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EQUITES PROPERTY FUND LIMITED - Acquisition of properties in Gauteng and Kwazulu- Natal

13 March 2018 - 18:40 PM

EQU Acquisition of properties in Gauteng and Kwazulu- Natal 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?) ACQUISITION OF PROPERTIES IN GAUTENG AND KWAZULU-NATAL 1. INTRODUCTION Shareholders are advised that Equites has concluded legal agreements (?sale agreements?) to acquire the letting enterprises in the following two properties from Investec Property Group Holdings Proprietary Limited (?seller?): - A 37 834m2 distribution centre let to Nestle (South Africa) Proprietary Limited (?Nestle?) on a 93 237 m2 site in Longmeadow Business Estate, Gauteng (Portion 1 of Erf 63 Longmeadow Business Estate Extension 2 Township, Registration Division I.R., Province Gauteng) (?the Longmeadow Property?); and - A 26 857m2 distribution centre let to Pick-n-Pay Retailers Proprietary Limited (?Pick n Pay Retailers?) and Nestle on a 50 454m2 site in New Germany, Kwa-Zulu Natal (Portion 5 of Erf 1394 New Germany Township, Registration Division F.T., Province of Kwa-Zulu Natal) (?New Germany Property?), for an aggregate purchase consideration of R648 018 978 (?purchase price?) (as at the estimated effective date of 1 June 2018) (?the transaction?). The two properties were offered to Equites as one transaction and the sale agreements are inter-conditional and indivisible. 2. RATIONALE OF THE TRANSACTION As logistics properties of this nature and quality rarely come to market, Equites is pleased to have acquired these two well-located, high-quality, modern logistics facilities of substantial scale, occupied by two A-grade tenants with strong lease covenants with fully repairing and maintaining leases that are long-dated and consistent with the lease expiry profile that Equites targets. Rental escalations are above inflation at 7.5% in respect of the two leases in the New Germany Property and 7.25% in respect of the lease in the Longmeadow Property. The Longmeadow Property has a 1 039m? vacancy in the office section which was acquired as part of the transaction for no additional consideration. Equites has targeted key logistics nodes in Gauteng, Cape Town and Durban as its areas of focus in South Africa. The acquisition of the New Germany Property represents its first foray into the Durban market. The topography of the greater Durban area makes building big logistics warehouses very expensive due to the extent of bulk earthworks required to create flat platforms. At R9 906/m? the New Germany Property?s purchase price compares favourably with replacement costs. The addition of these two high-quality income producing properties enhances the company?s existing real estate portfolio and is expected to result in enhanced returns over the medium to long term. The transaction is therefore consistent with Equites? stated growth and investment strategy of: - focusing on premium ?big-box? distribution centres, let to investment grade tenants on long-dated ?triple net leases?, in proven logistics nodes and built to institutional specifications; and - building a high-quality logistics portfolio in both South Africa and the UK, consisting of properties with predictable rental growth profiles, that promotes capital growth and increasing income returns over the medium to long-term. Equites views the two properties as evidencing the following sound investment/property fundamentals: Longmeadow Property - Situated in one of South Africa?s premier logistics nodes, Longmeadow Business Estate, the property benefits from excellent infrastructure, reliable access to labour and easy access to a range of road networks; - This 37 834m? facility was custom built to Nestle?s exacting international specifications; - The site extends to a total area of 93 237m?, which provides an internationally acceptable site cover of significantly less than 50%; - Nestle recently extended its lease until 31 December 2030. Nestle is a wholly-owned subsidiary of Nestle S.A., which is listed on the Swiss Stock Exchange with a current market capitalisation of approximately R3 trillion. The Nestle group is one of the top 100 companies in the world; - The existing Nestle lease expires on 31 December 2018 and the 12-year renewal provides for a reduction in rental to R59/m2 from that date (?Longmeadow adjusted rental?); and - 1 093m? in the office section of the property is vacant (2.89% of total GLA) with Nestle covering the operational costs in respect of this area until it is let. New Germany Property - New Germany adjoins Pinetown and Westmead and is a prime warehousing, logistics and manufacturing node situated near the N3 highway; - The property is centrally located with access to the N3 via the M7. The node also offers access to Durban via the King Cetshwayo highway. Various secondary roads servicing the greater Pinetown area are available should there be congestion on the N3 or King Cetshwayo highway. Importantly, this area is the last logistics area before the Mariannhill Toll Plaza; - This 26 857m? facility was developed for and used by Nestle until their recent decision to consolidate their entire Southern African warehousing food solution in the Longmeadow Property; - The major part of this property is currently let to Pick-n-Pay Retailers (25 398m?) with a portion of the offices (1 459m?) being let to Nestle. Both leases expire on 31 December 2022; - Pick n Pay Retailers is a wholly-owned subsidiary of Pick n Pay Stores Limited, which is listed on the JSE with a market capitalisation of approximately R34 billion. Pick n Pay Retailers is the major trading subsidiary of Pick n Pay Stores Limited and therefore the financial position and performance of the group is largely drawn from this subsidiary; and - The site extends to a total area of 50 454m?, which provides an internationally acceptable site cover of approximately 50%. 