GRIT: Attractive African real estate exposure

Grit Real Estate Income Group is a leading pan-African real estate company focused on investing in and actively managing a diversified portfolio of assets in carefully selected African countries (excluding South Africa). The group recently moved to the premium segment of the London Stock Exchange and has a market capitalisation of £165million.

The company published their half year results on 15th February, and we were delighted that the CEO Bronwyn Corbet and the Chief Strategy Officer Darren Veenhuis were able to provide an introduction to the company and update on recent events. A recording of the webinar is available here.

The presentation started with a run through of some of the facts that make Africa an attractive area for investment: there is a large and growing population; good underlying GDP growth in many countries, increasing middle/upper class population and rising infrastructure investment. Bronwyn then outlined the key elements to the business model. Grit focuses on robust tenants that are either part of blue-chip multinational groups or Government backed entities such as embassies. Leases are signed in hard currencies of either the US dollar or Euro with an average lease term of 5.2 years. The third part of the strategy is to be present in a several of the most developed and developing African countries with already established solid legal systems.

Seven years after its formation the group owns properties worth $850m across 8 countries listed here in their order of importance: Mozambique, Mauritius, Zambia, Morocco, Ghana, Kenya, Botswana and Senegal. Half of the assets are in countries with investment grade debt and half in countries described as emerging or growth economies. The 15 largest tenants account for 70% of revenues and include such high-quality names as: Beachcomber, Total, Vale, Vodacom, The US Embassy, Tullow Oil and Club Med. Across the sectors the split is roughly 50% in light industrial and corporate accommodation, 25% in hospitality and 25% in retail. The strategy is to reduce the retail exposure although there is still good demand for retail space as the penetration of internet shopping is a long way behind developed markets.

All property companies have been impacted to greater or lesser degrees by Covid. Grit has also suffered but their property portfolio has proved to be pretty resilient. At the end of December, over 90% of contracted revenues had been collected. Previously deferred revenues from Club Med have now been recovered and the Beachcomber & Lux resorts in Mauritius have resumed payments. The biggest impact has been in the retail sector where rent collections are running at 84% and this is the area which has had the largest negative impact on net asset values. All of the property assets are independently valued annually and over 80% were valued again in December. Over the last 12 months the value of retail assets has fallen by $51m to $210m.

Overall revenues fell from $24.1m to $23.6m in the six months to December 2020. However, there was very strong cost control including reducing admin costs from 2.1% to 1.6% of assets value which meant that net operating income actually rose 0.9%. Loan to Value metrics reduced marginally to 49.35 after the equity issue last year. The target is to reduce LTV to 35-40% over the medium term. In the meantime, debt maturities have been pushed back and the company is in discussion with bankers on the possible issuance of a corporate bond or syndicated loans (although unfortunately neither would be available to retail investors).

There are 3 small acquisitions in the pipeline, 2 of which are in healthcare in Mauritius, the other a light industrial warehouse in Kenya. All come on c. 10% property yields. These acquisitions will either be funded by sale of some of their retail assets or through DFI funding. There are two redevelopments underway which combined will cost $12.6m and these are expected to deliver yields of c. 8%.

The company mentioned their four sustainable priorities and are pleased with the progress being made. The aim is to reduce carbon emissions by 25% by 2025, improve building efficiency by 25% by 2025, have 40% of women in leadership positions and 65% local representation.

Grit has resumed dividend payments and time was spent both during the presentation and in Q&A on discussing the dividend. The guiding principles on the payment of dividends are: further progression in reducing the LTV, continued strong rent collection, finalisation of the Drive in Trading guarantee restructure and an assessment of the impact of the second Covid wave on asset values. During 2019 12.9cUS$ was paid as a dividend and the management expressed a wish to get back to this level in due course – this would be a very healthy dividend yield at the current share price of 52p. It would be a very attractive yield too if the shares were able to recover to trade closer to their NAV per share of 88p.

The presentation finished with a summary of the current areas of focus for management. Top of the list are continuing to make rent collection a priority and tight control of costs. This is closely followed by improving the vacancy rate and strengthening the balance sheet. The dividend has been resumed and management would like to see further progress on this in line with improvements in their financial metrics. The team also mentioned that now that the company has achieved a premium listing, they would hope to be included in FTSE indices and this would add to more interest in the shares.

All in all, this was a very clear presentation on the attractions of diversified African property portfolio managed by Grit. A recording of the webinar is available here. If you would like further information on other webinars organised by Yellowstone Advisory, please contact info@yellowstoneadvisory.com