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Category 2 Disposal Announcement – Liberty Life Building
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”)
CATEGORY 2 DISPOSAL ANNOUNCEMENT – LIBERTY LIFE BUILDING
1. INTRODUCTION
Shareholders are advised that on 13 February 2023 (“Signature Date”), Spear entered
into a sale of rental enterprise agreement (“Agreement”), in terms of which Agreement,
Spear will dispose of the property known means Erf 6281 Montague Gardens, held by
Spear under Deed of Transfer T14523/2020, with all improvements thereon (“Property”),
and the rental enterprise conducted by Spear on the Property (“Rental Enterprise”), as
a going concern (“Disposal”), for a disposal consideration of R400,000,000 (“Disposal
Consideration”).
2. RATIONALE FOR THE DISPOSAL
2.1. The Property, which forms part of Spear’s commercial office portfolio, was acquired by
Spear in 2019, prior to the onset of the Covid-19 pandemic. In the wake of the global
pandemic and its residual effects on global and local corporate office accommodation
and the way in which some large corporates engage with and manage their office
space requirements, management has, with the full support of the Spear board of
directors (“Board”), agreed to dispose of the Property. The Disposal creates portfolio
rebalancing opportunities, with a clear and focussed investment bias towards industrial
warehousing, logistics and retail assets within the Western Cape.
2.2. The form and function of commercial office space has changed. Large corporates have
adopted a hybrid in-office and work-from-home model which has an impact on longer
term office space requirements by some large corporate office users. The work-from-
home narrative is not a one-size-fits-all solution, but changes in work force dynamics
and the cost of losing human capital, has forced some businesses to reconsider and
redesign how and where their workforce operates from. This has resulted in original
space requirements needing to be augmented to cater for a post Covid-19 commercial
office sector. Management believes that, given the augmentations that has taken place
in the commercial office eco-system generally, and the general messaging from larger
corporates, the Disposal gives effect to its portfolio rebalancing strategy, risk
management strategy and capital recycling strategy.
2.3. Following a strategic review of Spear’s total portfolio, management determined that
both the value percentile and revenue percentile which the commercial office portfolio
contributes to the overall portfolio are misaligned with its strategy and in need of
mitigation and rebalancing as the office sector demand augmentations play out.
Management has clearly communicated its focussed strategy of increasing portfolio
exposure to industrial and retail assets within the Western Cape, as two key pillars of
Spear’s growth strategy. This strategy will continue to enhance the defensive
characteristics of the underlying Spear portfolio.
2.4. Whilst Spear’s retention of certain multi-let commercial office assets remains part of its
overall strategy, post the implementation of the Disposal, the revenue contribution of
the commercial office sector assets within the portfolio will be aligned to that of the
revenue contribution of the industrial sector assets within the portfolio, being
approximately 40% each, with the balance being from the retail sector assets within
the portfolio. The net Disposal Consideration represents an 8.70% discount to Spear’s
latest reported book value of the Property, after deducting all transaction costs
associated with the Disposal. This discount was however considered to be reasonable
and acceptable to the Board, given the strategic benefits of the Disposal and in light of
the following factors:
- the design and functional envelope that comprises the Property was built to meet
the needs of a large-scale single tenant user;
- the upcoming expiry date of the lease with the current tenant (and the likelihood
of renewal only being for a reduced portion of the lettable area of the Property);
- the cost of the resultant vacancy of a portion of the Property, pending the reletting
thereof;
- the cost of refurbishment and augmentation of the office space, and the related
allowances to be provided to the new tenant, upon reletting;
- the risk of negative rental reversions (lower risk);
- no agency fee’s being incurred on the Disposal;
- the refinancing cost of the Property in light of rising interest rates; and
- the alternative investment opportunities available to Spear, which align with its
investment and capital allocation strategy.
3. APPLICATION OF THE DISPOSAL CONSIDERATION
3.1. As at the Signature Date, the income yield on the Property is 9.57%, and the current
debt on the Property is due to be refinanced in July 2023. The proposed refinance
terms, received from Spear’s funders, reflect the movement in the South African
interest rates and do not compare favourably to the initial funding terms obtained at
the original acquisition date of the Property, with the refinancing terms aligning closely
to the disposal yield of the Property. Given the movement in South African interest
rates and the probability of further interest rate hikes over the course of 2023,
management will settle the debt attributable to the Property, to the value of
R375 million and retain approximately R24 million in cash, to be utilised for selected
capital allocation initiatives.
