- Acquisition of controlling interest in the Leopard portfolio consisting of 66 German retail properties currently held in joint venture.
- Total portfolio independently valued at €175.5 million reflecting a net initial yield of 7.4 per cent.
- Aggregate consideration of €49.0 million, comprising both increased equity interest and associated shareholder loans.
- The investment is expected to deliver a cash on cash yield of 10 per cent. p.a.
- The consideration will be funded from cash resources. The Portfolio’s existing debt facilities will be retained and reflects an overall portfolio leverage of 49 per cent.
- Portfolio provides exposure to high quality, secure, indexed-linked cashflows with opportunities to extend existing stores and re-gear leases.
- Efficient reinvestment of capital following the recent sale of the VBG German offices portfolio.
- The investment simplifies the Company’s portfolio and structure and provides greater flexibility over future asset management initiatives and reinvestment decisions.
Redefine International is pleased to announce that the Company has reached a conditional agreement with Redefine Global (Pty) Limited to acquire control of the German Leopard Portfolio joint venture, in which it holds an existing 50 per cent. equity interest, for an aggregate consideration of €49 million (€49.4 million including transaction costs).
Following the Acquisition, the Company will hold an effective 94 per cent controlling interest in the portfolio, whilst providing 100 per cent. of its non-bank financing requirements by way of shareholder loans.
The Leopard Portfolio comprises 66 German retail properties generating gross rental income of €13.9 million, of which 99.2 per cent. is indexed to between 60 – 70 per cent. of German CPI subject to indexation reaching a cumulative hurdle of 10 per cent. The portfolio is independently valued at €175.5 million reflecting a net initial yield of 7.4 per cent.
The consideration of €49.0 million reflects taking on existing debt facilities totalling €86.1 million (€43.1 million being the Company’s existing share). The facilities have an average all-in cost of 1.4 per cent. per annum which supports a 10 per cent. geared income return on the total consideration payable by the Group, including transaction costs.
The Seller is a wholly-owned subsidiary of Redefine Properties Limited, which is a substantial shareholder of the Company. Accordingly, the Acquisition constitutes a related party transaction for the purposes of Chapter 11 of the UK Listing Rules and is therefore conditional on Independent Shareholders’ (excluding Redefine Properties and its associates) approval, which will be sought at an Extraordinary General Meeting convened for 2.00 p.m. on 25 April 2017 at 2nd Floor, 30 Charles II Street, London SW1Y 4AE.
Mike Watters, CEO of Redefine International commented:
“In line with our strategy, this transaction represents a good opportunity to recycle capital into assets which generate a strong income yield, having sold the VBG portfolio of German offices at an 8.6 per cent. premium to book value. Furthermore, our controlling interest in the portfolio will provide more flexibility over future asset management initiatives and reinvestment decisions.”
Strategic rationale for the Acquisition
The Company recently disposed of its interest in the VBG portfolio of German offices, in which it had a 49 per cent. share, for €106 million which reflected an 8.6 per cent. premium to book value. The Company received net disposal proceeds of approximately €24.9 million. The sale delivered an IRR of 27 per cent. over the investment period and was in line with the Company’s strategy to recycle capital out of assets with limited income growth potential.
The acquisition of a further 44 per cent. overall equity interest in the Leopard Portfolio provides an efficient reinvestment of this capital into a portfolio which it is wholly responsible for management and administration of, and has external financing arrangements already in place (with no arrangement or break fees payable). The Acquisition provides a secure, high yielding income return from strong tenant covenants with the benefit of inflation linked rent reviews on 99.2 per cent. of the leases by gross rental value, whilst not materially changing the Group’s overall exposure to German real estate from that reported as at 31 August 2016.
Further to this, the Company, through its subsidiary Ciref Europe Limited, has agreed to acquire all shareholder loans outstanding between the Seller and the SPVs and therefore provide the subordinated debt financing requirements of the Leopard Portfolio, at an externally bench marked commercial rate of interest.
The Acquisition also simplifies the Company’s portfolio and structure, with the Leopard Portfolio assets becoming fully controlled by the Company, providing greater flexibility over future asset management and reinvestment decisions.
Information on the Leopard Portfolio
The Leopard Portfolio comprises 66 properties and totals over 138,000 square metres of lettable area. It includes a mixture of stand-alone supermarkets, foodstore anchored retail parks and cash and carry stores. The properties are well located within their respective micro markets, with 86.4 per cent. of the total annual rental income located in Western Germany and Berlin and the remainder in Eastern Germany. Key portfolio attributes include:
- Gross rental income of €13.9 million.
- Edeka, Netto, Rossmann and Real account for over 85.6 per cent. of gross rental income providing strong tenant covenants.
- An aggregate WAULT of 8.4 years.
