London listed Grit Real Estate Income Group Limited, has posted a robust operational performance for its financial year ended June 2020.
The pan-African real estate company, which focuses on investing in and managing a diversified portfolio of assets in select African countries, reported an increase in its property portfolio net operating income of 3.5%. However, the group’s loan-to-value (LTV) ratio rose to 53.1% over the same period, which was impacted by valuation pressures, predominantly in the retail sector.
“We expect Grit’s LTV to benefit from improvements in our property valuations over the medium term, the acceleration of our asset recycling strategy and target of recycling 20% by property portfolio value by the end of 2023, which we continue to pursue, and our perpetual note issuance, which has now been concluded” commented Bronwyn Knight, CEO of Grit.
“Our LTV will additionally benefit from the potential sale of AnfaPlace at no lower than the 30 June 2021 book value, which would also be expected to impact positively on the group’s distributable earnings per share”.
“Although our short-term focus remains on continuing our strong rental collections, balance sheet optimisation, and the reduction of our LTV to below 45%, we are pursuing select accretive growth, co-investment, and pre-funded development opportunities across resilient sectors. These high-quality, diversified opportunities, if successfully concluded, hold the potential to significantly improve the group’s net asset value, distributable earnings and yield” she said.
Grit’s portfolio comprises of 54 investments across 8 African countries and 5 classes. Its corporate accommodation, industrial, commercial office, and other assets, comprising of 53.2% of the group’s economic interest in property assets, remained materially unaffected by the pandemic fall-out.
Grit’s asset portfolio has a weighted average lease expiry of 4.8 years (2020: 5 years) and a weighted average contracted lease escalation of 3.8% per annum. (2020: 2.8% per annum). 90.9% of revenue is earned from multinational tenants (2020: 90.2%) across various sectors, with 92.7% of income (2020: 89.1%) produced in hard currency.
The group’s EPRA portfolio occupancy rate increased by 0.6% from 94.1% in the prior year to 94.7%, mainly due to the conclusion of new leases to Total in Commodity House Phase 1 (Mozambique) and several new leases signed in the retail sector.
Contractual rental collections increased by 3.9% from 88.6% to 92.5%, whilst the EPRA cost ratio reduced by 1.4% from 14.6% to 13.2%.
Property portfolio net operating income increased by 3.5% from US$53.5 million to US$55.3 million mainly because of prior year acquisitions in the period and a strong performance in sectors relatively unaffected by Covid-19.
Structural and cyclical shifts in the retail sector were exacerbated by Covid-19, and account for more than 80% of the group’s reported vacancy. Notwithstanding ongoing recovery in the sector, Grit intends to reduce its overall exposure to this sector in due course.
Although Grit does not take hospitality risk, rental concessions and rent deferrals were provided during the year under review to mainly hospitality sector tenants, comprising two principal tenant brands in Mauritius. Both these brands received strong government support, including liquidity support from the Mauritian Investment Corporation, which is supporting the resumption of lease repayments to Grit. The Group is encouraged by the lifting of Mauritius border restrictions from 01 October 2021, with tourist arrivals currently expected to recover strongly and swiftly.
Club Med Cap Skirring in Senegal is expected to resume trading on the 5th of December 2021, and this will see the resumption of rental payments at that date. The resort is currently experiencing strong bookings for the upcoming tourist season.
Grit’s distributable earnings per share concomitantly reduced by 37.7% from US$9.58 cents per share to US$5.97 cents per share. As a result of ongoing Covid-19 related uncertainties during the reporting period, valuation declines were experienced across the property portfolio, resulting in the value of total income producing properties dropping from US$823.5 million in the prior financial year to US$801.9 million, resulting in a total return per share decline of 11.3% (2020: 15.8% decline.)
EPRA NRV reduced by 12.6% from US$117.1 cents per share to US$102.4 cents per share mainly because of further write-downs in the retail sector assets and the VDE housing compound in Mozambique.
Since the onset of the pandemic, Grit’s property portfolio lost US$114.9 million in fair value, a 14.2 per cent reduction when compared on a like-for-like basis to 31 December 2019. The group’s loan to value consequently increased to 53.1% predominantly because of the decrease in valuations, additional short-term working capital facilities to fund rental deferrals provided to tenants in the hospitality sector and capital expenditure in the normal course of business, including capital calls from Gateway Real Estate Africa, Grit’s development associate.
“We have a high-quality portfolio of attractive property assets leased to very strong tenant covenants that is continuing to deliver a resilient performance with 92.5% of contracted revenue collected this period, versus 88.6% in the prior year, despite the headwinds of the pandemic. We are increasingly confident that the group’s property occupancy rate of 94.7% at the period end will continue to improve during the balance of 2021 and beyond, supported by our hospitality sector assets benefitting from the easing of travel restrictions and further leasing activity in both our Ghanaian office portfolio and retail sector assets. Trading is also showing encouraging signs of normalising, especially in the hospitality and retail sectors,” commented Knight.
Operational responses included new safety measures and increased cleaning protocols across all assets, support for key tenants and brand partners, including reductions in service charges, rent deferrals and concession as well as community support in the form of food programmes and personal protective equipment.
“From a financial response perspective, we have defined detailed strategies to achieve our near-term targets of reducing LTV to below 45%. Senior management and the board have taken a 10% pay reduction in the year under review, and the board recommended withholding the final 2021 dividend, after also suspending the 2020 final dividend”.
“We cancelled or suspended several announced pipeline acquisitions to protect balance sheet capacity and have negotiated a temporary extension of the group’s LTV and ISCR covenants”.
“Our asset recycling strategy gained traction with the partial disposal of AnfaPlace Mall and Acacia corporate residential compound that was announced in late 2020. These strategies are now being further accelerated with the Board defining a target of 20% of the portfolio being recycled by December 2023”.
“Our strategy remains effective, and I am increasingly confident that we are well positioned and that the steps we are taking will not only safeguard Grit for the near term but ensure that we proactively seize the opportunities that arise to return to growth, acceptable shareholder returns and an attractive cash dividend,” added Knight.
Post the reporting date, Grit successfully obtained an equity classified perpetual note and IFC debt funding for the accretive acquisition of the Orbit manufacturing facility in Kenya. The Group further extended the debt maturity for US$116 million to between April 2023 and April 2025.