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15 on Orange Lease and Asset Update
SPEAR REIT LIMITED
(Incorporated in the Republic of South
Africa)
(Registration number: 2015/407237/06)
Share code: SEA
ISIN: ZAE000228995
LEI: 378900F76170CCB33C50
(Approved as a REIT by the JSE)
(“Spear” or “the Company”)
15 ON ORANGE LEASE AND ASSET UPDATE
1. INTRODUCTION
Shareholders are hereby advised that the Company and its wholly-owned subsidiary,
Blend 15 Proprietary Limited (“Blend 15” or the “Landlord”), being the owner of the
property comprising the 15 on Orange Sectional Title Scheme, which includes the hotel,
commercial, retail and parking sections (“Property”) entered into an agreement of lease
(“Lease”) with The Capital Apartments and Hotels Proprietary Limited (“Tenant”) and an
option agreement (“Option Agreement”) with The Capital Apartments and Hotels Group
Proprietary Limited (“Purchaser”), the details of which are set out below.
The Lease is a fixed income lease and is in line with management’s stated strategy to
continue its transition to fixed income assets only.
2. SALIENT TERMS OF THE LEASE
Occupation Date
In terms of the Lease, the Tenant will take occupation of the Property on or about 3 June
2021. (“Occupation Date”).
Commencement Date
The Lease shall commence on 1 August 2021 or as soon as possible thereafter, (“Lease
Commencement Date”)
Lease Period
The duration of the Lease shall be 7 years calculated from the Lease Commencement
Date (“Initial Lease Period”).
Option to Renew
The Tenant has the option to renew the Lease for a further period of 7 years, provided
that the Tenant is not in breach of the Lease during the Initial Period. The option to renew
the Lease may be exercised at any time during the Initial Period, by the Tenant delivering
a written notice to this effect to Blend 15.
Monthly Net Rental (excluding Municipal and Utility Charges)
The basic monthly net rental (excluding municipal and utility charges, which are
recoverable from the Tenant) payable by the Tenant to Blend 15 for the hotel, commercial,
retail and parking sections shall be a fixed amount. During the first and second years of
the Lease Period, the basic monthly rental shall be R1 916 666.67 (including value-added
tax). Thereafter, the basic monthly rental payable during the remaining years of the Lease
Period will escalate annually at a fixed rate of 5% per annum (compounded annually) with
effect from the second anniversary of the Lease Commencement Date
Use of the Property
The Tenant shall use the Property for the provision of hospitality, serviced apartments,,
restaurant and conference related services.
Conditions Precedent to the Lease
The Lease is subject to the fulfillment of the various conditions precedent that must be
fulfilled by no later than 31 March 2021.
3. BENEFITS OF THE LEASE TO SPEAR
The Lease is a fixed income lease and is in line with management’s stated strategy to
continue its transition to fixed income assets only.
The Lease will be for a maximum period of 7 years with various renewal options available
to the Tenant. The Tenant will invest no less than R15 million of its own capital into various
room and FFE upgrades, establishing aparthotel rooms and related accommodation in
line with the Tenant’s business operating model. Post the various room and public area
upgrades, the Tenant will be responsible for up keep and on-going refurbishment costs
for the hotel.
The Lease is triple net lease in terms of which the Tenant will be responsible for all costs
associated with the Property. Net rental income of the initial 12-month basis will contribute
R20 million to Spear’s income statement (rental income of only R1.8 million was received
from the previous hospitality tenant for the FY21 period, as a result of the Covid-19
pandemic and its residual impact). The new fixed income lease will have a notable,
restorative and positive impact on group earnings from 1 August 2021.
During FY21, the impact of Covid-19 eliminated the majority of hospitality income of the
Company due to its variable nature impacting group earnings negatively. The new Lease
removes the variable income risks associated with 15 on Orange, providing certainty to
shareholders in line with Spear’s fixed income investment strategy.
The Tenant will be responsible for all operational requirements during the currency of the
Lease in addition to any and all FFE upgrades required by the Tenant at any particular
time. The Landlord will have zero involvement in the running or management of the hotel
for the period that the Lease remains in place.
The conclusion of the Option Agreement is in line with Spear’s stated strategy to exit its
hospitality assets.
4. THE CAPITAL HOTEL AND APARTMENT GROUP
Established in 2008, The Capital Hotel and Apartments Group is led by industry veteran
Marc Wachsberger and a highly skilled hospitality team. The Capital Hotel portfolio is one
of the fastest growing owner operated hotel and luxury apartment providers in South
Africa. The current hospitality portfolio consists of over 1400 rooms, apartments and
conference centres across 10 hotels in South Africa. The Capital Hotels are located in
Johannesburg, Pretoria, Cape Town and Umhlanga with national and Southern Africa
growth plans.
5. SALIENT TERMS OF THE OPTION AGREEMENT
In terms of the Option Agreement, Blend 15 irrevocably granted the Purchaser a call
option (“Call Option”) to purchase the Property, together with (i) the Lease, (ii) all movable
assets owned by Blend 15 and situated on the Property and (iii) all of Blend 15’s rights,
title and interest in and to the name “15 on Orange” or any deviation thereof (collectively,
the “Disposal Assets”), for the disposal consideration of R265 000 000 (“Disposal
Consideration”), subject to the escalation as set out below.
Exercise of the Call Option and the Resultant Disposal
The Call Option may be exercised at the discretion of the Purchaser at any time during a
period of two years of the Lease Commencement Date (“Option Period”).
If the Purchaser fails to exercise the Call Option within the Option Period, the Call Option
shall lapse and be of no force and effect.