3.2. Spear anticipates that the fixed debt ratio of the group, as at 28 February 2023, will be
approximately 62%, and that post implementation of the Disposal during the 2024
financial year, the fixed debt ratio will increase to between 72% and 77%. This will be
in line with management’s strategy of hedging between 65% and 75% of the group’s
debt at any given time, for periods of between 25 and 36 months.
3.3. The application of the Disposal Consideration will reduce Spear’s loan to value ratio
(“LTV”) by approximately 500 bps and the forecasted Spear group LTV, following the
implementation of the Disposal, will be between 34% and 36%. The anticipated date
of the Disposal will be after the payment date of the final dividend for the 2023 financial
year and post the implementation of the Island Urban Logistics Park acquisition. Post
the implementation of the Disposal, Spear’s LTV will be below managements strategic
band of between 38% and 43%. Management will keep the LTV at below the strategic
LTV band in the short term, until the rising interest rate cycle turns. Management is
considering various investment opportunities at this point in time that would require
future debt funding and would see movements in LTV on a forward-looking basis when
market opportunities are harnessed in line with its three-pronged capital allocation
approach, which is to allocate capital to:
- new acquisitions, developments or redevelopments, which are higher than Spear’s
weighted average cost of capital and which are accretive to the underlying
portfolio;
- Spear’s ongoing share repurchase programs; and
- portfolio enhancements, which generate organic portfolio income growth.
4. CONDITION PRECEDENT
4.1. The Disposal is subject to the fulfilment of the condition precedent (“Condition
Precedent”) that the Disposal has (to the extent necessary) been unconditionally
approved by the Competition Authorities in terms of the Competition Act, No. 89 of
1998, or conditionally approved on conditions which are acceptable to the parties.
4.2. The Condition Precedent must be fulfilled by not later than 120 days after the Signature
Date, which date may be extended by the parties in writing.
5. 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 (as defined below) (“Transfer Date”), which is anticipated
as being during the month of September 2023.
6. WARRANTIES AND OTHER SIGNIFICANT TERMS OF THE AGREEMENT
6.1. The counterparty to the Agreement is Capitec Bank Limited, a wholly owned subsidiary
of Capitec Bank Holdings Limited (“Purchaser”).
6.2. The Agreement contains representations and warranties by Spear in respect of the
Rental Enterprise and the Property, in favour of the Purchaser, which are standard for
a transaction of this nature.
6.3. Subject to such warranties, the Rental Enterprise and the Property are sold
“voetstoots”.
7. THE PROPERTY
Details of the Property are as follows:
Property Geographical Sector Gross Weighted
Name and Location Lettable Area Average Net
Address (m2) Rental / m2
Liberty Life Century City, Commercial 18,244 R200.15
Building, Cape Town Office
Century City
Boulevard,
Century City
Details regarding the Property, as at the Signature Date, are set out below:
Disposal Yield Weighted Average Weighted Average Vacancy % by
Attributable to Escalation Lease Duration Gross Lettable
Shareholders (years) Area
9.57% 7.00% 2.33 8.93%
Notes:
a) In addition to the Disposal Consideration, the costs associated with the Disposal are
estimated at R1 million. No agents’ commission is payable in respect of the Disposal.
b) The Disposal Consideration payable in respect of the Rental Enterprise (which
includes the Property), is considered to be its fair market value, as determined by the
directors of Spear. The directors of Spear 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.
8. FINANCIAL INFORMATION
8.1. As at 31 August 2022, being the date of the last published unaudited consolidated
interim financial statement of Spear for the six month period ended 31 August 2022,
the value of the net assets attributable to the Rental Enterprise, was R437,000,000.
8.2. The profit after tax attributable to the Rental Enterprise for the six month period ended
31 August 2022, was R12,049,217.24, based on the last published unaudited
consolidated interim financial statement of Spear for the six month period ended
31 August 2022, which were prepared in terms of IFRS.
9. CLASSIFICATION OF THE DISPOSAL
The Disposal Consideration represents more than 5% but less than 30% of Spear’s
market capitalisation as at the Signature Date and accordingly the Disposal constitutes a
category 2 transaction in terms of the JSE Limited Listings Requirements.
Cape Town
13 February 2023
Sponsor Legal Adviser
PSG Capital CDH
Date: 13-02-2023 02:00:00
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