Dissolution of Calgro M3 and SA Corporate joint initiative and withdrawal of Calgro M3 cautionary announcement
CALGRO M3 HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration Number: 2005/027663/06)
JSE Share Code: CGR ISIN: ZAE000109203
The dissolution of the Calgro M3 Holdings Limited and SA Corporate Real
Estate Limited (“SA Corporate”) joint initiative and withdrawal of the Calgro
M3 cautionary announcement dated 6 March 2019
In August 2016, Calgro M3 and SA Corporate, through their respective wholly owned subsidiaries,
Calgro M3 Real Estate (Pty) Ltd (“Calgro M3 Real Estate”) and Afhco Holdings (Pty) Ltd (“Afhco”),
established the joint initiative company, Afhco Calgro M3 Consortium (Pty) Ltd (“the JV
Company”). Calgro M3 Real Estate and Afhco own 49% and 51% of the issued share capital in the
JV Company respectively, and as such the JV Company is controlled by Afhco. The control of this
entity by SA Corporate (through its subsidiary Afhco), resulted in the JV Company meeting the
criteria of a controlled company in terms of Section 25BB of the Income Tax Act (as a subsidiary
of a Real Estate Investment Trust (“REIT”)) and therefore, the JV Company is entitled to enjoy the
benefits of the REIT tax dispensation.
The considerations for establishing the JV Company were, inter alia, that Calgro M3 was in the
process of developing various integrated residential developments in Gauteng and the Western
Cape which provided a platform for Afhco to expand and diversify its residential rental portfolio
to include suburban residential units and for Calgro M3, it would form part of its long-term
strategy of diversifying its earnings (through increasing its annuity income from rental stock
ownership), by establishing a new residential rental business in the low to mid-income markets
through various partnerships with a targeted total investment of R4 billion.
During the existence of the JV Company, sale and development agreements relating to the
Fleurhof Lifestyle Estate (“Fleurhof”), Jabulani Lifestyle Estate (“Jabulani”), South Hills Lifestyle
Residential Estate (“South Hills”), Scottsdene development project (“Scottsdene”) and Belhar
development project (“Belhar”), were negotiated and concluded by the JV Company with the
relevant Calgro M3 group subsidiary companies, in terms of which an agreed number of residential
housing units would be constructed by the relevant Calgro M3 subsidiary companies for the JV
Company in each of the relevant development projects.
The dissolution of the JV Company does not constitute a change in the long-term strategy of Calgro
M3, which remains committed to building its long-term annuity income through the expansion of
its residential rental business, without parting with its “Building legacies, Changing lives” mantra,
which may in certain instances, when addressing social challenges within its integrated
developments, lead to a short term negative effect on initial property yields.
2 RATIONALE FOR DISSOLVING THE JOINT INITIATIVE
Due to the temporary electrification challenges experienced at Fleurhof and the illegal invasions
at Scottsdene (which are in the process of being resolved), and the slow tenancy take-up of the
South Hills free standing houses, all of which have led to the temporary inability to sufficiently
tenant available units within these development projects, the JV Company’s targeted yields have
come under pressure. Through incidents of this nature, the partners have come to realise that the
fundamental goals and risk appetites of a property development company diversifying into a more
long-term annuity income market, and a pure yield driven REIT, were vastly different.
Calgro M3 is in the process of diversifying its business operations to include a residential rental
portfolio and has the ability to accommodate the lower initial yield during the rental take up
period (brought about by development related risk such as the Fleurhof electrification challenges
and the Scottsdene illegal invasions) and can also spend more on sustainable developments with
less consideration to the immediate impact on the yield, provided the long term strategy and
planning leads to the achievement of yields of an acceptable level over time. Calgro M3 also has
a greater appetite for leverage within its investment portfolio, at levels not suitable to Afhco,
where gearing of up to 65% will be pursued, and which will make the long-term capital
appreciation on its rental portfolios even more attractive over time.
SA Corporate as a yield driven REIT, needs to ensure that its rental units are consistently achieving
the targeted and forecasted property yields and therefore are not in a position to absorb the
tenanting delays that are typically experienced by a development company. In addition, the
integrated development model and some of the suburban residential areas in which the JV
Company’s development projects are located, present different challenges to those experienced
in the central business districts that Afhco specialises in.
Against this background, Calgro M3 and SA Corporate entered into discussions to explore various
alternatives to resolve the issues experienced, and this culminated in the ultimate decision to
dissolve the joint initiative.
3 TRANSACTION OVERVIEW
3.1 Cancellation of the development agreements
As a result of the circumstances set out above, the sale and development agreements concluded
by the JV Company with the relevant Calgro M3 subsidiary and joint initiative companies in respect
of the Scottsdene, Belhar and Fleurhof units and the South Hills free standing houses, have been
cancelled and the units, including those that are partially constructed, together with the South
Hills free standing houses, will be transferred back to the relevant Calgro M3 subsidiary and joint
initiative companies, against repayment by Calgro M3 to the JV Company, of an amount equal to
the original acquisition cost paid by the JV Company. In order to effect the transfer of the relevant
properties and/or individual units back to Calgro M3 through the deeds office, cancellation and
buy-back agreements have been concluded between the JV Company and the relevant Calgro M3
subsidiary and joint initiative companies concerned.
