SA CORPORATE REAL ESTATE LIMITED CALGRO M3 HOLDINGS LIMITED (Incorporated in the Republic of South Africa) (Incorporated in the Republic of South Africa) (Registration number 2015/015578/06) (Registration Number: 2005/027663/06) (Approved as a REIT by the JSE Limited ( JSE )) JSE share code: SAC ISIN: ZAE000203238 JSE Share Code: CGR ISIN: ZAE000109203 ( SA Corporate ) ( Calgro M3 ) (Collectively the Parties ) JOINT ANNOUNCEMENT: SA Corporate and Calgro M3 joint initiative and acquisition of its first phase portfolio of properties 1 INTRODUCTION SA Corporate and Calgro M3 are pleased to announce that the Parties have agreed to enter into a joint initiative through Afhco Holdings (Pty) Ltd ( Afhco ), a wholly owned subsidiary of SA Corporate, and Hizoscape (Pty) Ltd, respectively (to be renamed Calgro M3 Real Estate (Pty) Ltd) ( Calgro Real Estate ), a wholly owned subsidiary of Calgro M3. In terms of a shareholders agreement ( the Shareholders Agreement ), Afhco will subscribe for 51% and Calgro Real Estate for 49% of the issued share capital in Afhco Calgro M3 Consortium (Pty) Ltd ("the Company"), a newly incorporated private company trading under the Afhco brand ( the Joint Initiative ). The Company has been incorporated specifically to facilitate the Joint Initiative and is being constituted to acquire, once developed and tenanted, a defined portfolio of residential properties from Calgro M3 ( the Properties ) but with a long term strategy to acquire further developed and tenanted residential portfolios of properties from Calgro M3, other developers and the broader market (the Proposed Transaction ).
2 IMPLEMENTATION DATE The effective date in respect of the Joint Initiative and the Proposed Transaction will be 1 September 2016, subject to the fulfilment of the condition precedent referred to in paragraph 6 below. 3 RATIONALE FOR THE JOINT INITIATIVE AND THE PROPOSED TRANSACTION AND NATURE OF BUSINESS OF THE COMPANY The Joint Initiative and the Proposed Transaction is consistent with each of the Parties investment and growth strategies relating to the development and expansion of high quality residential portfolios that promote sustainable distribution growth and capital appreciation in the medium to long term. As indicated above the Company is being constituted to initially acquire a defined portfolio of residential properties from Calgro M3 with the further goal to acquire additional residential portfolios from Calgro M3, other developers and the broader market. In addition, SA Corporate s rationale for entering into the Joint Initiative is to partner with an experienced developer who JSE investors are confident will: achieve portfolio scale in a sector with underweight listed exposure and defensive characteristics due to the non-discretionary nature of rental payments; have access to a pipeline of stock that needs to be largely developed due to the poor quality of most existing income generating property acquisition opportunities, which do not meet investment criteria; cap SA Corporate s development exposure to that appropriate for a REIT; mitigate and diversify development risk; ensure competitively priced funding thereby reducing the acquisition cost of developed properties; and establish a partnership of common long term values in respect of (a) quality affordable accommodation, (b) contributing to the upliftment of communities and their lifestyles, (c) building an attractive investment product with sustainable growing annuity income for REIT investors, (d) responsible and environmentally conscious development and (e) good corporate governance. Furthermore, Calgro M3 s rationale is: to partner with an experienced REIT with an established track record in managing residential portfolios, allowing the Calgro M3 group to remain focused on development;
address the housing shortage by creating substantial rental opportunities in line with the Minister of Human Settlements' objectives; create annuity income for the Calgro M3 group and thereby further diversification of income and cash flow streams; balance exposure between Public and Private sector development; create rental opportunities for people who do not qualify for property ownership in existing projects; establish rental brand in partnership with experts in the field; and remain true to our value of creating a lifestyle change Building legacies, changing lives. At present, there are five residential development projects that Calgro M3 is in the process of developing and which have been earmarked for purchase by the Company ( the Development Projects ). Furthermore, the Company will source new residential development opportunities to be developed by Calgro M3 and acquire income generating properties meeting the quality benchmarks of the Company. This initiative will capitalise on the Parties complementary but different development and investment capabilities to enable them to bring a more sustainable, higher specification product to the market at a target yield circa 11 % on completion and tenanting. 4 TRANSACTION OVERVIEW 4.1 Shareholders Agreement The Parties shall enter into a Shareholder s Agreement, which shall provide, inter alia, for preemptive rights in respect of the sale of shares and effective control by Afhco, resulting in the Real Estate Investment Trust ( REIT ) tax dispensation being applicable in respect of the Company and allowing the Company to have REIT "controlled company" status. In addition, the provisions of the Shareholders Agreement shall provide for the purchase of the below mentioned first phase of residential Development Projects from Calgro M3 ("the Proposed Initial Acquisition"). Furthermore, the acquisition of each Property forming part of the Proposed Initial Acquisition will be governed by a sale and development agreement.