If the Purchaser exercises the Call Option within the Option Period, Blend 15 shall have
agreed to sell the Disposal Assets to the Purchaser and the Purchaser shall have agreed
to purchase the Disposal Assets from Blend 15 (“Disposal”).
Within thirty days of the date on which the Call Option is exercised (“Call Option Exercise
Date”), the Purchaser will be required to furnish the conveyancers with an unconditional,
irrevocable bank guarantee, as security for the payment of the Disposal Consideration
(“Guarantee”).
Disposal Consideration
If the Purchaser fails to deliver the Guarantee within thirty days of the Call Option Exercise
Date, the Disposal Consideration will increase by an additional R13 250 000.
Furthermore, if the Property is not transferred, free of any encumbrances, into the name
of the Purchaser by the date falling four months after the date on which the last of the
Conditions Precedent to the Disposal (as defined below) have been fulfilled or waived, as
the case may be (“CP Fulfilment Date”), the Disposal Consideration will be increased at
an annual rate of 5% (compounded annually), for the period commencing on the date
falling four months after the CP Fulfilment Date (or such later date as may be agreed
between the parties) and ending on the earlier of (i) the date that is 24 months thereafter,
and (ii) the date of transfer of ownership of the Property into the name of the Purchaser
(“Transfer Date”).
The Disposal Consideration shall be paid by the Purchaser to Blend 15 in cash.
Conditions Precedent to the Disposal
The Disposal is subject to the fulfilment of the following outstanding conditions precedent
(“Conditions Precedent to the Disposal”):
- to the extent applicable, within 120 days after the Call Option Exercise Date, the
Disposal is approved unconditionally by the South African Competition Commission
or is approved on such terms and conditions as are reasonably acceptable to the
parties); and
- within 10 business days of the Call Option Exercise Date, Spear, as shareholder of
Blend 15, approves the Disposal in terms of section 112 of the Companies Act No.71
of 2008.
In terms of the Option Agreement, Spear irrevocably and unconditionally undertakes to
vote in favour of the above section 112 resolution and further undertakes not to dispose
of its shares in Blend 15 without procuring that the acquirer of such shares makes an
equivalent undertaking in favour of the Purchaser.
Warranties and other Significant Terms of the Option Agreement
The Option Agreement contains warranties and indemnities by the Company and Blend
15 in favour of the Purchaser which are standard for a transaction of this nature. The
warranties are qualified and limited to the extent that any breach thereof was caused by
The Capital, as the tenant of the Property in terms of the Lease.
In terms of the Option Agreement, the Purchaser may, instead of acquiring the Disposal
Assets, elect to acquire the entire issued share capital of Blend 15 (“Sale Shares”) from
Spear. The provisions of the Option Agreement that applies to the Disposal shall apply
mutatis mutandis to the sale of the Sale Shares, provided, inter alia, that
- the purchase consideration shall be paid to Spear within 14 days after the CP
Fulfilment Date (“Sale of Shares Closing Date”) or such earlier or later date as may
be agreed between Spear and the Purchaser; and
- section 15 in the sectional title scheme, being the penthouse, together with certain
parking bays, a storeroom and a balcony will be internally transferred directly to Spear
by Blend 15 for the sum of R1 and will not comprise part of the Disposal.
6. APPLICATION OF THE DISPOSAL CONSIDERATION
In line with Spear’s stated strategy to reduce its group loan to value (LTV), the full Disposal
Consideration will be utilised to settle debt.
7. EFFECTIVE DATE OF THE DISPOSAL
The effective date of the Disposal will be the date of registration of transfer of the Property
into the name of the Purchaser.
8. RATIONALE FOR THE CALL OPTION
Granting the Call Option to the Purchaser is in accordance with Spear’s stated strategy
of exiting its hospitality assets in the short to medium term.
9. THE PROPERTY
Details of the Property are as follows:
Property Geographical Sector Gross Gross Weighted Weighted
Name Location Lettable Lettable Average Average
and Area Area Gross Gross
Address (m2) - (m2) – Rental / Rental / m2
Hospitality Commercial m2 - –
and Retail Hospitality Commercial
and Retail
15 on Cape Town Hospitality 14 207 1 847 R146 R111
Orange
Notes:
a) In addition to the Disposal Consideration, the costs associated with the Disposal are
estimated at R 1 000 000 (One Million Rand). No agents’ commission is payable in
respect of the Disposal.
b) In determining the Disposal Consideration, the value of the Property is considered to
be its fair market value, as determined by the directors of the Company. The directors
of the Company 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.
10. FINANCIAL INFORMATION
The value of the net assets attributable to the Disposal Assets as at 31 August 2020,
being the date of the last unaudited management accounts of Blend 15, was
R278 569 309. The value of the property at the same date was R277 326 460 , which
includes section 15 in the sectional title scheme, being the penthouse (valued at
R12 000 000), together with certain parking bays, a storeroom and a balcony that will not
form part of the Disposal.
The unaudited profit after tax attributable to the Disposal Assets for the six months ended
31 August 2020, was R431 624, based on the unaudited management accounts of Blend
15 for the six months ended 31 August 2020 , which were prepared in terms of IFRS.
Blend 15 is a wholly-owned subsidiary of Spear and, accordingly, Spear is satisfied with
the quality of the management accounts of Blend 15.
11. CLASSIFICATION OF THE DISPOSAL
The Disposal constitutes a category 2 transaction in terms of the JSE Limited Listings
Requirements.
Cape Town
18 March 2021
Sponsor and Corporate Adviser Legal Advisor
PSG Capital Cliffe Dekker Hofmeyr
Date: 18-03-2021 08:30:00
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