Investore Property Ltd and its creator & asset manager, Stride Property Ltd, engaged in some transactions this week which will see Investore buy 3 Bunnings properties from Stride, along with a number of other capital management issues.
Stride intended to sell the 3 properties to Investore when Investore listed last year, but didn’t get lease agreement in time. The new proposal requires Investore shareholder approval, but a meeting date hasn’t been set yet.
Investore is to buy 3 Bunnings properties at Hamilton, Rotorua & Palmerston North from Stride for $78.5 million at an initial yield of 6.13%, with structured growth of fixed 2.5%/year rental uplift.
Investore’s board is also exploring a possible share buyback & bond offering, and said its guidance of 7.46c/share cash dividend for the 2018 financial year was unchanged.
Stride established Investore out of a division of its own business and added a portfolio of Countdown supermarkets to list it in 2016. The forward investment strategy was to continue to acquire large format retail properties, a segment of the market identified as offering unique investment attributes.
“With this investment mandate clearly established, the board’s focus has been to look for further opportunities to expand Investore’s portfolio and to enhance shareholder returns by optimising capital structure. Investore believes the combination of the proposed acquisition, the capital management initiatives being considered, which include options around the implementation of a share buyback scheme & a bond issue, and repositioning of the portfolio, delivers on this strategy.”
Investore signalled in its 2016 initial public offering product disclosure statement that Stride had intended to transfer its remaining large format retail properties to Investore. However, Stride retained ownership of the identified assets because the terms of transfer couldn’t be agreed with the tenant, Bunnings Ltd, within the timeframe required to align a divestment with the timing of the Investore IPO.
As a material transaction under NZX listing rules concerning related parties, the transaction requires Investore shareholder approval. A meeting date hasn’t been set yet, but the board hopes to get approval for settlement to be concluded by 28 February. It’s engaged Northington Partners Ltd to prepare an independent appraisal report.
Independent Investore directors Mike Allen & Kate Healy managed the sale & purchase agreement negotiation with the Stride board and received independent valuations from Jones Lang LaSalle which supported the $78.5 million acquisition price.
Investore’s board said the acquisition of this Bunnings portfolio would diversify the tenant mix, reducing the Countdown concentration from 81% (as at 30 September 2017) to 73%, with Bunnings equating to 10% of the portfolio contract rental.
The board said the Bunnings’ portfolio would be leased on new 12-year lease terms and provide a higher proportion of structured growth into Investore’s portfolio, with a fixed 2.5%/year rental uplift. Net rent under the new lease starts at $4.81 million/year.
Following settlement of these properties, Investore’s bank loan:value ratio (LVR) is expected to increase from 39% to 46%. The board said: “Although this is below the targeted maximum LVR ratio of 48%, Investore is planning on disposing up to 3 properties to provide balance sheet capacity for future activities, including capital expenditure works, and is exploring the options around the implementation of a potential share buyback scheme. In addition, the board is also considering a bond issue.”
Bunnings retains the right to acquire the properties at year 48 of the lease, on the assumption that a new 6-year lease term is in place.
As a part of the 3 lease restructures, Stride will pay Bunnings $18 million on termination of the old leases & commencement of the new leases, implying a net cost to Stride of $13 million post-tax deductibility. As the payment is a component of investment property, it’s not expected to materially affect Stride’s distributable profit for the year to March 2018.
Stride has retained its other Bunnings property, at Carr Rd, Mt Roskill, where Bunnings has signalled its intent to carry out works within the next 12 months. Subsequent to these works, and subject to changes in the market or other portfolio commitments, Stride said it expected to put this asset on the market at the end of 2018.
Stride chair Tim Storey said the Stride board had reviewed its strategy on ownership of large format retail property and reaffirmed its view that interests in such assets should be held through Stride’s investment in Investore, or sold.
Attribution: Company releases.