Calgro M3’s main consideration in agreeing to retake ownership of the South Hills free-standing
houses was to retain a stake in this highly sought after affordable residential security estate with
various benefits and amenities such as state of the art security, fibre, parks, children’s play areas
and sports facilities, and to continue its drive to expand its residential rental business.
3.2 Sale of JV Company’s shares (“Share Sale Agreement”)
Pursuant to the cancellation of the relevant sale and development agreements and the return of
the South Hills free standing houses as described above, Afhco has acquired Calgro M3's minority
(49%) interest in the JV Company for a purchase consideration of R161,960,431.15. The purchase
consideration will be settled in cash. As a result of this transaction, Afhco owns 100% of the JV
Company and by extension has retained the Jabulani units and the South Hills multi-storey units.
The purchase consideration for Calgro M3’s 49% shareholding in the JV Company, is considered
to be in line with the fair market value (as determined by the parties) of Calgro M3’s interest in
the assets remaining in the JV Company.
3.3 Net asset value and profits attributable to the transaction
At the time of the transaction, the value of the JV Company’s total assets was R501 million,
funded by a Calgro M3 shareholder loan of R153 million (including accrued interest and
distributions due), an AFHCO shareholder loan of R112 million (including accrued interest and
distributions due) and bank debt of R236 million. The net asset value of the JV Company therefore
was R265 million. The profit (before shareholder loan interest) attributable to these assets of the
JV Company was R20.6 million (49% of this value: R10.1 million). This information has been
obtained from the unaudited annual financial statements of the JV Company for the year ended
31 December 2018, prepared in accordance with IFRS.
The project specific information required in terms of the JSE Listings Requirements in relation to
each of the projects affected is set out below:
Project name and Gross Rentable Weighted Value attributed to
location1 area (m2) average rental Afhco acquisition
per m2 R million
Jabulani (Soweto, 11 520 R 110 N/A – Equity transaction
South Hills- multi storey 31 820 R 128 N/A – Equity transaction
Project name and Gross Rentable Weighted Value attributed to
location1 area (m2) average rental the 51% acquisition
per m2 by Calgro
Scottsdene Estimated to be N/A – Under R 45,2
(Kraaifontein, Western 33 760 construction and
• South Hills – portion 8 891 Forecast to be R 66,6
1 -136 of erf 1202 R100
(90 Res 1 units)
• South Hills – 6 125 Forecast to be R 45,8
portions 533 -548 of R100
erf 1202 (62 Res 1
units) (on behalf of
Fleurhof (Johannesburg Estimated to be N/A – Under R 66,4
West, Gauteng) 33 720 construction
Belhar (Belhar, Cape Estimated to be N/A – Under R0
Town, Western Cape) 40 000 construction
1.The projects are all in the Residential sector and multi tenanted.
2. No independent valuation has been carried out and the board of directors of Calgro M3 is of the
view that the values attributed to each of the projects above represents the value of the projects.
3.4 Effective cashflow from the transaction
Pursuant the settlement of the transaction, repayment of related shareholder loan accounts and
repayment of the R155 million deposit advanced by Afhco to Calgro M3, Calgro M3 will owe SA
Corporate R127,8 million which will be settled through a cash payment of R23,8 million and the
remaining R104 million, through a 3 year listed note, on its listed debt capital markets program,
bearing interest at 3 month JIBAR plus 395 basis points.
Calgro M3 will immediately have the economic benefit of the South Hills free standing houses and
the completed Fleurhof, Scottsdene and Belhar units. Even with the project related challenges
dealt with above, Calgro M3 believes this to be beneficial to the Calgro M3 cashflow cycle, rather
4 CONDITIONS PRECEDENT
At the time of the execution of the agreements there was a resolutive condition precedent, which
had not occurred, and therefore the agreements have become unconditional.
5 EFFECTIVE DATE
Notwithstanding the conclusion dates of the agreements, the effective date of the transaction is
1 January 2019. However, due to delays receiving confirmation in respect of the resolutive
condition, the parties concluded a Confirmation Agreement on 15 March 2019 and as a
consequence, the transaction will only be accounted for by Calgro M3 in its 2020 financial
The Share Sale Agreement constitutes a Category 2 transaction in terms of the JSE Listings
Requirements for Calgro M3, and accordingly does not require approval by Calgro M3
7 WITHDRAWAL OF CAUTIONARY
Shareholders are referred to the Calgro M3 cautionary announcement dated 6 March 2019 and
are advised that as the transaction has been finalized, caution is no longer required to be exercised
by the shareholders when dealing in Calgro M3 securities.
15 March 2019
Corporate Advisor and Transaction Sponsor to Calgro M3
Grindrod Bank Limited
Date: 15/03/2019 05:15:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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