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London-listed Grit Real Estate Income Group Limited (“Grit” or “the Group”), a leading pan-African real estate company focused on investing in and actively managing a diversified portfolio of assets underpinned by predominantly US$ and Euro-denominated long-term leases with high-quality multinational tenants, today posted a robust operational performance for the financial year ended 30 June 2023.
Bronwyn Knight, CEO of Grit commented:
“We are very pleased with this set of results which positions us well for growth in terms of our Grit 2.0 strategy. Notwithstanding significant macro-economic headwinds across most emerging markets as a result of rising global inflation and interest rates, we disposed of non-core assets at or close to book value, reduced our debt and debt refinancing risks and made substantial progress in acquiring a majority interest in GREA, our development associate.
“During the year under review, GREA delivered the award-winning Precinct office park and Artemis Curepipe hospital in Mauritius and is on time and budget to deliver the Eneo at Tatu Central call centre facility in early 2024 calendar year.
The Group posted a 7.3% increase in revenue from ongoing operations (excluding disposals) to US$ 63.4 million, up from US$ 59.1 million in the prior financial year. Net operating income from ongoing operations increased by 5.7% to US
$ 52.0 million (FY22: US$ 49.2 million) despite strong headwinds as a result of global interest rate volatility and rising finance costs.
During the year under review, Grit repaid net debt of US$ 28.3 million predominantly from the proceeds of non-core asset disposals and by redirecting cash generated from operations towards debt reductions. Consequently, loan-to-value was reduced by 2.4% to 44.3%. The Group successfully recycled assets to the value of US$ 135 million at or close to book value, including its investment in Beachcomber Hospitality Investments Limited comprising three hotels in Mauritius, and its 25.1% interest in Botswana listed Letlole La Rona.
The Group’s contractual rent collections showed further improvement in the year under review, growing to 101.3% of contracted lease income (from 92.8 % for the 12 months to 30 June 2022). In addition, 94.5% of income is either in US$, Euro, or pegged currencies, compared to 91.5% in the prior financial year.
Grit’s current portfolio comprises 33 income producing assets valued at US$ 862.0 million located across 11 African countries and seven sector classes, including commercial offices, corporate and consular accommodation, light industrial, medical, retail, and hospitality assets.
The portfolio EPRA* vacancy rate increased to 6.4% against 4.7% in the prior financial year, mainly as a result of mix changes in the portfolio post asset disposals. A weighted average lease expiry rate of 4.4 years (FY22: 4.8 years) was reported, with an annual weighted average contractual escalation rate of 3.0% (FY22: 5.4%) per annum.
“Our evolution from income to impactful income is underpinned by the value we create in new developments and with our various capital-light professional services. I am very pleased with the good traction we’ve made in this regard, with asset management fees increasing by 180.8% to US$ 1.4 million.
“Although this performance is off a low base, the total fee income generated from real estate, facilities, and development management services to both internal, third-party clients and co-investors amounted to US$ 4.7 million for the year, comprising almost 7.5% of revenue from continuing operations,” Knight added.
Administrative expenses increased by 40.3%, mainly as a result of high inflationary pressures, onboarding costs associated with the increased investment in APDM and GREA, as well as the full-year impact of the Group’s income-generating Kenyan office and the set-up of Bora Africa with a view on future growth. The Group believes that further cost reduction initiatives and an expected increase in the asset base following the consolidation of GREA will result in administrative expenses decreasing from a current 2.4% to 1.8% of total income-producing assets over the medium term.
Adjusted EPRA* earnings consequently decreased by 77.0% to US$ 0.72 cents per share, and distributable earnings was down 15.6% to US$ 4.29 cents per share. The 8.3% reduction in EPRA net replacement value (“NRV”) ** to US$ 72.8 cents per share was driven by a combination of sluggish property valuations considering the global macroeconomic environment, provisions and write-offs against property projects and transaction costs relating to the GREA acquisition and the US$ 306 million syndicated loan.
Grit is not a real estate investment trust (“Reit”) and the board elected to not declare a final dividend. Consequently, the total dividend for the year to US$2.00 cents per share, representing a 46.6% pay-out of distributable earnings.
Knight explained that Grit had several cash requirements during the year under review to support its strategic objectives and capital projects. The Group successfully increased its shareholding in GREA for US$56.4 million, repaid a total of US35.1 million in debt, and funded the US$ 7.4 million of upfront costs for its US$306 million syndicated loan facility.
“In addition, we are transitioning from the cash-generative assets disposed of during the year under review to assets coming onstream within the increased GREA portfolio. This has resulted in a temporary disruption of normalised dividend flows from underlying properties, which we expect to normalise in the current six-month period.
“Ongoing interest rate volatility and inflationary pressures combined with rising tensions in the Middle East has heightened the macroeconomic risks we face as a Group, resulting in the Board electing against declaring a final dividend.
“Several initiatives, including a normalised dividend cycle from recently completed assets in the GREA portfolio, the implementation of the GREA dividend policy and further asset recycling is expected to provide significant cash injections into the Group, replenishing our operational cashflows and allowing for either a special dividend or an increased first-half dividend in the current year,” she said.
Post the balance sheet date, Grit concluded the final phase of acquiring a majority interest in GREA and APDM, resulting in the Group owning a direct interest of 51.48% in GREA and 78.95% in GREA’s asset management company, APDM. Subsequent to the issue of shares to APDM in terms of the management incentive programme, Grit now holds an effective interest of 54.22% of GREA.
Grit also established Bora Africa, a specialist industrial real estate vehicle, and seeded five of its industrial assets into the entity. To fund future pipeline and impact-focused real estate acquisitions, the International Finance Corporation approved a US$ 30 million subordinated notes issue by Bora Africa.
“GREA’s acquisition and recapitalisation as well as the completion of the IFC financing instrument into Bora Africa positions us well to deliver strong growth through our Grit 2.0 strategy with an increased focus on selective impact investment in sectors such as light industrial, diplomatic housing, medical facilities and data centres.
“Although rising interest rates continue to be a headwind for earnings, our focus remains on cost optimisation, the reduction of administrative expenses and a long-term, sustainable debt strategy that will allow us to manage the weighted average cost of funding alongside achieving contractual lease escalations,” Knight concluded.
