Shoprite and Equites form a firm to house a R2bn portfolio

SHOPRITE Holdings and Equites Property Fund have established a joint venture property company (JVCo) to house a R2 billion portfolio of distribution centres and associated undeveloped land in Brackenfell in the Cape and Centurion in Gauteng.

The joint venture represents the outcome of a competitive and sought-after tender Shoprite put out for just one of its distribution centres last September, as well as five months of subsequent negotiations between Shoprite and Equites, said Equites chief executive Andrea Taverna-Turisan yesterday. Equites will inject R2.1bn cash into the JVCo in exchange for a 50.1 percent equity stake in the JVCo.

The portfolio would comprise some 19 percent of Equites’ total portfolio. The JVCo would then acquire the Cilmor distribution centre and the associated undeveloped land for R1.2bn cash. The JVCo and Shoprite Checkers will conclude “triple net” 20-year lease agreements for the Brackenfell, Cilmor and Centurion distribution centres.

The JVCo will manage the portfolio and it will also serve as a platform for the development of the undeveloped land, as well as future property acquisition and development opportunities.

Shoprite said the deal would optimise return on invested capital; release of capital to be deployed into higher yielding retail projects and technology; provide operational and capital flexibility and result in a partnership with a best-in-class logistics property company.

The properties involved are a logistics campus, two modern distribution centres and undeveloped land. Shoprite Checkers intended to retain its shares in the JVCo.

The initial yield on the leases would be 7.5 percent and the rental would escalate at a rate of 5 percent each year. In any future development of the land, Equites would be appointed as the developer and the JVCo would fund the development.

Taverna-Turisan said they were delighted as it had been challenging to acquire properties in the South African context that met Equites’ strict investment criteria.

The transaction enhanced Equites’ competitive advantage, while the inclusion of Shoprite, Africa’s largest food retailer, as one of Equites’ major tenants further diversified Equites’ exposure to credit risk.

The logistics campus and the modern distribution centres had been built to Shoprite’s exacting requirements and to institutional standards and the conclusion of three, 20-year leases with a predictable, escalating cash flow, meant Equites was shielded from certain market risks which it would otherwise be exposed to.

The long-dated, annuity income stream also presented significant opportunities to reduce Equites’ cost of debt funding over the medium to long term.