STENPROP LIMITED
(Incorporated in Bermuda)
(Registration number 47031)
BSX share code: STP.BH JSE share code: STP
ISIN: BMG8465Y1093
(?Stenprop? or ?the company?)
ACQUISITION OF A SIGNIFICANT MULTI-LET INDUSTRIAL PORTFOLIO AND STRATEGIC MANAGEMENT PLATFORM
POSITIONS STENPROP FOR GROWTH
1. INTRODUCTION
Shareholders are advised that Stenprop has reached agreement to acquire a portfolio of multi-let industrial properties (the
?MLI Portfolio?) as well as the management business that has built up and managed the portfolio, C2 Capital Limited (the ?C2
Management Platform?) for a combined consideration that values the two businesses at #130.5 million (collectively, the
?acquisitions?).
The MLI Portfolio is made up of 25 separate multi-let industrial estates situated in or near densely populated nodes across the
United Kingdom. The portfolio, which is operated under the brand industrials.co.uk, has a gross lettable area of approximately
2 million square feet (200,000m2) and a diversified base of over 400 tenants. Further details of the MLI portfolio are set out in
paragraph 4 below.
The C2 Management Platform, founded in 2009 by Julian Carey, specialises in the acquisition and active management of multi-
let industrial estates across the UK.
2. RATIONALE
Stenprop?s objective is to deliver sustainable growing income to its investors. One of the ways Stenprop seeks to achieve this is
through active recycling of assets into opportunities with better earnings growth potential. The acquisition of the MLI Portfolio
and the C2 Management Platform is in line with this strategy. It will provide the company with a strategic platform in the multi
let industrial estates (MLI) sector that it is confident will, on a sustainable basis, deliver increased earnings growth.
The ability to achieve higher growth by investing in the MLI sector is underpinned by a number of positive fundamentals:
- MLI assets are attractively priced, generally trading at yields which are higher than other property classes in the UK.
This is primarily because MLI assets are management intensive and require economies of scale and management
expertise to deliver consistent returns.
- The MLI occupational market currently benefits from a favourable structural demand/supply imbalance which
Stenprop believes is likely to translate into higher rents over time. The supply of MLI properties is constrained as a
result of a number of factors:
- Build costs have gone up by approximately 70% over the last 10 years whilst industrial rents have remained
largely unchanged. As a result most MLI properties are currently trading well below their replacement cost.
The purchase price reflects a cost of c. #65 per square foot, which is less than the replacement cost of the
assets.
- The combination of rising costs and stable rents has meant it is challenging to profitably build multi let estates
at current rental levels.
- The small amount of available land in urban areas has been assigned to higher value uses in recent times (such
as residential or larger distribution warehouses).
- In this environment of constrained supply, occupier demand for MLI space is growing as the impact of technology
and the internet drives changes in the way people work, shop and interact. The range of occupiers of MLI space is
expanding from traditional industrial occupiers through to last mile distributors, e-retailers and other technology
orientated businesses such as 3D printing. On top of this, decentralisation in working practices is driving demand for
more localised space.
- As a result of these supply constraints, coupled with the growing list of uses for MLIs and the relatively low absolute
rents payable per tenant, well managed MLIs are beginning to experience rental growth in excess of current inflation
rates. Stenprop believes this is an early stage trend which will continue for a number of years.
- A focus on MLI results in exposure to small to medium size businesses, a sector which has grown in number by over
50% since 2000. Typically, these tenants are focused on providing services to the c. 60m people living in the UK,
rather than being exposed to international markets and global trade.
- Alternative higher value uses such as residential will continue to underpin the future value of the MLI properties
acquired by Stenprop due to a focus on buying properties in or near densely populated areas.
In addition to these positive fundamentals, there is substantial scope to add value through proactive asset management. MLI
units are simple and versatile with low obsolescence and capital expenditure requirements. Shorter lease terms of between
three and five years allow for active management. The aggregation of costs across a portfolio of assets drives down average
costs. The acquisition of the C2 Management Platform provides Stenprop with the necessary in-house skills and expertise to
provide this specialised asset management; complements the skills and expertise of Stenprop?s existing management team;
and is a key factor in providing Stenprop with the platform on which to build a much larger MLI platform over time.
