
During a downward interest rate cycle, Balwin will benefit from offering both product model types.


3. INITIAL DISPOSAL IN LINE WITH REVISED STRATEGIC OBJECTIVE

Balwin is pleased to announce that in line with its revised strategic objective outlined above, it has
entered into a sale agreement (the “Agreement”), with the Rental Company in terms of which
Balwin has agreed to sell 144 (one hundred and fourty-four) residential rental apartments in its
Greenpark development (constituting the entire phase one of the development earmarked for
rental units only) and 12 (twelve) residential rental apartments in its Amsterdam development
(the “Units”) to the Rental Company for a total consideration of R98,425,904.56 (the
“Transaction”).


4. DETAILS OF THE BUSINESS OF THE RENTAL COMPANY

The Rental Company was established by Yieldex Trading 2 Proprietary Limited (“Yieldex”) in 2018
which owns 75% of the total issued share capital. The underlying shareholders of Yieldex are
Tremgrowth Proprietary Limited, KLT Holdings 1 Proprietary Limited, Malewell 2 Proprietary
Limited and Yieldex Holdings Proprietary Limited. Balwin will subscribe for the remaining 25%
(twenty five percent) of the issued share capital of the Rental Company for Rnil consideration (the
“Subscription”). Balwin will not be required to fund or provide any sureties for any external
funding raised by the Rental Company to settle the Purchase Consideration for the Transaction.

The Rental Company has the objective to build a portfolio of rental apartments of sufficient scale to
list as a real estate investment trust on a recognised stock exchange and has identified other
residential developments within Balwin’s existing pipeline of land that it is interested to acquire,
on market-related terms, subject to agreement between the parties concerned for each such
acquisition. Through the Subscription, Balwin will participate in long-term capital growth, net asset
value growth, and in time, regular dividend income.


5. PURCHASE CONSIDERATION

The total consideration payable by the Rental Company to Balwin in terms of the Agreement is
R98,425,904.56 in aggregate (“Purchase Consideration”), which is to be paid to Balwin on the
date of transfer of the residential rental apartments into the name of the Rental Company. The
consideration will be reinvested into the existing development pipeline of Balwin.
Balwin has agreed to the following additional terms in relation to the Transaction:

    -   Balwin will manage the rental Units on behalf of the Rental Company for a fee;
    -   Balwin has provided the Rental Company a two-year net-income guarantee (“Net-Income
        Guarantee”);
    -   The Purchase Consideration will be adjusted downwards if the target net-income in year
        two is not met. The adjustment will be based on any net-income shortfall in that year,
        capitalised at a rate of 10.5% (“Potential Downward Adjustment”);
    -   Balwin will achieve an approximate overall 30% margin on the sale of Units to the Rental
        Company. However, 10% of the total Purchase Consideration will be withheld by the
        Rental Company in the form of a shareholder loan by Balwin to the Rental Company, which
        will serve as security for the Net-Income Guarantee and the Potential Downward
        Adjustment.


6. SMALL RELATED PARTY TRANSACTION

Due to the fact that Stephen Volker Brookes, Ronen Zekry and Arnold Shapiro are directors of
Balwin and the Rental Company, these directors are deemed to be associates of the Rental Company
and the disposal is deemed to be a “related party transaction” in terms of section 10 of the Listings
Requirements of the JSE Limited (“JSE”).

However, as the disposal amounted to less than 5% (five percent) of the market capitalisation of
Balwin on the date of conclusion of the Agreement, the disposal is classified as a “small related party
transaction” in terms of section 10.7 of the JSE Listings Requirements. Accordingly, written
confirmation is required from an independent expert confirming the fairness of the terms of the
disposal in relation to Balwin shareholders.


7. FAIRNESS OPINION

Balwin appointed BDO Corporate Finance Proprietary Limited “BDO”) as the independent expert
to provide written confirmation of the fairness of the Agreement to Balwin shareholders and to the
JSE. BDO, having evaluated the Transaction, has found that it is fair and that the Purchase
Consideration for the Units is within its valuation range and equal to its core valuation (the
“Fairness Opinion”). This Fairness Opinion is available for inspection at the registered offices of
Balwin for 28 days from the date of this announcement.
The JSE has approved the Fairness Opinion confirming that the Transaction is fair to Balwin
shareholders.
Shareholders are advised that this announcement is made for information purposes only and no
action is required by Balwin shareholders with regard to the disposal.


8. PROFITS ATTRIBUTABLE AND NET ASSET VALUE

The value of the net assets that are the subject of this Transaction is R59,844,133.00. The
unadjusted profits before tax attributable to the net assets that are the subject of this Transaction
is R25,743,611 and the unadjusted profits after tax attributable to the net assets that are the subject
of this Transaction is R18,535,399.92.

In terms of the Fairness Opinion, the net asset value of the Units, falls within the valuation range
prepared by the independent expert. As detailed above, the opinion is available for inspection at
the registered offices of Balwin for 28 days from the date of this announcement.


9. EFFECTIVE DATE OF THE ACQUISITION

In terms of the Agreement, the effective date of the Transaction will be the date on which the
residential apartments are registered in the name of the Rental Company.


Johannesburg
5 December 2018


Sponsor:
Investec Bank Limited


Independent expert:
BDO Corporate Finance Proprietary Limited

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