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Establishment of joint venture by Equites and Shoprite
EQUITES PROPERTY FUND LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 2013/080877/06)
JSE share code: EQU
ISIN: ZAE000188843
(Approved as a REIT by the JSE)
("Equites" or the "group")
ESTABLISHMENT OF JOINT VENTURE BY EQUITES AND SHOPRITE
1. INTRODUCTION
Shareholders are advised that Equites and Shoprite Holdings Limited, through its wholly-owned
subsidiary Shoprite Checkers Proprietary Limited ("Shoprite”), have concluded binding heads of
agreement ("Heads of Agreement") in terms of which, inter alia –
- Equites and Shoprite will establish a joint venture company (the "JVCo") to which Shoprite will
contribute a portfolio of distribution centres and associated undeveloped bulk land in Brackenfell in
the Western Cape and Centurion in Gauteng valued at R2.0 billion and Equites will contribute cash
of R2.1 billion to the JVCo in exchange for a 50.1% equity stake in the JVCo, with Shoprite owning
the balance;
- the JVCo will thereafter acquire from Shoprite the Cilmor distribution centre in Brackenfell, with
associated undeveloped bulk land, for an agreed cash consideration of R1.2 billion (the Brackenfell,
Cilmor and Centurion distribution centres and associated undeveloped bulk land are hereinafter
referred to collectively as the "Portfolio");
- the JVCo and Shoprite will conclude "triple net" lease agreements in respect of the Brackenfell,
Cilmor and Centurion distribution centres (collectively the “Lease Agreements”); and
- the JVCo will manage the portfolio and it will serve as a platform for the future development of the
undeveloped bulk land situated at Cilmor and Centurion and for future property acquisition and
development opportunities
(the "Transaction").
2. RATIONALE
- The establishment of the joint venture between Equites and Shoprite will have the following benefits:
- Equites, as a leading, specialist logistics REIT, will add to its existing property portfolio a high-
quality portfolio of distribution centres underpinned by long-term leases with Shoprite;
- Shoprite will unlock significant value from its distribution centres while retaining significant
influence over the Portfolio by virtue of its shareholding and role in the JVCo;
- Equites and Shoprite will have forged a strategic partnership for their mutual, long-term
benefit; and
- through their strategic partnership in the JVCo, Shoprite and Equites will share in any value
which may be unlocked in the JVCo through future acquisitive and development activities.
- The Transaction meets Equites’ strategic objectives of:
- focusing on an asset class which has proven to outperform over time;
- investing in assets which meet modern logistics criteria and which present opportunities for
further expansion and growth; and
- creating further scale in its high-quality logistics portfolio through the acquisition of a portfolio
with stable and predictable rental growth profiles which enhances capital and income growth
in the medium to long-term.
- For Equites, the Portfolio evidences the following sound fundamentals in line with its investment
criteria:
- Enhanced income certainty – on implementation of the Transaction, the Portfolio will
constitute approximately 19% of the Equites portfolio and will extend the weighted average
lease expiry period from 9.5 years to 11.7 years;
- Diversification of tenant base – the inclusion of Shoprite, Africa’s largest food retailer, as one
of Equites’ major tenants further diversifies its tenant exposure;
- Superior quality builds – both the logistics campus and the modern distribution centres were
all built to Shoprite’s exacting requirements and to institutional standards;
- Low expected volatility – the conclusion of three, 20-year leases (with three 10-year renewal
options each) with predictable, escalating cash flows, shields Equites from certain market risks;
and
- The creation of cost-effective funding opportunities – the long-dated, annuity income stream
presents significant opportunities to reduce Equites’ cost of debt funding over the medium to
long term.
3. DETAILS OF THE PORTFOLIO
The Portfolio is comprised of a logistics campus, two modern distribution centres and undeveloped bulk
land, as detailed below:
Weighted
average
rental per
Property GLA^ Property square Purchase
No. Name Geographical Location (m2) type metre consideration
Corner of Logistics
Olievenhoutbosch Avenue campus
Centurion and Brakfontein Road, and strategic
1 campus Louwlardia, Centurion 169 966 land R50.00 R1 359 680 000
Cilmor Modern
distribution Cecil Morgan Drive, distribution
2 centre Brackenfell, Cape Town 128 706 centre R55.58 R1 144 488 400
Brackenfell Corner Old Paarl and Modern
distribution Kruisfontein Roads, distribution
3 centre Brackenfell, Cape Town 101 797 centre R42.00 R684 080 000
Undeveloped Cecil Morgan Drive, Strategic
4 bulk land Brackenfell, Cape Town 39 593* land N/A R47 511 600
^ gross lettable area
* this is the extent of the undeveloped bulk land rather than the GLA of the land
a) Western Cape distribution centres
The Cilmor and Brackenfell distribution centres are situated in Brackenfell, one of the oldest and largest
industrial hubs in Cape Town. Its major access routes are the N1 and the R300, providing easy access
to Cape Town International Airport, Cape Town Harbour and Container Depot and Cape Town CBD
while also conveniently located in close proximity to a large labour pool.
i. Cilmor distribution centre
The Cilmor distribution centre is one of the most technologically advanced distribution centres on the
African continent. The warehouse consolidates deliveries from about 500 suppliers and comprises
frozen, ambient and chilled sections which house a variety of Shoprite’s retail products, reducing the
requirement for storage space at retail sites.