Stenprop is confident that, in addition to delivering organic growth through ongoing asset management of the MLI portfolio, it
will be able to add further MLI properties onto the platform through earnings enhancing acquisitions. Individual MLI properties
tend to trade at higher yields than large portfolios as, on their own, they lack the diversification and necessary economies of
scale to be efficiently operated. The opportunity to acquire individual MLI properties at higher yields and operate them
efficiently through the C2 Management Platform should also contribute to overall growth. To achieve this, Stenprop intends to
pursue further acquisition opportunities within the MLI sector with the objective of integrating additional properties and
portfolios into its newly acquired industrials.co.uk platform, with the intention of establishing itself as a leading player in the UK
MLI space.
3. TERMS OF THE ACQUISITIONS
The MLI Portfolio is owned by Industrials UK LP which is in turn owned by Industrials Investment Unit Trust (?IIUT?) and
Industrials UK GP LLC (?GP?). Stenprop will, through two wholly owned subsidiaries, acquire all of the units in IIUT and all of
the shares in GP from Rebano Holdings BV and C2 Industrials LLP for an effective aggregate purchase price of #58m (#127m
less the #69m of debt in Industrials UK LC provided by the Royal Bank of Scotland) (the ?purchase price?), being the net asset
value of IIUTand GP. The purchase price is subject to a further adjustment to take account of any working capital in the
structure at the time of completion.
The MLI portfolio is being acquired with effect from the date of completion of the transaction, which is expected to be on 30
June 2017. The purchase price is payable in cash, with a #6,350,000 deposit having been paid on exchange of contracts on 6
June 2017 and the balance of the purchase price payable on completion, with a subsequent adjustment for working capital.
There are no outstanding conditions to completion and the sellers have provided normal warranties and indemnities for a
transaction of this nature. These have been underwritten with warranty and indemnity insurance.
The purchase consideration will be ultimately funded out of the proceeds from the sale of the Nova Eventis shopping centre,
which is scheduled to complete on 22 June 2017, and from the sale of certain of the properties in Stenprop?s Swiss portfolio that
are in the process of being sold. To ensure that it has the cash available to settle the purchase price on completion, Stenprop
has secured a twelve month bridging finance facility of ?31 million, which attracts an arrangement fee of 1% and interest at 7%
per annum. The loan is subject to a group loan to value covenant of 65%. A further twelve month facility of ?8 million has been
secured at an interest rate of 7% per annum.
Stenprop will acquire the shares in C2 Capital Limited from Julian Carey for #3.5 million, to be settled by the issue of 3,270,500
Stenprop shares (the ?consideration shares?), adjusted upward or downward in cash for working capital.
The consideration shares are subject to restrictions on sale for three years after completion, with no shares capable of being
sold in the first year, up to one third being capable of being sold in the second year and a further third in the third year. Normal
warranties and indemnities for a deal of this nature have been provided, including restrictive covenants that will (subject to
limited exceptions) prevent Julian Carey from engaging in any business relating to multi-let industrial properties for three years.
It is expected that Julian Carey will join the board of Stenprop as an executive director in due course.
4. PROPERTY SPECIFIC INFORMATION
Weighted
average rental
per square
Geographic location foot*
Property name (UK) Sector GLA (sq.ft) (# psf)
1 Compass Industrial Park North Multi-let Industrial 365,955 3.42
2 Dana Trading Estate South East Multi-let Industrial 225,676 5.52
3 Anniesland Business Park Scotland Multi-let Industrial 182,050 6.13
4 Redbrook Business Park North Multi-let Industrial 164,301 3.01
5 Lea Green Business Park North Multi-let Industrial 152,624 4.35
6 Capital Business Park Wales Multi-let Industrial 95,211 6.36
7 Caldene Industrial Estate North Multi-let Industrial 81,975 5.98
8 Greenway Business Park South East Multi-let Industrial 64,898 4.43
9 Shire Court Network Centre North Multi-let Industrial 62,909 3.85
10 Lion Business Park South East Multi-let Industrial 61,716 7.09
11 Davey Close Trade Park Midlands Multi-let Industrial 54,268 5.67
12 Sovereign Business Park Midlands Multi-let Industrial 53,947 4.73
13 Sherwood Network Centre North Multi-let Industrial 53,385 4.18
14 Imex Business Centre Scotland Multi-let Industrial 49,735 7.70
15 Eurolink 31 North Multi-let Industrial 49,225 4.70
16 Boaler Street Industrial Estate North Multi-let Industrial 48,217 3.97
17 Poulton Close Industrial Estate South East Multi-let Industrial 47,246 5.45
18 Wholesale District & Trade Park South East Multi-let Industrial 35,808 6.05
19 Croft Business Park North Multi-let Industrial 33,359 6.59
20 Rawdon Network Centre Midlands Multi-let Industrial 32,381 4.67
21 Rivermead Business Park South East Multi-let Industrial 27,201 7.64
22 Wharton Street Industrial Estate Midlands Multi-let Industrial 22,642 4.52
23 Wainright Street Industrial Estate Midlands Multi-let Industrial 18,789 4.60
24 Argyle Business Centre Midlands Multi-let Industrial 8,031 7.61
25 Cuckoo Trade Park Midlands Multi-let Industrial 6,080 7.71
Total 1,997,629 4.94
The aggregate acquisition costs payable for the acquisitions are #1.8 million. The purchase price payable for the MLI
Portfolio is considered to be its fair market value, as determined by the directors of the company. The directors of the
company are not independent and are not registered as professional valuers or as professional associate valuers in terms of
the Property Valuers Profession Act, No.47 of 2000.
