Discovery is buying its own head office building in Sandton, 1 Discovery Place, in a deal worth R4 billion.
Discovery moved into the office in 2018 and believes it will remain there for more than seven years, until the expiration of its current lease agreement.
The move also accounts for the long-term, strategic nature of office planning, especially given the scale of Discovery’s Johannesburg operations.
“The group is deeply committed to South Africa and believes the head office has served the group well in all aspects and aligns with its purpose, values, and its long-term outlook,” Discovery said.
The deal will see Discovery Phase 1, which includes the Grove and Park buildings of 1 Discovery Place, and will cancel the lease for Phase 2 at the Ridge building.
The move will be facilitated by Discovery Propco, which has entered into an agreement with South Africa’s largest landlord, Growthpoint Properties, and the trustees of the Truzen 114 Trust.
Discovery Propco will purchase Phase 1 of the letting enterprise of the office comprising 91,756 sqm.
The sellers have also agreed with Discovery Central Services to cancel the Phase 2 lease, comprising 19,369 sqm.
Discovery said the total consideration for the transaction is R4.05 billion, exclusive of VAT, and that the deal is fully funded via pre-arranged debt.
Discovery said that the transaction is subject to Competition Authority approval and other customary suspensive conditions.
BusinessTech has regularly visited 1 Discovery Place, which differs heavily from most offices in the country.
The vast office has several other amenities, including its own Woolworths Food Store, a Seattle Coffee, Home Affairs Services, a gym and a rooftop terrace.
Why the move
Discovery said that the transaction provides strong financial and economic benefits for the group. This arises because economic dynamics have moved in favour of a purchase.
This is due to the interest rate environment, with more cuts expected, and property prices in Johannesburg, which have reduced significantly.
This has enabled Discovery to switch from a long-term lease to a fully funded financing arrangement with ownership, at a lower overall cost.
The positive effect of the move is expected to be immediate and to expand net annual cash-flow savings, delivering roughly R800 million in net present value over the remaining lease period.
The group has accounted for the long-term lease obligations under IFRS 16, where the right-of-use asset and corresponding lease liability are recognised in the statement of financial position.
It noted that the obligations of the financing lease have had a similar risk exposure to debt financing. However, with a different accounting treatment, the value has been excluded from the group’s financial leverage ratio.
Once the transactions take effect, the group expects a positive impact on earnings.
While the financial leverage ratio will initially increase, it is expected to reduce to the lower end of the group’s guidance range of 10% to 20% over the next few years.
Growthpoint Properties said that the move reduces its office exposure and contributes to a reduction in single-tenant asset concentration in the Sandton node.
It also supports a rebalancing of Growthpoint’s portfolio towards sectors and regions expected to deliver more stable, resilient income profiles over the longer term, such as retail, logistics, and the Western Cape.
1 Discovery Place Images
