DISCOVERY LIMITED - Voluntary Announcement: Purchase of Discoverys Head Office Building, 1 Discovery Place

Evidence from the filing

• The transaction generates a substantial R800 million in net present value savings over the remaining lease term.

  “The effect of the transaction is that the Group is locked into an immediate and expanding net annual cash-flow saving, delivering approximately R800 million in net present value over the remaining lease period, in addition to ownership of the building.”

• Discovery is optimizing its physical footprint by cancelling the Phase 2 lease while securing long-term ownership of its primary operations.

  “Discovery will acquire Phase 1 ("Grove and Park buildings") of 1DP and cancel the lease for Phase 2 ("Ridge building").”

• The acquisition is expected to be earnings-positive and is timed to capitalize on favorable property prices and interest rate dynamics.

  “Once the transaction becomes effective, the Group expects a positive effect on earnings and an initial increase in the FLR, followed by a continued reduction towards the lower end of the Group's guidance range of 10% to 20% over the next few years.”

• The shift from leasing to ownership is expected to result in an immediate and expanding net annual cash-flow saving for the Group.

  “This has enabled a switch from a long-term lease arrangement to a fully-funded financing arrangement with ownership, at a lower overall cost.”

• The transaction will lead to an immediate increase in the Group's financial leverage ratio due to the massive R4.05 billion debt funding required for the purchase.

  “Once the transaction becomes effective, the Group expects a positive effect on earnings and an initial increase in the FLR, followed by a continued reduction towards the lower end of the Group's guidance range of 10% to 20% over the next few years.”

• The acquisition is being fully funded through debt, which adds significant interest rate risk.

  “The total consideration of the transaction is R4.05 billion (exclusive of VAT), with the acquisition to be fully funded through pre-arranged debt.”

• The Group is committing capital to commercial real estate despite admitting that property prices in Johannesburg have reduced significantly.

  “This arises because economic dynamics have moved in favour of a purchase, with both prevailing interest rates and property prices in Johannesburg having reduced significantly.”

• The cancellation of the Phase 2 lease implies a contraction in physical space requirements.

  “Discovery will acquire Phase 1 ("Grove and Park buildings") of 1DP and cancel the lease for Phase 2 ("Ridge building").”

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