4.2 Proposed Initial Transaction Consideration and Funding The full Initial Transaction consideration ( the Proposed Initial Transaction Consideration ) amounts to R1,639 billion, as follows: 4.2.1 R573.65 million or 35% of the Proposed Initial Transaction Consideration will be funded through limited recourse debt by the Company; 4.2.2 the remaining 65% will be funded by an equity contribution in cash from the Parties with: SA Corporate contributing 51% of the equity to the amount of R543 million; and Calgro M3 contributing 49% thereof to the amount of R522 million. 4.3 Value of net assets and profits attributable to the net assets that are the subject of the Proposed Transaction As the Company is newly incorporated there is no profit history or net asset value at present. The net asset value of the Company upon completion of the Initial Transaction will be R1,065 billion. The Company will be capitalised as the completed Properties are tenanted and transferred over the next 18 to 24 months. The annual net property income attributable to the assets that are the subject of the Proposed Initial Transaction is forecast to be R176 million. A full valuation of the Properties to be acquired will be performed on completion of the residential development projects. 4.4 Anticipated yield On completion of the Proposed Transaction the Company will target a net yield on property acquisition cost (including a 5% rental shortfall guarantee) of circa 11% for the Development Projects. 5 PROPERTY SPECIFIC INFORMATION Details of the Properties that form part of the Development Projects are: No. Location Rentable area (1) (m 2 ) 1. Johannesburg West, Gauteng 33 720 2. Soweto, Gauteng 11 520 3. Johannesburg South, Gauteng 43 068 4. Kraaifontein, Western Cape 33 760 5. Belhar, Western Cape 40 000 Total 162 068
Note: 1. It should be noted that the above rentable areas exclude parking (to be let separately) and all common areas, such as dry yards, walkways, staircases and private crèches. Afhco shall, at a market related property management fee, manage each property on behalf of the Company and will be responsible for running the day to day operations of the Company. 2. Weighted average rental per square meter has not been disclosed as the Properties are being developed and are currently untenanted. 6 CONDITION PRECEDENT Currently, the implementation of the Shareholders Agreement in respect of the Company is subject only to the obtaining of competition authority approval, if required. 7 CATEGORISATION OF PROPOSED TRANSACTION 7.1 The Proposed Initial Transaction constitutes a category 2 transaction in terms of the JSE Listings Requirements for Calgro M3, and accordingly does not require approval by Calgro M3 shareholders. 7.2 The Proposed Initial Transaction constitutes a category 2 transaction in terms of the JSE Listings Requirements for SA Corporate, and accordingly does not require approval by SA Corporate shareholders. Sandton 29 August 2016 Corporate Advisor and Transaction Sponsor to Calgro M3 Grindrod Bank Limited Sponsor to SA Corporate Nedbank Corporate and Investment Banking,
Corporate Advisor to SA Corporate Phoenix Capital (Pty) Ltd Legal Advisors to SA Corporate and Competition Law Advisors to the Parties Cliffe Dekker Hofmeyr Inc