Pick n Pay has called off plans to buy 60% of its new distribution centre at Eastport in Gauteng as the JSE-listed retailer takes a more prudent approach to capital investment amid a sluggish economy.
In May last year Pick n Pay told Business Day it had secured long-term funding at a competitive interest rate to fund the purchase.
Pick n Pay will now lease the property for 15 years as per the initial agreement, and on a triple net lease, which means it will pay all the running costs of the property leased such as maintenance, security, rates and taxes.
“The decision to amend the nature of the financing agreement was driven by the company taking a more prudent approach to its capital investment, partly driven by the impact of load-shedding costs on the business,” CEO Pieter Boone said in a media statement.
The company is facing tough times with its share price down almost 40% so far this year due to higher costs associated with power cuts and stiff competition from Checkers.
Its operating profit margin is 2.7%, well below Shoprite’s 5.8%, giving it less room to continue to absorb the higher costs.
In the year ended February 26, Pick n Pay's net debt rose by R2.2bn to R3.7bn, while headline earnings per share were down 16.3%.
Pick n Pay spent R522m on diesel to power backup generators, or about R430m when electricity initiatives are taken into account.
The group said load-shedding added significant costs to supply chain pressures, and food retailers were particularly affected by additional cost to keep food fresh.
Boone said a new agreement with Fortress enables Pick n Pay to deliver all the operating benefits associated with retailer’s move to Eastport, while being able to focus their capital investment on customer and sales growth through new stores and store refurbishments.
“The distribution centre will help Pick n Pay deliver logistics and supply chain innovations, achieving efficiencies and growing market share at a time when faster and cheaper service of our stores has never been more important to deliver on our customer promise of low prices and reliable service,” he said.
Pick n Pay took occupation of the distribution centre on June 1, which was developed to consolidate its existing Longmeadow distribution centres and its three smaller facilities. Eastport will serve a store network in Gauteng, Mpumalanga, the Free State, North West and Limpopo provinces and selected stores in the Northern Cape.
The distribution centre cost about R2bn (land and construction), with Pick n Pay’s 60% share estimated at R1.3bn. The amended agreement means Fortress will no longer receive the R1.3bn cash payment from the sale of 60% to Pick n Pay. Still, Fortress’s loan-to-value ratio (LTV) — a key measure of the financial health of a property company — will remain at 37.5% as recorded at the end of December.
Fortress specialises in the logistics and retail property sectors in SA and owns premium logistics assets in Central and Eastern Europe. Its strategy is to build a two-thirds logistics and one-third defensive retail.
CEO of Fortress Real Estate Investments, Steven Brown said the company had already incurred the development costs and there would be no changes to the balance sheet.
“The amendment does not affect the company’s operations since Fortress had always planned to hold a material stake [originally 40% and now 100%] in the asset, and Pick n Pay has signed a triple net lease for 15 years,” said Brown.
Fortress said the R2.13bn estimated total cost of the development, including capitalised interest would be determined once final accounts have been received and settled.
According to the May 17 2021 initial agreement, Pick n Pay would purchase 60% in the distribution centre. The retailer had signed an initial 15-year lease term on an initial 7% yield on total development cost, and an escalation rate of 6% per annum.
With the amended agreement announced on June 5, Fortress retains 100% ownership of the 164,000m2 distribution centre developed for the retailer Eastport Logistics Park in Gauteng.
Pick n Pay retains the right of first refusal on any potential disposal of the asset outside the Fortress group, and would rent the property on an 8.5% yield on total development cost.
Brown told Business Day that a higher yield was required since economic conditions had changed with higher inflation and interest rates since the initial agreement back in May 2021. “Capital is now more costly than it was, so we required a higher return on the asset to amend the terms of the agreement,” he said.
He said the 6% annual escalation clause was specific to the Pick n Pay transaction, but within the group, annual escalations vary across rental agreements.
At the end of December 2022, the weighted average in-force escalations for the SA logistics portfolio was 6.9% — while current market norms for this subsector range between 6%-8%.
Demand for logistics
Brown said that despite the higher interest rate and inflationary environment, they don’t expect tenants with similar arrangements to backtrack on deals.
In September 2022 Fortress and Crusader Logistics announced a joint venture to develop a distribution centre for the logistics company at the Eastport Logistics Park in Gauteng for R240m.
“With many transactions where tenants co-invest, we seeing increased interest in them acquiring more of the building as the replacement cost is significantly higher now than when we initially built the assets,” said Brown.
He said the logistics sector fundamentals are relatively sound, with Fortress experiencing high demand for its prime assets in the past two years — mainly from distributors of commodities such as pulp, polymers, providers of health care, sugar, food and retail inventory.
“Fortress successfully developed and let about 350,000m2 of prime logistics facilities at its various logistics parks in SA — indicating tenants’ preference for well-located, secure and modern logistics facilities,” Brown said.
With Katharine Child
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