Equites sells two UK prime logistics sites
• Sale proceeds will fund development pipeline in SA and reduce gearing
JSE-listed Equites Property Fund, specialist owner and developer of prime logistics assets in SA and the UK, has sold two UK logistics properties as part of its disposal programme announced in February.
The DSV and Coloplast properties in Peterborough, comprising warehousing and offices, were sold to Clarion Partners Europe for £51m, which equates to a 7.95% discount on the carrying value of the assets at endAugust 2022.
Equites said the two properties were acquired in 2018 for £43m at a 5.4% yield. The deal crystallises a geared internal rate of return of more than 13% excluding any exchange rate gains over the past five years.
In a statement on Thursday, Equites said the net cash proceeds of about R1bn would lower the loan-to-value (LTV), a key measure of the financial health of a property company.
“It will also increase the weighted average lease expiry of the portfolio and enhance the growth profile of distributable earnings per share over the long term,” the company said.
In addition, Equites said the proceeds would fund its development pipeline in SA that consisted of pre-let development agreements with blue-chip tenants on long-term leases. Equites owns prime logistics assets in SA and the UK valued at R26.3bn at the end of August. Its tenants are multinationals that are prepared to sign leases for 10, 15 and 20 years and who, given their commercial might, tend to meet rental payments on time.
The properties were sold as the remaining lease lengths of 5.4 years for the DSV property, and 6.3 years for Coloplast are below the weighted average lease expiry of the UK portfolio of 15.6 years as of the end of August 2022.
Equites said the fair value of the assets less the deferred tax liabilities in the target companies amounted to £56,282,347, based on property values of £40,580,000 for the DSV property and £19,438,807 for the Coloplast property. The contribution to net profit after tax (including fair value adjustments and finance costs) for the six months ended August 2022 were £895,425.
CEO Andrea Taverna Turisan told Business Day earlier this month that Equites expected stability of valuations coming back to the UK market.
At last valuation, Equites’ UK portfolio was about £450m. With the new valuation, the company expects the value of income producing assets will come off at 10%-15% in sterling.
Data from MSCI showed a 19% decline in capital values for UK logistics properties in 2022, increasing the prime distribution yield to 5%.
The net initial yield of Equites’ portfolio (property valuations versus passing rent) was 4% at end-August. Passing rent is the current contractual rent on the property. Equites estimates the passing rent to increase 30%40% after all rent reviews over the next four years.
“Though the market will go through tough times, we are very comfortable about our investment in the UK, and we feel the sector we are in is massively underserviced given the growing demand for space,” Taverna-Turisan said.
Along with the sale of these two assets, he said Equites was focused on capitalising on growth opportunities and investor appetite in the UK.
To this end, Equites has appointed Rothschild & Co to undertake a formal process to present the Newlands Development Platform to potential equity partners globally.
Equity partners will only be introduced if they create maximum value for shareholders.
“An additional equity partner will crystallise a portion of the value that has been created to date and will release capital to Equites,” Taverna-Turisan said.
Zoned land availability in the UK would always be a challenge because the zoning processes were complex and took longer, which put a strain on the supply side of land, he said.
Equites has 10 sites in the UK of about 526ha with potential for 1.3-million square metres of logistics space. They carry gross development value of about R50bn over the medium term.
Taverna-Turisan said the UK would not go back to where it was 18 months ago, but he expected prime yields to settle at about 4.5%. In the past few years, rental growth had been in double digits, and while this would no longer be the case the growth would still be healthy, he said.
In a pre-close investor presentation on February 28, Equites said it intended selling two UK assets for R1.1bn and was in advanced negotiations with the buyer.
This deal is the first of three phases of the R3.9bn disposal programme in SA and the UK aimed at strengthening the company’s balance sheet.
Due to the disposals, its LTV will increase 35%-40% in the short term, with a medium-term target range of 30%-35%.
At end-August, its LTV increased from 31.5% to 33.3% mainly due to development capital expenditure of R977m in SA and the UK.