3. DETAILS OF THE PROPERTY The total purchase price of R648 018 978 constitutes an acquisition yield of 8.75%. This is based on the contracted rental income for the 12 months commencing 1 June 2018 and assuming a market-related rental for the vacant office space at the Longmeadow Property of R100 per m2. The effective acquisition yield of the transaction is 7.40% based on the effective purchase price as set out in paragraph 4.2 below and the Longmeadow adjusted rental as set out in paragraph 2 above. Gross Weighted average Total Geographical Lettable rental per square consideration Property name location Sector Area (m2) metre (monthly) payable Longmeadow 1 Nguni Drive Logistics 37 834 R93.08 R 381 952 567 Property Longmeadow Ext 2 New Germany 31 Lanner Road, Office 26 857 R60.00 R 266 066 411 Property New Germany The total consideration payable is considered to be in line with 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. 4. SALIENT TERMS OF THE LEGAL AGREEMENTS 4.1 The transaction is subject to the following outstanding conditions precedent: - Equites confirming that it is satisfied with the results of its due diligence investigation; and - the approval of the Competition Authorities. 4.2 The purchase price payable by Equites for the properties shall be calculated as follows: - In respect of the Longmeadow Property, by capitalising the aggregate net rental for a 12-month period from 1 January 2019 by 7% and adding the positive difference between the actual rental payable by Nestle from the transfer date up until 31 December 2018 and the net rental that Nestle would have paid during the aforementioned period if the monthly rental was equivalent to the monthly rental charged in 2019 (?top slice rental?). - In respect of the New Germany Property, by capitalising the aggregate net rental for a 12-month period from the date of transfer by 7.5%. - If transfer occurs on 1 June 2018, the aggregate purchase price for the two properties will be R 648 018 978, which includes an amount of R9 402 967 relating to the top slice rental. The aggregate purchase price excluding the top slice rental amounts to R638 616 011 (?effective purchase price?). 4.3 The effective date of the transaction will be the date on which the two properties are transferred from the seller to Equites, from which date the ownership of the properties (and all risk and benefits in respect of the properties) will pass to Equites. It is estimated that the effective date will be 1 June 2018. 4.4 The seller has provided warranties and indemnities to Equites that are standard for a transaction of this nature. 5. FINANCIAL INFORMATION Set out below is the forecast for the transaction (?the forecast?) for the 9 months ending 28 February 2019 and year ending 29 February 2020 (?the forecast period?). The forecast has been prepared on the assumption that transfer of the two properties will be completed, and rental income in terms of the leases received, from 1 June 2018. 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 the Forecast for the 9 months ending year ending 28 February 2019 29 February 2020 ZAR ?000 ZAR ?000 Rental revenue 33 289 48 772 Straight-line adjustment 6 780 6 023 Net property income/net operating profit 40 069 54 795 Less: finance costs -13 086 -17 497 Net operating profit after tax 26 983 37 298 Add back: Straight-line adjustment -6 780 -6 023 Profit available for distribution 20 203 31 275 The forecast incorporates the following material assumptions in respect of revenue and expenses: 1. Rental revenue comprises: a. contracted rental income of R33 289 000 in respect of the 9 months ending 28 February 2019 and R47 455 000 in respect of the year ending 29 February 2020. Top slice rental is credited to the purchase consideration and is not recognised as rental revenue; b. the rental derived from the Nestle lease in Longmeadow is based on the contracted lease agreement and has been adjusted in accordance with IFRS to account for the purchase price adjustment for the higher rental from 1 June 2018 to 31 December 2018 and the subsequent reversion for the remaining lease period; c. U\uncontracted rental of R1 316 933 in respect of the existing office vacancy at the Longmeadow Property, which is assumed to be let with effect from 1 March 2019. 2. All contracted rental agreements are assumed to be valid and enforceable. The escalations provided for during the forecast period are in line with the rental agreements. 3. The leases are fully repairing and insuring leases and normal property operating expenses are assumed to be recoverable from the tenants. 4. The property and asset management functions for both properties will be performed internally. 5. The transaction will be financed in line with the current capital structure. This assumes a loan-to-value of 30% throughout the forecast period. The marginal cost of debt assumed in the forecast is 9.0%, which is in line with the current marginal cost of funding. 6. No fair value adjustment is recognised. 7. 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 a category 2 transaction for Equites in terms of the JSE Listings Requirements and accordingly does not require approval by Equites shareholders. 13 March 2018 Corporate advisor and JSE sponsor Java Capital Date: 13/03/2018 05:40:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 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