Grit Real Estate Income (GRIT) has announced that it has entered into a binding agreement with Gateway Real Estate Africa Ltd (GREA) for Grit to dispose of a 39.50% interest in Delta International Bahrain SPC (DIB), the beneficial owner of AnfaPlace Mall (Anfa) for a total of US$25,488,440. Anfa forms part of a mixed-use complex on the Atlantic coast of Casablanca, Morocco. GREA is a private real estate development company and is also an associated company of GRIT’s by virtue of the fact that GRIT holds a 19.98% interest in GREA. In addition to this, GRIT has provided a more general corporate update that includes details of its business, trading, NAV, rental collection and dividend, as well as details of the appointment of a new Independent Non-Executive Director.
Key highlights from GRIT’s trading update
GRIT has provided the following key highlights:
- The Company disposes of a 39.50% indirect interest in AnfaPlace Mall, reducing its retail sector exposure to c.24.9%.
- Extension of US$15 million bullet payment on Anfa debt facility to February 2022. The Company now has no material debt maturities before August 2021.
- August rental collections of 98.5% of Grit attributable contracted lease income. New Mauritius Hotels Group (Beachcomber), which accounts for c.13.2% of the Group’s attributable contracted rental revenue, resumed rental payments on 1 August 2020.
- Redevelopment of the Company’s light industrial asset in Pemba Mozambique, on the strength of a new five year US$ denominated triple net lease executed with Bollore Transport & Logistics (“Bollore”), for a total budgeted contract value of US$7.62 million
- The Board now expects Net Asset Value per Share at 30 June 2020 to decline by between 18% to 22% predominantly as a result of downward valuations of its property portfolio (led mainly by the Company’s retail sector exposure), increased provisions for financial liabilities and impairments of financial and other assets.
- Group LTV is expected to be c.50.6% as at 30 June 2020. Movements in EUR exchange rates since that date have been supportive to NAV and LTV.
- The Group’s dividend distributions are currently under review by the Board, having regard to, among other things, the financial position, LTV ratio and performance of the Group (including the levels of rental income contracted and collected), levels of economic visibility and the long-term interests of shareholders.
- Jonathan Crichton appointed as an Independent Non-Executive Director of the Company with effect from 17 September 2020.
- The Company intends to release its abridged audited consolidated financial statements for the year ended 30 June 2020 on Monday, 26 October 2020.
Comments from Bronwyn Corbett, CEO of Grit Real Estate Income Group Limited, on the AnfaPlace Mall disposal
“We remain positive on the medium-term prospects for AnfaPlace Mall and the opportunities that recently promulgated Moroccan OPCIs (REITs) will provide for strong capital appreciation, liquidity and access to robust capital markets, however the uncertainty surrounding the impact of Covid-19, specifically in the retail sector, make it prudent for us to reduce our interest in the asset at this time. This is aligned with the Groups strategy to diversify from retail and focus on the industrial, corporate accommodation and office sectors, which we expect to continue to be more resilient and deliver enhanced value to our shareholders. The disposal will contribute to the rebalancing of our sector exposure with the sale reducing our retail exposure from 32.1% to c.24.9%.
Covid-19 has created a challenging backdrop, which has impacted Grit’s business over the past six months, but we are continuing to take actions to ensure Grit remains financially robust with sufficient financial headroom and further strengthen its position to successfully navigate this period of economic uncertainty. The robust August rent collection of 98.5% leaves the Group increasingly confident in the Company’s outlook.
The Group continues to focus on delivering its investment strategy and exciting growth opportunities that underpin the Company delivering attractive, secure and sustainable income and capital growth to our shareholders from across our high-quality portfolio over the short and longer term.”
The rationale for the AnfaPlace Mall disposal
Retail assets constituted 32.1% of Grit’s total Net Asset Value as at 31 December 2019, which the company says is above its target exposure of 25%. The Covid-19 pandemic has introduced significant disruption to the operations of a number of the Group’s retail assets and GRIT’s Board believes it appropriate to bring overall retail exposure in line with its self-imposed targets. It has provided the following key highlights:
- Anfa has faced disruption as a result of its closure on 19 March 2020 due to the state of emergency declared by the Moroccan government. Trading resumed once again on 25 June 2020.
