23rd Jul 2009 17:00
NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, IN, INTO OR FROM AUSTRALIA, CANADA, JAPAN OR THE UNITED STATES
South African Property Opportunities plc
Outcome of strategic review and publication of circular to convene an extraordinary general meeting of shareholders
The Board of Directors of South African Property Opportunities plc ("SAPRO") is pleased to announce the results of its strategic review and the publication of a circular to shareholders giving notice of an extraordinary general meeting at which resolutions will be proposed to approve the revised strategy and to re-register SAPRO under the Isle of Man Companies Act 2006.
In connection with the strategic review, the Board has concluded that SAPRO's current business plan, cost structure and misaligned incentives have and likely will continue adversely to affect shareholder returns. Consequently, and for reasons explained in more detail below, the Board has decided to: (i) serve a termination notice on SAPRO's investment manager on 20 October 2009, the earliest date that notice can be served under the management agreement; (ii) commence negotiations for a revised company management structure and cost base to more adequately align managers with shareholders, which will also reflect SAPRO's lower cost requirements; (iii) terminate the engagement of certain service providers and enter into more economical fee structures with other service providers; (iv) make no new investments unless they are directly beneficial to unlocking value on existing sites; (v) bring certain projects to early fruition over the next twenty-four months in order to allow greater focus on and development of fewer large sites; and (vi) return the realization proceeds to shareholders or reinvest a portion thereof in favourable opportunities in existing projects in accordance with shareholder wishes.
Background
SAPRO was set up in 2006 to finance and develop South African properties in the residential, retail, commercial and industrial sectors. SAPRO had an initial life of seven years with a possible winding up commencing in 2013. As of 1 July 2009, SAPRO had investments in sixteen projects including two mixed use projects, five residential projects, two retail projects, one commercial project (awaiting approval) and six industrial projects. Fourteen of these projects are held through joint ventures with the remaining two projects being wholly-owned. The Board estimates that under the existing investment strategy, final realizations would not occur until 2020 and that the bulk of shareholder returns would not be generated until the period 2017 - 2020.
Since the second half of 2008, SAPRO shares have consistently traded at an unacceptably wide discount to net asset value that has exceeded 60 per cent. In response to shareholder concerns about the discount and other company matters, the Board in February 2009 announced a strategic review. In March two additional directors were added to the SAPRO Board, and in April three directors resigned.
Following realignment of the Board during the course of the strategic review, the new board in April commenced a comprehensive review of SAPRO's assets and structure. The Board reviewed each investment's expected return, taking into account cash requirements, availability of development finance, success and projected success in completing sales of completed projects, pricing assumptions, construction risks, and joint venture arrangements. Additional factors considered included the macro economic climate, site location, and each project's stage in the planning or development process. The Board has also considered each site's risk/reward profile, the current or future availability of utilities and other bulk services, project attractiveness to joint venture partners or additional investors, and optimal exit strategy.
In connection with SAPRO's structure and expenses, the Board has focused on fees paid to the manager including the structure of management and performance fees. The Board considered the incentives in the fee structures and the influence of exogenous factors such as currency movement on compensation. The Board examined the recipients of the fees and their respective contributions to SAPRO's performance. The Board also focused on fees paid to various third party service providers, including how those fees were comparable to what others would charge for similar services.
Conclusions
In connection with the asset review, the Board concluded that a substantial portion of SAPRO's land value uplift has already been achieved and that future uplift will largely be dependent on a number of variables that make it difficult to predict future returns. The Board additionally believes that SAPRO's long investment horizon and lack of interim realizations may also contribute to the large discount because investors may be concerned about the true underlying value of the portfolio and shareholders' likely returns. The Board therefore concluded that SAPRO needs to adopt an entrepreneurial approach to unlocking value on sites with profitable trading potential and in so doing allow greater focus on the key development projects within the portfolio. This should allow the company to maintain greater flexibility, balance sheet strength and the ability to return funds to shareholders.
In view of these conclusions and following consultation with shareholders, the Board has decided to dispose of a portion of SAPRO's portfolio where acceptable returns can be generated. The Board has therefore identified certain sites that it believes can be sold on favourable terms over the next twenty-four months and expects to commence realizing these assets presently. The Board intends to closely consult with shareholders regarding whether shareholders want the entire realization proceeds returned to shareholders or a portion reinvested in the development of the other remaining projects.
With respect to fees and structural issues, the Board estimates that if SAPRO continued to 2020 under the current structure, fees could consume as much as half of the capital originally raised and that total costs could erode shareholder return to a single digit IRR. This expected return, the Board believes, offers shareholders a questionable risk/reward tradeoff in a promising, albeit risky, emerging market. The Board further believes that these fees may be a further cause of the large discount at which SAPRO has been trading.
The Board therefore intends on 20 October this year to serve notice in accordance with the existing management contract on the current investment manager such that its management contract will terminate on 20 October 2010. The Board expects to replace the current management structure with revised management arrangements during the course of the notice period. The Board has identified other immediate cost savings in connection with third party service providers that are expected to result in savings of about ₤300,000 annually.
Appointment of New Directors
The Board is currently considering appointing appropriately qualified individuals as independent non-executive directors and expects future announcements as appropriate.
Extraordinary General Meeting
The Board is convening an extraordinary general meeting to be held at the registered office of SAPRO, Third Floor, Britannia House, St George's Street, Douglas IM1 1JE, Isle of Man on 17 August 2009 at 10 a.m. Resolutions will be proposed to approve the revised strategy and re-register SAPRO under the Isle of Man Companies Act 2006.
Further details about the proposed business of the meeting are set out in a circular to shareholders to be published shortly.
For further information please contact:
South African Property Opportunities plc
John Chapman, Director
Tel: +1 212 9459 159
Matrix Corporate Capital LLC
Paul Fincham
Tel: +44203 206 7175
Related Shares:
South African Property Opportunities