BALWIN PROPERTIES LIMITED - Conclusion of a Right of First Refusal Agreement for 4,544 Apartments and Small Related Party Transaction

Conclusion of a Right of First Refusal Agreement for 4,544 Apartments and Small Related Party Transaction

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


CONCLUSION OF A RIGHT OF FIRST REFUSAL AGREEMENT FOR 4,544 APARTMENTS
AND SMALL RELATED PARTY TRANSACTION


 1. INTRODUCTION

Shareholders of Balwin PROPERTIES are advised that the Company has entered into a Right of First
Refusal Agreement (“ROFR”) with Balwin Rentals (Pty) Limited (“Balwin RENTALS”), in terms of
which Balwin RENTALS has been granted the right to acquire 4 544 residential rental apartments
(“Rental Apartments”) on certain land parcels owned by Balwin PROPERTIES.

  Development      Number     of      Location                                          Expected
                   Rental                                                               completion
                   Apartments                                                           date
  Greenpark        1 056    Boksburg                                                    1/12/2021
  Greenlee         1 728    Linbro Park, Sandton                                        1/03/2024
  Greencreek       1 760    Riverwalk Estate (adjacent to The Blyde                     1/03/2025
                            Crystal Lagoons development in Pta East)
 2. RATIONALE FOR ROFR WITH BALWIN RENTALS

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

In 2018, Balwin PROPERTIES created a green brand distinguished by a unique design and
architecture that is exceptionally cost efficient, allowing sustainable rentals of between R4500 and
R9000 per month whilst delivering an above average yield.

In terms of the ROFR, any Rental Apartments over which Balwin RENTALS exercises it right of
acquisition will be sold to Balwin RENTALS at an approximate 30% margin, and Balwin RENTALS
will in turn derive income from leasing these Rental Apartments.

This transaction improves Balwin PROPERTIES’s operating structure because:

   (i)     Balwin PROPERTIES can now obtain increased bank funding on a ring-fenced basis, to
           construct the residential Rental Apartments on the back of a guarantee received from
           Balwin RENTALS;
   (ii)    The sale of Rental Apartments in bulk as envisaged in terms of the ROFR creates a
           regular income stream for Balwin PROPERTIES; and
   (iii)   Balwin PROPERTIES should receive annuity income over time, from its 25%
           shareholding in Balwin RENTALS
 3. SMALL RELATED PARTY TRANSACTION

Pursuant to the ROFR, Balwin RENTALS has exercised its right to acquire 96 residential Rental
Apartments in the Greenpark development for a total consideration of R57,139,200.00 (the
“Transaction”) and a Sale Agreement has been concluded to give effect thereto (the “Agreement”).

 4. PURCHASE CONSIDERATION

The total consideration payable by Balwin RENTALS to Balwin PROPERTIES in terms of the
Agreement is R57,139,200.00 in aggregate (“Purchase Consideration”), which is to be paid to
Balwin PROPERTIES on the date of transfer of the Rental Apartments into the name of Balwin
RENTALS, being the effective date of the Transaction. The Purchase Consideration will be
reinvested by Balwin PROPERTIES into its existing development pipeline.

Balwin PROPERTIES has agreed to the following terms in relation to the Transaction:

      -   Balwin PROPERTIES will manage the Rental Apartments on behalf of Balwin RENTALS for
          a management fee;
      -   Balwin PROPERTIES has provided Balwin RENTALS with a three-year net-income rental
          guarantee at 10.5% per annum (“Net-Income Guarantee”);
      -   The annual escalation of the Net-Income Guarantee is 3%;
      -   The Purchase Consideration received by Balwin PROPERTIES may be adjusted
          downwards only if the target net-income guaranteed by Balwin PROPERTIES in year
          three is not met. However, the adjustment will be based on any net-income rental
          shortfall in year three but limited to a downward adjustment of 15% of the original Purchase
          Price received by Balwin PROPERTIES (“Potential Downward Adjustment”);
      -   Balwin PROPERTIES will achieve an approximate overall 30% margin on the sale of the
          Rental Apartments to Balwin RENTALS. However, 10% of the total Purchase
          Consideration will be withheld by Balwin RENTALS in the form of a shareholder loan,
          earning interest at the prevailing prime rate 3 years after the loan was first advanced by
          Balwin PROPERTIES, which loan will serve as security to Balwin RENTALS for the
          Net-Income Guarantee and the Potential Downward Adjustment.

 5. CONDITIONS PRECEDENT

 The ROFR and the Transaction are subject to all such regulatory approvals, including without
 limitation, Competition Commission approval, as may be required.

 6. FINANCIAL EFFECTS OF THE TRANSACTION

 The value of the net assets that are the subject of the Transaction is R34,765,477.00. The
 unadjusted profits before tax attributable to the net assets that are the subject of the Transaction is
 R14,920,784.00 and the unadjusted profits after tax attributable to the net assets that are the
 subject of the Transaction is R10,742,965.00.


 7.   FAIRNESS OPINION

 Due to the fact that Stephen Volker Brookes, Ronen Zekry and Arnold Shapiro are directors of
 Balwin PROPERTIES and Balwin RENTALS, these directors are deemed to be associates of Balwin
 RENTALS and the Transaction is deemed to be a “small related party transaction” in terms of section
 10.7 of the Listings Requirements of the JSE.
  Accordingly, an independent expert was required to opine on the fairness of the terms of the
  disposal. Balwin PROPERTIES has appointed BDO Corporate Finance Proprietary Limited
  (“BDO”) as the independent expert to provide written confirmation of the fairness of the Transaction
  to Balwin PROPERTIES shareholders and to the JSE (the “Fairness Opinion”).

  BDO, having evaluated the Transaction, has found that it is fair and that the Purchase
  Consideration for the Transaction Rental Apartments is within its valuation range and equal to its
  core valuation. This Fairness Opinion is available for inspection at the registered offices of Balwin
  PROPERTIES for 28 days from the date of this announcement. This Fairness Opinion has also
  been approved by the JSE.

  Shareholders are advised that this announcement is made in terms of the JSE Listings
  Requirements and for information purposes only and Balwin PROPERTIES shareholders require
  no further action.

8. EFFECTIVE DATE OF THE TRANSACTION

  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 Balwin RENTALS.

  Johannesburg
  19 February 2019

  Sponsor:
  Investec Bank Limited

  Independent expert:
  BDO Corporate Finance Proprietary Limited

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