- The three-month closure resulted in increasing vacancies and lower revenues as a result of rental concessions, while further concessions and rent deferrals for the period through to 31 December 2020 are being considered as the mall returns to normalised levels of trade.
- Covid-19 lockdowns have resulted in delays in filling vacant space, and along with start date delays of new incoming tenants, reported vacancy statistics at 30 June 2020 have risen to c.21.3% from the reported figures of 11.7% at 31 December 2019
- The Board remains positive on the medium-term prospects for the Mall, but now expects the recovery trajectory, post its relaunch in September 2019, to be delayed through the Company’s next financial year.
- Knight Frank, a RICS accredited valuer, has provided a valuation for Anfa at 30 June 2020 for the purposes of the Group’s annual results for the year ended 30 June 2020 of US$89,363,300 ($109,110,000 at 31 December 2019). This represents a downward movement of 18.1% over the past six months as a result of changes to discount rates and net operating income assumptions (including delayed vacancy take up), predominantly expected over the next 24 months.
- For the purposes of the Transaction, further independent RICS accredited valuations for Anfa were obtained, and a resulting valuation of US$87,500,000 was agreed in the computation of Freedom Property Fund SARL’s (“Freedom Property Fund”) total equity value (which includes group loans from Grit’s 100% owned Mauritian finance company DIF1 Co Ltd (“DIF1”)) of US$38,981,448 on 1 July 2020. Freedom Property Fund is the sole legal and beneficial owner of Anfa which is 99% owned by DIB.
- The disposal of Grit’s 39.50% interest in DIB was achieved through the equity injection of US$25,488,440 by GREA which relieved Grit of an obligation of an equivalent amount in liabilities that were due. Grit receives no net cash from the disposal.
- Following the completion of the Transaction, the Group’s retail exposure is expected to fall to c24.9%
The mechanics of the AnfaPlace Mall disposal
The Transaction, with an effective date of 1 July 2020, is to be executed through the issuance and subscription of Shares in DIB, which owns a 99% interest in Freedom Property Fund, for US$7,200, resulting in GREA owning a 39.5% equity interest in DIB. At the same time, GREA will subscribe for class B Preference Shares in DIF1, for a value of US$25,481,240 and Grit’s shareholder loan in DIF1 will be converted to class C Preference Shares, thus matching the preference shares proportionately to the new effective shareholding in AnfaPlace Mall. Both classes of Preference Share will earn a coupon at a rate of 8% per annum, but the Class B Preference Shares held by GREA shall rank in priority to the Class C Preference Shares held by Grit Services Limited (“GSL”) and to the remaining GSL Shareholder Loan. The final effective shareholding to be taken up by GREA in Anfa is subject to an adjustment account (to be based upon audited 30 June 2020 accounts), which is to be concluded by no later than 30 November 2020.
Investec Bank, the current debt financier to Freedom Property Fund, has approved GREA as a new incoming shareholder. A US$15 million bullet payment under this Investec facility, which was due for repayment on 31 October 2020, has been extended to 28 February 2022, the date on which the full facility matures.
[QD comment: The deal is fairly complex due to the structure of Grit’s ownership of the mall (through shareholder loans in an SPV) but the end result for Grit is that it has reduced exposure to the troubled retail sector at a time when the sector’s future is looking bleaker by the day. It’s not a great time to be selling retail, but with no visibility on valuations in the future Grit was faced with the decision of cutting their losses and taking some of the pain now or holding out for a turnaround in the retail sector. Grit’s investment strategy centres on taking the risk out of investing in Africa through leasing property to multinational corporate companies. This deal furthers that strategy.]
August rent collection and trading update
As a percentage of Grit’s attributable contracted rental revenues for August 2020, the Group has collected 98.5% of rentals due for the month and has provided rental concessions (and therefore loss of revenue) of 3.4%.
For the period March to July 2020, the Group collected 85.4% of the value of its attributable contracted rental revenue
New Mauritius Hotels Group (Beachcomber), which accounts for c.13.2% of the Group’s attributable contracted rental revenue, resumed rental payments on 1 August 2020.
