Investec Property Warrants

1
Investec Property Warrants
2
Contents

• Main Features
• What is an Investec Property Warrant?
• Variable Exercise Price
• Distributions
• Comparing the Alternatives
• Tax Treatment

3
Main Features

• Security issued by Investec and listed on the JSE
• Offers long-term leveraged exposure to the listed
  Real Estate sector
• Pay a fraction of the share price and receive the
  full benefit of distributions and share price
  growth
• No margin calls, No further payment obligations
• Potential losses limited to the initial
  investment
• Liquidity provided by Investec
• Potential Tax Benefits

4
What is an Investec Property Warrant?

• An Investec Property Warrant is a security that
  gives the holder the right to buy a share in a
  listed property stock on the Expiration Date.
• The Holder can purchase the share in 2 easy
  steps
• Make an initial payment to buy the Investec
  Property Warrant
• Make a final payment (the exercise price) on the
  Expiration Date IF you want to acquire the
  underlying share.
• The exercise price is a floating amount that
  varies over the life of the warrant
• The Exercise Price is initially set on the issue
  date but is then recalculated on a daily basis

5
What is an Investec Property Warrant?

• Each day the exercise price
• increases by an interest amount and
• reduces by the cash amount of any distributions
  paid by the underlying company
• If the distributions of the underlying share are
  greater than the interest amount, the Exercise
  Price will reduce over time
• If the Exercise Price reaches R0.01 (or falls
  below) the Warrant will exercise early
• Early exercise is automatic and the Warrant
  Holder will receive the underlying shares for no
  additional payment (Investec may decide to waive
  the R0.01)

6
Variable Exercise Price

• The exercise price is initially set on the issue
  date
• It is recalculated on a daily basis using the
  following formula
• New Strike Old Strike x (1R/365) -
  Distributions
• The interest rate used to increase the exercise
  price is a Base Rate plus a Margin of 250bp
• The Base Rate is fixed on the Issue Date and then
  resets each year to the prevailing 12 month JIBAR
• Distributions are deducted from the exercise
  price on a gross basis and are not net of tax.
• Distributions are deducted on the ex-distribution
  date declared by the underlying company

7
Variable Exercise Price

• Example
• Share price R2.95
• Exercise price R1.50
• Rate 12.30
• Distribution R0.16
• Variation in exercise price
• New exercise price 1.5 x (1 0.1230/365)
• R1.5005
• Less the distribution R1.5005 0.16
• New exercise price R1.3405

8
Variable Exercise Price
Underlying Security paying regular distributions

Exercise Price
Exercise Price reduces by the Distribution
R5.00
Warrant Automatically Exercises
Time
Ex-Div Date
Ex-Div Date
Ex-Div Date
Expiration Date
9
Distributions

• Unlike dividends, distributions from Property
  loan stocks and unit trusts are taxed as income
• Holders of Investec Property Warrants do not pay
  income tax on the distributions
• Instead the distributions are used to reduce the
  exercise price
• In this way the investor receives the full
  benefit of all cash distributions paid by the
  underlying share during the life of the warrant

10
Exercise Process

• Investec Property Warrants are European call
  warrants
• They are exercisable under the following
  scenarios
• Optional exercise the holder of the warrant pays
  the outstanding exercise price on expiry
• Automatic exercise occurs when the exercise
  price has been reduced, by distributions, to 1c
• - For optional exercise, holders must ensure
  that Investec receives an exercise notice from
  their stockbroker on the expiry date
• - If a valid exercise notice is not delivered
  on on the expiration date, the warrant will
  terminate

11
Comparing the Alternatives

• Assumptions
• Exercise price of Warrant is reduced to 1c in 5
  years
• After tax returns calculated over the 5 year
  period
• Annualised Share price growth is calculated over
  a 5 year period
• Scenarios
• Cash Individual directly invests in listed
  property stock and all distributions are invested
  in the money market
• Reinvestment Individual directly invests in
  listed property stock and all distributions are
  reinvested in the underlying shares
• Property Warrant Individual invests same amount
  in Investec Property Warrants

Annualised After Tax return
Annualised Share Growth
12
Initial Issue
Indicative prices only
13
Tax Treatment

• This is a summary of a Tax opinion Investec has
  obtained from Jowell Glyn and Marais
• If a South African resident taxpayer purchases
  the warrant on capital account
• - The disposal of the warrant should have no
  income tax implications and any gain should
  be taxed as capital
• - The change in the exercise price will not
  trigger a CGT event
• - The exercise of the warrant should not
  trigger a CGT event as it is seen as the
  fulfillment of the purchase objective
• - The base cost for CGT purposes will be the
  initial purchase price of the warrant plus
  the Exercise Price (if any)

14
Disclaimer
The value at which Investec Property Warrants may
be bought or sold depends on factors such as the
exercise price, stop loss level, underlying share
price, interest rates and other factors generally
applicable to stock markets on which the relevant
underlying share is traded. Investec Property
Warrants may become significantly less valuable
during their life and, in certain circumstances,
automatically lapse or expire worthless.
Distributions paid, if any, are at the discretion
of the underlying company and cannot be assured
by Investec. Investec does not provide tax
advice. As the taxation profile of each investor
is different, potential investors should seek
independent tax advice. Investec has included a
summary of the tax opinion from Jowell Glyn
Marais Inc. for information purposes only.
15
Contact Details

• Tel No
• 27 860 103 343
• Web Address
• www.investecwarrants.com