The average capital cost of the portfolio equates to approximately #65 per square foot. The average passing rent equates to
approximately #4.94 per square foot, or #5.15 per square foot on contractual uplifts. The average space occupied per tenant
is approximately 5,000 square foot with an average annual rent of approximately #25,000.
5. FINANCIAL INFORMATION
Set out below are the forecast revenue, operational net income, and net profit after tax of the acquisition of the MLI
portfolio (?the forecast?) for the 9 months ending 31 March 2018 and the 12 months ending 31 March 2019 (?the forecast
period?).
The forecast has been prepared on the assumption that the acquisition of the MLI Portfolio will be implemented on 30
June 2017 and on the basis that the forecast includes forecast results for the duration of the forecast period. The forecast
does not include the acquisition of the C2 Management Platform as the information relating to this acquisition has been
included in this announcement on a voluntary basis.
The forecast, including the assumptions on which it is based and the financial information from which it has been prepared,
is the responsibility of the directors of the company. The forecast has not been reviewed or reported on by independent
reporting accountants.
The forecast presented in the table below has been prepared in accordance with the company?s accounting policies, which
are in compliance with International Financial Reporting Standards.
Forecast for the Forecast for the
9 months ending 12 months ending
31 March 2018 31 March 2019
#?000 #?000
Rental income 6,477 9,176
Non recoverable property operating expenses (658) (803)
Net rental income 5,819 8,373
Administrative expenses (188) (250)
Net operating income 5,632 8,124
MLI Portfolio financing costs (1,636) (2,181)
Profit before tax 3,996 5,943
Taxation (368) (549)
Net profit available for distribution 3,628 5,394
The forecast incorporates the following material assumptions in respect of revenue and expenses:
1. The forecast is based on information derived from the management accounts, budgets, and rental contracts
provided by the sellers.
2. Rental income is derived from the forecasts provided to the company by the sellers.
3. Net rental income includes the effects of straight lining rental income.
4. Total comprehensive profit includes the effects of finance costs.
5. Contracted revenue is based on existing lease agreements including stipulated increases, all of which are valid
and enforceable.
6. Leases expiring during the forecast period have been assumed to be re-let at current market rates after a 6 month
void period unless the lessee has indicated its intention to renew the lease.
7. On all new leases the company has assumed a 3 month rent free period
8. Of the rental income for the 9 months ending 31 March 2018, 91% relates to contracted rental income and 9%
relates to uncontracted rental income.
9. Of the rental income for the 12 months ending 31 March 2019, 73% relates to contracted rental income and 27%
relates to uncontracted rental income.
10. Non recoverable property operating expenses have been forecast by the responsible property manager on a
property by property basis based on service charge budgets, capex budgets and forecast vacancy rates.
11. Stenprop intends to maintain its historic pay-out ratio of approximately 85% of profit available for distribution as
dividends.
12. No fair value adjustment is recognised.
13. There will be no unforeseen economic factors that will affect the lessee's ability to meet their commitments in
terms of existing lease agreements.
6. CATEGORISATION OF THE ACQUISITION
The acquisition of the MLI Portfolio is classified as a category 2 transaction in terms of the JSE Listings Requirements.
Accordingly, it is not subject to approval by shareholders.
The acquisition of the C2 Management Platform is not a categorised transaction in terms of the JSE Listings Requirements
and the information provided in this announcement is provided on a voluntary basis.
As IIUT and GP will become subsidiaries of the company, the company will ensure that there are no provisions in their bye-
laws that may frustrate or relieve the company from compliance with the JSE Listings Requirements.
Stenprop has a primary listing on the Main Board of the JSE and a secondary listing on the BSX.
7 June 2017
JSE sponsor
Java Capital
Bermuda Stock Exchange sponsor
Estera Securities (Bermuda) Limited
