June 6 2023
Local retailer Pick n Pay will no longer co-own a new flagship distribution centre at Eastport in Gauteng. Instead the top-end centre will be owned by JSE-listed property group, Fortress Real Estate Investments. Fortress specialises in owning logistics properties as well as commuter retail shopping centres.
Initially Fortress had plans to buy 60% of the new distribution centre but it will now on it outright. Pick n Pay will lease the property for 15 years on a triple net lease.
“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,” Pick n Pay CEO Pieter Boone said in a media statement.
Pick n Pay and other retailers are battling amid a recession in SA with crumbling infrastructure. Loadshedding has made running supermarkets way more expensive than ever before especially as food needs to be kept cold and fresh.
Pick n Pay’s operating profit margin is now 2.7%, below Shoprite’s 5.8%. In the year to end-February 26 2023, Pick n Pay spent R522m on diesel to power backup generators.
Pick n Pay will rather spend capital on refurbishments and rolling out new stores.
“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,” Boone said in a media statement.
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 serves stores in Gauteng, the Free State, Mpumalanga, the North West and Limpopo provinces.
The 164,000m2 distribution centre cost around R2bn to build, with Pick n Pay’s 60% share estimated at R1.3bn. The amended agreement means that Fortress will no longer receive the R1.3bn cash payment from the sale of 60% to Pick n Pay.
Fortress specialises also owns premium logistics assets in Poland.
CEO of Fortress, Steve Brown said the company had already incurred the development costs and there would be no changes to its balance sheet related to Eastport.
“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.
At the end of December 2022, the weighted average in-force escalations for Fortress’ SA logistics portfolio was 6.9% and current market norms for the subsector ranged between 6% and 8%.