ii. Brackenfell distribution centre
The Brackenfell distribution centre comprises two ambient distribution warehouses including office and
staff facilities, a refrigeration facility including office and staff facilities, a returns centre including office
and staff facilities, a flow-through facility including a flow-through office and a receiving office and an
office park.
b) Gauteng – Centurion logistics campus
Situated between Johannesburg and Pretoria, Centurion is at the intersection of the N1 and N14
highways. It is in close proximity to O.R. Tambo International Airport, Lanseria International Airport
and is conveniently situated within the major Johannesburg conurbation. Louwlardia, where the
Centurion logistics campus is situated, is an established logistics hub and is home to many national
distribution centres. This location also provides access to a large labour pool.
The Centurion campus consists of a dry goods warehouse including a safety store and staff facilities, a
refrigeration facility including office and staff facilities, a returns centre including office and staff
facilities, a truck workshop and ancillary buildings, as well as an office park housing Shoprite's Gauteng
regional head office. This campus not only services the Gauteng, Free State and Northern Cape markets
but is also the platform for distribution into several other African countries.
The directors of Equites are satisfied that the value attributed to each of the properties within the
Portfolio is in line with their respective fair market values. The directors of Equites are not independent
and are not registered as professional valuers or as professional associate valuers in terms of the Property
Valuers Profession Act No. 47 of 2000.
4. TERMS OF THE TRANSACTION
Equites will contribute c.R2.1 billion in cash to the JVCo and Shoprite will transfer the Brackenfell and
Centurion distribution centres (collectively valued at c.R2.0 billion) to the JVCo in exchange for shares
in the JVCo. Post the contributions Shoprite and Equites will own 49.9% and 50.1% of the JVCo,
respectively. It is the intention of Shoprite to retain its shares in the JVCo.
The JVCo will acquire the Cilmor distribution centre and the associated undeveloped land for a cash
consideration of c.R1.2 billion, while the unutilised cash will be lent to Equites and will be repaid by
Equites to the JVCo as and when the JVCo requires funds for purposes of future property acquisitions
or developments.
Contemporaneously with the sale of the distribution centres to the JVCo, Shoprite (as tenant) and the
JVCo (as landlord) will conclude the Lease Agreements.
Each Lease Agreement will be a fully repairing and insuring lease, enduring for an initial period of
20 years, with the right to renew for a further three 10-year periods on the same terms and conditions.
The initial yield on the leases will be 7.5% and the rental will escalate at a rate of 5% each year.
In respect of the undeveloped land at Centurion and Cilmor, the Lease Agreements will contain
provisions relating to the future development of such undeveloped land, in terms of which Equites will
be appointed as the developer and the JVCo will fund the development.
The effective date of the Transaction will be the date on which the last of the conditions contained in
the Heads of Agreement has been fulfilled, which is expected to be during May 2020 with the transfer
of the Portfolio expected by the end of June 2020.
The Transaction is subject to certain conditions precedent, including –
- completion of an ordinary course due diligence investigation Equites to the satisfaction of
Equites;
- conclusion of the Transaction agreements and documents;
- board approval of the Transaction by the boards of directors of both Shoprite (and where
required, approval by the shareholder of Shoprite) and Equites; and
- approval by the Competition Commission in accordance with the Competition Act No. 89 of
1998.
The Heads of Agreement contains undertakings, warranties and indemnities which are normal for a
transaction of this nature.
5. FINANCIAL INFORMATION
Set out below is the group forecast for the transaction (“the forecast”) for the 8 months ending
28 February 2021 and year ending 28 February 2022 (“the forecast period”).
The forecast has been prepared on the assumption that the Transaction will be fully implemented from
1 July 2020.
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.
Forecast for Forecast for
the the
R’000 period ending year ending
28 February 28 February
2021 2022
Contractual rental income 159 412 247 089
Straight-lining lease adjustment 104 144 148 245
Rental revenue 263 556 395 334
Finance costs (26 065) (39 098)
Net profit for the period 237 491 356 237
The forecast incorporates the following material assumptions in respect of revenue and expenses:
- The contractual rental agreements are assumed to be valid and enforceable.
- The leases are a triple net leases and normal property operating expenses are therefore assumed
to be recoverable from or paid directly by the tenant.
- The property and asset management functions will be performed by Equites.
- The forecast assumes a loan-to-value of 40% throughout the forecast period. The marginal cost
of debt assumed in the forecast is 8.20%, which is in line with Equites’ current marginal cost of
debt funding.
- No fair value adjustment is recognised.
- JVCo will be a ‘controlled company’ for the purposes of section 25BB(1) of the Income Tax
Act.
- There will be no unforeseen economic factors that will affect the tenant's ability to meet its
commitments in terms of the leases.
6. CATEGORISATION
The Transaction is classified as a category 2 transaction in terms of the JSE Listings Requirements and
accordingly does not require approval by Equites’ shareholders.
24 February 2020
Corporate advisor and sponsor to Equites
Java Capital
Attorneys and legal advisor to Equites
Cliffe Dekker Hofmeyr
Tax advisors to Equites
AJM
Date: 25-02-2020 07:10:00
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