By Maano Andy Thovhakale 

Equites Property Fund and Shoprite Holdings Limited, through its wholly-owned subsidiary Shoprite Checkers Proprietary Limited, have concluded a development and “triple net” lease agreement.

This article will cover:

  • the R1.2bn development deal,
  • all things Equities Property
  • DSV Campus sale and lease back, and
  • the previous sale and lease back deal with Shoprite

Equites Property Fund Limited is a South African real estate investment trust, with a definite focus on being a market leader in the logistics property market.

Equites Property Fund  strategy in SA is focused on developing and acquiring modern logistics properties, which are let to blue-chip tenants on long-term leases. The SA portfolio (including land) is valued at R15.6 billion and two-thirds of the rental income is derived from Gauteng. 

The below are some of the clients Equities Properties has in South Africa and the UK:

Equites Property Fund  has been appointed by Shoprite to develop a 92 791 square metre logistics warehouse facility in the City of Ekurhuleni Metropolitan Municipality, at an indicative total cost of development of R1 245 300 000.

The property is to be let to Shoprite on a 20-year lease, with a right to renew for three additional 10-year periods, which substantially increases the weighted average lease expiry period of the portfolio.

The development 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 rental will be determined based on the contracted initial yield of 7.75%, in accordance with the actual development cost and will escalate at a rate of 5% percent per annum.

How will Equities fund the R1 245 300 000?

The construction cost of the development is R979 million, and the remaining development disbursements will be funded from undrawn debt facilities as well as from proceeds received from property disposals in South Africa. 

Equites Property Fund has cash and undrawn facilities of R1.8 billion.

As Equites Property Fund already owns the underlying parcel of land, no further capital is required to control the land. 

In South Africa, land ownership is key to the success of a bidding process for new developments. 

Equites Property Fund’s land holdings are expected to reduce by 60% over two years (FY21-FY23), including further land acquisitions. This is due to more developments.

What impact will this have on Equites Property Fund’s Loan-to-Value (LTV)?

It will increase Equites’ LTV by 2.3%, on a proforma basis. 

Equites Property Fund’s LTV ratio was 31.5% at 28 February 2022, demonstrating a strong capital structure. The following factors impacted the LTV ratio during the financial year:

  1. Equites invested R4.3 billion in the development and acquisition pipelines in SA and the UK, which had a 14% increase in the LTV ratio.
  2. The retention of capital from two dividend reinvestment programmes (R700 million) decreased the LTV ratio by 3.1%.
  3. Equites successfully raised R2 billion in capital through two accelerated bookbuilds, which was well supported by institutional investors, resulting in both capital raises being oversubscribed. As a consequence, the LTV ratio decreased by 9.5%.
  4. Loans and borrowings increased from R6.8 billion at February 2021 to R9 billion at February 2022, in line with growth in the portfolio of 33%.

South African fund managers ‘prefer’property companies’ LTVs not to exceed 40%.

LTV ratio is a metric that assesses the lending risk that a lender carries by providing a loan to a borrower.

Rebosis Property has the highest LTV ratio of listed property funds with a LTV ratio ~72%.

Banks also use the interest cover ratio (ICR). This is a debt and profitability ratio used to determine the ease with which an entity can pay interest on its outstanding debt.

How are Equites Property Fund’s debt levels?

  • Equites Property Fund’s concluded a R2 billion debt, refinance, and upsize package with Standard Bank which comprised of an R800 million three-year sustainability-linked unsecured bond, a £50 million two-year sustainability-linked loan (including a £25 million upsize), and a R221 million three-year loan. The deal is the first pound sterling.
  • 10 November 2022 Equites raised R1.25 billion in a debt auction. Equites was looking to raise R1 billion, with the option to upsize to R1.25 billion, off its JSE-listed DMTN Programme, and received R2.34 billion of bids from 21 different bidders

Equites Property Fund’s uses a combination of natural hedges and derivative financial instruments to hedge exposure to interest rate risk. At 28 February 2022, 91% of the existing term loan balances were hedged for three years, thereby providing income certainty over the medium term.

DSV Campus sale and lease back.

