Equites International Limited (“Equites International”), has concluded an agreement with Travis Perkins Properties Limited (“the seller”), in terms of which Equites International will acquire a recently developed, 19 909 square meter cross docking distribution centre situated in Coventry, England (“the property”) from the seller for a purchase consideration of £41 000 000 (equivalent to approximately ZAR697 000 000) (the “purchase consideration”) (“the transaction”).
The transaction is subject to the seller entering into a 15 year lease with Kuehne + Nagel Limited (“K+N”) before 6 October 2017.
The transaction is consistent with Equites’ stated growth and investment strategy of:
- Diversification into the United Kingdom (“UK”) in order to mitigate the risks of its emerging market focus and access the advanced know-how and technology in respect of logistics facilities in the UK; - 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. In the UK, the locations of preference are the central Midlands and “last-mile” fulfilment centres near major metropolitan areas; and - Building a high quality logistics portfolio, 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 property as evidencing the following sound investment fundamentals:
- The property, which meets modern logistics requirements, is located immediately adjacent to Jaguar Land Rover’s World Headquarters and global engineering campus in Coventry in the industrial ‘golden triangle’ which is the most important logistics hub in the UK. It benefits from excellent connectivity with the A45/A46 Coventry interchange right next to the site and easy access to the M6, M1, M45 and M40 motorways. The property is within a 4 hour drive from 80% of the UK population and this highly desirable Midlands node has the highest volume of logistics demand in the UK;
- The property is 19 909 square metres in extent on a 7.29 hectare site which translates into a low coverage of 27% providing the tenant with a cross docking warehouse, a small high quality office area, dock level and level access doors, extensive 82 metre yards and clear height to eaves of 12 metres;
- K+N and the seller have concluded Heads of Terms in respect of a 15 year lease, with an option in favour of the tenant to break after 12 years, which will commence the day on the conclusion of the comprehensive agreement of lease between the parties (“K+N lease”). The tenant forms part of the Swiss based Kuehne + Nagel International AG Group which is a global transport and logistics service provider. The group provides sea freight and air freight forwarding, contract logistics, and overland businesses with a focus on providing IT-based solutions. It employs approximately 66 000 people in 1 000 offices in more than 100 countries and has around 7 million square meters of warehousing space under management. K+N, the UK subsidiary which entered into the lease, had a turnover of £1 208 billion in 2015; and
- The K+N lease will be subject to upward only rental reviews in years 5 and 10 linked to the higher of open market value or CPI increases with a 2% and 4% cap and collar respectively. Independent expert advice has been that the current estimated rental value for the property is higher than the base rent of £6.25 per square foot as per the K+N lease, which confirms the rental growth profile of the property.
The property will therefore add to the quality, defensiveness and income predictability of Equites.
DETAILS OF THE PROPERTY
The purchase consideration is based on the first year’s rental income of £1 985 000, of which £1 860 000 relates to the rental payable in respect of the property (at a base rent of £6.25 per square foot) and the payment of £466 500 in respect of the external area/yard of 7.5 acres with the balance being payable in respect of other improvements to the property funded by the seller and extensive external storage areas.
Property name Geographical location Sector GLA (m2 ) Weighted average rental per square foot Weighted average rental per square metre Purchase
Kuehne + Nagel 100 Scimitar Way, Whitley, Logistics 19 909 Warehouse (214 000 sq ft) / £6.25 Warehouse (19 881 sq m) / £67.27 £41 000 000
Coventry, CV3 4GB, England Canopy (28 000 sq ft) / £2.00 Canopy (2 601 sq m) / £21.53
The purchase price 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.
TERMS OF THE TRANSACTION
4.1 The transaction is subject to the seller entering into a 15 year lease with K+N before 30 September 2017.
4.2 The effective date of the transaction will be the day the property will transfer into the name of Equites International, on which date all risk and benefits in respect of the property will pass from the seller to Equites International.
4.3 On 26 July 2017, Equites International paid a deposit on account of the purchase consideration in the amount of £2 050 000, with the balance of the purchase consideration being due and payable against transfer.
Set out below is the forecast for the property (“the forecast”) for the six months ending 28 February 2018 and year ending 28 February 2019 (“the forecast period”).
The forecast has been prepared on the assumption that the acquisition will be implemented on 31 August 2017 and on the basis that the forecast includes forecast results for the duration of the forecast period.
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.
The forecast presented in the table below has been prepared in accordance with the company’s accounting policies, which are in compliance with International Financial Reporting Standards.
Forecast for the 6 months ending 28 February 2018 ZAR
Forecast for the year ending 28 February 2019 ZAR
Revenue (excluding straight lining) 16 872 500 33 745 000
Net property income/net operating profit 16 847 000 33 694 000
Net operating profit after tax 5 685 232 11 370 465
Profit available for distribution 5 685 232 11 370 465
The forecast incorporates the following material assumptions in respect of revenue and expenses:
1. The forecast has been prepared in £ and translated at an exchange rate of ZAR17/£.
2. The forecast is based on information derived from the management accounts, budgets, and rental contracts provided by the seller.
3. Rental income is derived from the forecasts provided to the company by the seller.
4. Net operating profit after tax includes the effects of finance costs.
5. Rental revenue comprises contracted rental only. Contracted revenue is based on an existing lease agreement including stipulated increases, all of which are valid and enforceable.
6. Property operating expenditure has been forecast by the property manager on a line-by-line basis based on management’s review of historical expenditure, where available, and discussion with the property manager.
7. Initially, the transaction will be financed from available cash resources in South Africa which will be hedged through a currency derivative. The intention is to subsequently refinance up to 50% with UK debt. The all-in fixed cost of funding has been estimated at 3%.
8. No fair value adjustment is recognised.
9. There will be no unforeseen economic factors that will affect the lessee's ability to meet its commitment in terms of the K & N lease.
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.
COMPLETION OF DSV TRANSACTION
On 2 November 2016 shareholders were advised that Equites International concluded an agreement with Tango Real Estate LLP (“the DSV seller”), which is a joint venture vehicle between Prologis UK Limited (“Prologis”) and Wittington Investments (Developments) Limited, in terms of which Equites International acquired a 19 511 square meter distribution centre let to DSV Solutions Limited (“DSV”) situated at Prologis Park, Sideway, Stoke-on-Trent, England (“the DSV property”) from the seller (“the DSV transaction”).
The DSV property was in the process of being developed by Prologis on behalf of the DSV seller for DSV which entered into a 10 year lease with the DSV seller. The DSV transaction was therefore subject to several conditions precedent including, inter alia, 1) the completion of the development by Prologis and the delivery to Equites International of the Certificate of Practical completion and 2) the lease between the DSV seller and DSV becoming unconditional.
Following the fulfilment of all the conditions precedent the DSV transaction was completed on Thursday, 29 June 2017, on which date ownership of the DSV property passed to Equites International against payment of the purchase consideration of £18 141 000.