Pipeline and asset management update
The Company has extended the target execution dates on all of its announced pipeline opportunities and is assessing each one of these in the context of Covid-19 impacts, return profiles and capital allocation options including, inter alia, co-development and co-funding models.
All announced pipeline opportunities are still under negotiation and in certain instances announced terms may change. Further announcements on these will be made in due course.
The Company has entered into a turnkey development agreement for the redevelopment of its light industrial asset in Pemba Mozambique on the strength of a new five year USD denominated triple net lease executed with Bollore Transport & Logistics (“Bollore”). The project entails a significant repurposing of the asset according to agreed tenant specifications for a total budgeted contract value of US$7.62 million. Upon completion, the lettable area of the asset will have increased from 4817sqm to 7486sqm (a 55% increase in the total lettable area). Sectional completion of the works, which will trigger the commencement of the new Bollore lease agreement, is expected in Q1 2021, with final completion of the remaining areas targeted for Q4 2021.
Updated NAV and dividend guidance
Ahead of the release of the Company’s abridged audited results, the Board now expects Net Asset Value per Share at 30 June 2020 to decline by between 18% to 22% predominantly as a result of downward valuations of its property portfolio (which has been effected by the Covid-19 pandemic and movements in foreign currencies against the US Dollar), increased provisions for financial liabilities and impairments of financial and other assets.
The portfolio continues to experience the greatest Covid-19 disruption in the retail and hospitality sectors, while the corporate accommodation, office and light industrial segments have seen only limited impact to date. The expected movement in property valuations as at 30 June 2020, are summarised as follows:
|Sector *||Valuation 31 December 2019
|Like for like valuation movements to 30 June 2020|
|Office||201.9m||-1% to 2%|
|Corporate Accommodation||139.2m||0% to -1%|
|Light Industrial||27.8m||-1.5% to -2.5%|
|Hospitality||151.5m||-4% to -5%|
|Retail||259.6m||-16% to -17%|
*excluding LLR and development assets
Group LTV is now expected to be c.50.6% at 30 June 2020 while the Company’s lowest currently imposed LTV covenant stands at 53%. As a precautionary measure, the Company continues to engage with its lenders on the extension of LTV and interest cover covenants and expects to make announcements in this regard in the coming weeks.
Movements in EUR exchange rates since 30 June 2020 have been supportive of NAV and LTV. The Group’s medium-term target is an LTV of between 35% and 40% and the Board is currently considering a number of strategies to achieve this target over the next 24 months including further asset sales, accessing government support programmes and other funding instruments to fund growth.
Post the Anfa bullet payment extension, the Company has no material debt maturities before August 2021.
In light of recent events, and until we have greater clarity on the economic outlook, dividend distributions of the Group are under review by the Board, having regard to, among other things, the financial position, LTV and performance of the Group (including the levels of rental income contracted and collected), levels of economic uncertainty and the long-term interests of shareholders.
Extension of deadline to release final results
As a result of the Covid-19 pandemic, the UK’s Financial Conduct Authority has temporarily granted LSE Main Market listed companies the option to delay the publication of annual audited financial reports from four to six months after the end of their financial year end, and have urged companies to avail themselves of the additional two month period to fully assess the impact that Covid-19 may have on their businesses.
The SEM Listing Rule 12.14 requires the publication of the Company’s abridged audited consolidated financial statements within the 90 days after the end of its financial year, i.e. by Wednesday, 30 September 2020. The Company has obtained formal approval from the SEM to delay the publication of its abridged audited consolidated financial statements until Friday, 30 October 2020.
The Company intends to release its abridged audited consolidated financial statements for the year ended 30 June 2020 on Monday, 26 October 2020.
Jonathan Crichton announced as a new independent non-executive director
Jonathan Crichton has been appointed as an Independent Non-Executive Director of the Company with effect from 17 September 2020. Mr. Crichton has extensive international banking experience as a senior executive across Asia, Europe and the United Kingdom within the HSBC Holdings Group and has been a member of numerous risk and audit committees. He is currently an Independent Non-Executive Director of MCB Ltd.