Late 2021, Equites Property Fund’s and the Eskom Pension & Provident Fund agreed to form a joint venture that will buy the DSV Campus from DSV Real Estate for R2 050 000 000 and lease it back to DSV for an initial annual rent of R157 515 084.

What is a sale and leaseback?

It is a transaction where one entity (the seller-lessee) transfers an asset to another party (the buyer-lessor) and leases back that same asset.

This is becoming a popular way for entities to secure long-term financing from its assets.

Accounting treatment varies on whether transfer qualifies as a sale. If transfer of asset is not a sale (no control), it is considered to be a financing transaction. Legally, sale has occurred, economically, asset remains with the seller and no P/L on sale should be recognised.  

How does the structure of the joint venture look like?

A joint venture (JVCO) was formed.

Equites Property Fund own 51% and Eskom Pension and Provident Fund own 49%.

Equites Property Fund’s total equity contribution to the joint venture was expected to be R732 million. 

Equites Property Fund’s stated that it has the ability to dispose of a stake in its South African properties to the JV in the future, which ensures that Eskom Pension and Provident Fund will obtain exposure to the logistics sector whilst providing Equites with an alternative source of equity for its development pipeline. 

Eskom Pension and Provident Fund is one of the largest asset managers in SA, with R145 billion assets under management.

Eskom Pension & Provident Fund aims to earn an annual return of at least 4.5% after inflation, applicable taxes, and investment fees and costs, over a rolling three-year period.

The DSV Campus has 142 129m2 Gross Lettable Area. The lease will endure for an initial period of 10 years.

The initial annual rental payable by DSV Solutions to the joint venture shall be R157 515 084 (incl VAT).

How did Equities fund the R732m and what was the effect on Equities’ LTV?

Equites Property Fund’s equity contribution to the JV will be funded from existing cash resources and undrawn debt facilities.

The sale and lease back transaction increased Equites’ LTV ratio by 3.1% from 28.6% as at 31 Aug 2021 to 31.7%. 

Equites Property Fund  says that it has delivered total shareholder returns of 46% as a result of strong distribution and Net Asset Value growth between 2017 and 2021.

SA REITs are required to distribute a minimum of 75% of their taxable earnings in the form of dividends. 

Sale and leaseback transactions by Equites Property Fund with Shoprite.

FY21, Equites Property Fund  concluded a strategic venture with Shoprite for the acquisition of a 50.1% equity stake in 3 distribution centers with an initial portfolio value of R3.2bn and led to a 1.8% increased in LTV ratio.

The 3 distribution centres located in Western Cape and Gauteng were then leased back to Shoprite on three 20 year fully repairing and insuring leases (with three 10-year renewal options) and an annual rental escalation rate of 5%. 

So Shoprite disposed 3 of its distribution centres to Retail Logistics Fund (RLF).

Equites Property Fund  acquired a 50.1% stake in RLF, with Shoprite holding the remaining 49.9%.

Equites Property Fund  exercises control over RLF and this was assessed using IFRS 10 considerations.

Equites Property Fund, as a holder of 50.1% of the equity in RLF, remains exposed to both downside risks and upside potential as a result of the broad scope of the business that RLF can conduct and through its ability to direct the activities that are undertaken by RLF. 

Equites Property Fund’s power over RLF gives Equites the ability to affect the amount of returns generated by RLF.

RLF is consolidated by Equites in respect of its Group financial statements and Shoprite is reflected as a 49.9% non-controlling interest at a Group level. 

Equites delivered a 24.6% total return (change in share price plus dividends) during the 2022 financial year, marginally outperforming the South African Property Sector which delivered a total return of 22.4%. This brings the total return since listing (18 June 2014) to 17.0%, on an annualised basis, significantly outperforming the sector which delivered a 1% annualised return over the same period. 

Equites Property Fund’s rental collection is 100%. Less than 10% of Equities Properties’ leases expire in the next two years, translating into a high degree of income predictability. Good news for Equites Property Fund’s shareholders.


Follow Maano Andy Thovhakale’s regular LinkedIn newsletter, “Deal Zone”, by clicking here.