- Portfolio occupancy of 99.2 per cent. by estimated market rental value.
- 99.2 per cent. of gross rental income is subject to indexation of typically between 60 per cent. – 70 per cent. of German CPI, subject to cumulative indexation reaching a hurdle of 10 per cent. since the last rent review date.
The portfolio provides exposure to high quality, secure, indexed-linked cashflows with opportunities to extend existing stores and re-gear leases.
Consideration and financial effects of the Acquisition
The Company has reached agreement to acquire 88 per cent. of the issued share capital of Leopard Holdings South Africa S.à r.l. (an effective 44 per cent. equity interest in the Leopard Portfolio) for €0.3 million and 100 per cent. of the associated outstanding shareholder loans for €48.7 million.
The aggregate consideration payable of €49.0 million is based on an adjusted net asset value (“NAV”) of the Leopard Portfolio (€43.6 million as at 31 August 2016). Adjustments have been made to take account of certain balance sheet adjustments agreed between the parties. A further allowance has been made to give recognition to the considerable savings achieved from completing the Acquisition by way of a share transaction as opposed to a direct property acquisition (whereby a property acquisition of this size could be expected to attract standard purchaser’s costs of 8.5 per cent. (€7.5 million)). In addition, under the terms of the Acquisition, the Company will acquire the Leopard Portfolio with economic effect from 1 March 2017, thereby receiving the benefit of c. €0.8 million in net income which would otherwise accrue to the Seller between 1 March 2017 and the proposed completion date.
The Company currently reports its existing 50 per cent. shareholding in the Leopard Portfolio as a joint venture and has historically consolidated its results using the equity method of accounting. This reflects only its proportionate share of the joint venture’s net profit or loss within the Group’s consolidated income statements, and discloses its proportionate share of the joint venture’s net assets as a single line investment within the consolidated balance sheet.
The proposed Acquisition of a further 44 per cent. Shareholding which will increase the Group’s total equity interest in the Leopard Portfolio to 94 per cent., will result in the investment being fully consolidated on a line by line basis into the Group’s consolidated income statement and consolidated balance sheet. The residual 6 per cent. minority shareholding, which will be held by Secure German Investments Limited, will be accounted for as a non-controlling interest share and reflected within the single line item in both the consolidated income statement and Group balance sheet.
Based upon the 31 August 2016 audited accounts, this would have the following headline financial effect in pounds sterling (the Group’s functional currency) and based on a currency conversion rate of £1.00 : €1.177:
On the consolidated balance sheet:
- Reduce Loans to Joint Ventures by £37.0 million.
- Increase investment property by £150.4 million.
- Increase external borrowings by £73.7 million.
- Reduce cash by the consideration payable, being £41.6 million.
On the consolidated income statement:
- Increase net operating income by £8.9 million.
- Increase external finance costs by £0.9 million.
- Reduce finance income by £2.5 million.
- Increase losses incurred from change in fair value of derivative financial instruments and revaluation of investment property by £1.7 million.
- Increase profit for the year by £3.2 million.
On a proportionate basis, the Acquisition will contribute an additional £5.4 million in gross rental income to the Group and approximately £4.6 million in net rental income after all landlord costs. The increase in underlying earnings of £4.2 million, which excludes the impact on earnings of unrealised gains and losses, results in a cash on cash yield of approximately 10.0 per cent. on the consideration payable by the Company, including transaction costs.
Funding the acquisition
The consideration payable by the Group will be funded from existing cash resources. The Leopard Portfolio is currently part funded by four bank facilities totalling €86.1 million (€43.1 million being the Company’s existing share) which will remain in place. The facility has an all-in cost of 1.4 per cent. per annum, with the only significant maturity occurring in May 2020.
Related Party Transaction
Redefine Properties is the ultimate holding company of Leopard Holdings South Africa S.à r.l., the target company in connection with the Acquisition. By virtue of Redefine Properties’ 29.79 per cent. shareholding in the Company, Redefine Properties is a related party due to it being a substantial shareholder of the Company under the UK Listing Rules. The Acquisition constitutes a related party transaction under Chapter 11 of the UK Listing Rules.
Consequently, the Acquisition is conditional upon, and must be approved by, the Independent Shareholders before it can be completed. Accordingly, the approval of the Independent Shareholders will be sought at the Extraordinary General Meeting to be held on 25 April 2017.
A Circular containing the Notice of the Extraordinary General Meeting has been sent to shareholders today and in accordance with LR 9.6.2 R of the Listing Rules of the UKLA, a copy of the Circular is expected to be submitted today to the UK’s National Storage Mechanism and will be available for inspection at: http://www.morningstar.co.uk/uk/NSM and will also be available on the Company’s website, www.redefineinternational.com.