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Grit’s 2.0 strategy gains traction despite macro headwinds

Bronwyn Knight, CEO of Grit Real Estate Income Group.

London-listed Grit Real Estate Income Group Limited has published its interim results for the six months ended December 2023 reporting an increase of 15.8% in its net operating income from continuing operations to US$29.7 million from US$15.7 million in the prior comparative year.

Our unwavering execution of the Board’s approved Grit 2.0 strategy continued to gain traction, despite ongoing macro-economic challenges with several encouraging green shoots emerging,” commented CEO of Grit, Bronwyn Knight.

We’ve made significant progress with the simplification of our structure, operations, and financial reporting over the last 18 months. We also successfully disposed of our interests in associate accounted properties where we had limited opportunity of obtaining controlling interests at or close to book value and redirected the capital to assets that we can control.”

The Grit 2.0 strategy is becoming increasingly evident within the composition of the Group’s net operating income, with Diplomatic Housing, Healthcare and Data Centre segments replacing earnings that were disposed of.”

The Group recommenced distribution to shareholders, declaring an interim dividend of US$1.5 cents per share.

The final stage of Grit’s simplification involves grouping property assets into logical industry subsidiaries and positioning these within the Group for optimal growth and value creation.

Grit 2.0 effectively allows us to capture the property value chain across all verticals,” Knight explained.

Considering the lack of depth within the African real estate market, it enables us to secure NAV uplift by developing assets, holding these over an extended period under long leases earning lease income, as well as earning fee income through development management, asset and property management services – not only for Grit but for third parties as well.”

Knight said that Grit’s ability to own the entire value chain is evidenced in the optimisation of its administration costs through its in-sourced solutions.

“By optimising our intellectual property, we generated close to US$6.5 million in fee income during the reporting period, with expectations of growing this further as further critical mass is generated.”

Group administrative costs consequently reduced by 15.4% during the reporting period, and remains on track to achieve a targeted US$4 million or 19% reduction in administrative costs by the end of the current financial year.

The Group’s move of its industrial assets under the banner of Bora Africa, as well as its Acacia Estates and diplomatic housing assets to its development subsidiary, GREA, post the period under review supported its “capital light” strategy, facilitating a US$48 million cash injection to GREA from its co-investor, the Public Investment Corporation.

These recapitalisation proceeds will be directed towards debt reduction and pipeline developments within diplomatic housing, industrial, and healthcare sectors that will also generate fee income, in line with the Group’s 2.0 strategy.

Knight contextualised Grit’s performance against strong macro-economic headwinds, mainly due to significant adjustments in global interest rates during the period under review, which caused sharp increases in the Group’s overall cost of capital.

Grit’s weighted average cost of debt subsequently increased to 9.62%, with several hedges maturing over the period. At period-end, Group loan-to-value (LTV) stood at 47.6%, with a target LTV of between 35% and 40% in the short- to medium-term.

The Group’s portfolio comprises a total of 33 investments in 11 African countries with exposure to seven property asset classes and a total portfolio GLA of 301 306m2. Property fair valuations contracted marginally by 1.6% because of rising interest rates during the period.

90% of revenue is earned from multinational tenants, excluding retail assets (79% including retail) and the EPRA occupancy rate stood at 99% (95.5% including retail assets).

“Going forward, prudent capital allocation will remain fundamental to the business. We have shown the ability to recycle US$161 million of assets at or close to book value in very difficult markets.”

“Debt reduction will have a direct impact on our LTV and earnings, and therefore remain a prime consideration. A second part of this will be capitalizing on the NAV uplift as a result of GREA’s development portfolio coming on stream, as well as further leveraging our fee-income earning capabilities.”

“We are also very sensitive to returning capital to investors and will consider share buy-backs in addition to continued distributions,” Knight concluded.