Grit Real Estate Income (GR1T) has entered into a binding agreement to reduce its interest in Acacia Estate, a 76 residential units condominium property located in Maputo, Mozambique that is let to the US government. In what is effectively a partial sale to a related party (see below for the nuts and bolts of the transaction), GR1T will reduce its interest from an 80% direct interest to a combined direct and indirect interest of 62.65%. GR1T says that the transaction has an implied property valuation of US$67,540,000, which it says is equivalent to its carrying value at 30 June 2020. The effective date of the transaction is 1 November 2020 and the sale will be settled in cash.
Acacia Estate is still a core asset
GR1T says that Acacia Estate is still a core asset, but it believes that the property has reached an attractive valuation yield of 7.93% at 30 June 2020, representing a 9.4% increase on the August 2018 acquisition value. However, GR1T will continue to asset manage the structure and shall continue providing full property management activities. Upon completion of the deal, Grit Services Limited (GSL) will realise US$11,812,908 in cash from the part disposal of its share in the Property. This will be used to replenish its working capital reserves in the short term and for redeployment into the company’s pipeline over the medium term.
The rationale for the transaction
Grit’s interest in Acacia Estate was acquired in August 2018, when the value of Acacia was US$61.7 million and the related net asset value (NAV) of SPV Cognis 1 Limitada Cognis (this owns the Acacia Estate and GR1T has an 80% in interest in this SPV – see below) was US$13.7 million. At June 2020, Acacia has been valued at US$67.5 million (representing a 9.4% increase in property value). GR1T’s Board says that it supports the partial disposal of Acacia and has cited the following reasons:
- The sale achieves the independent valuation as at 30 June 2020;
- The weighted average lease expiry in years equates to 3.15 years and is regarded as being within the optimal timeframe for value realisation;
- The transaction will free up capital for Grit to replenish its working capital reserves in the short term and for redeployment into yield accretive pipeline over the medium term;
- Grit will continue to asset manage the structure for a proportionate asset management fee;
- Grit will continue to property manage Acacia;
- Grit will maintain control and continue to consolidate Acacia; and
- Grit will decrease its exposure to Mozambique in line with the guidance of a maximum exposure of 25% per jurisdiction.
Comments from Bronwyn Corbett, CEO of Grit Real Estate Income:
“We continue to execute on Grit’s strategy of owning and managing high quality real estate assets let to high quality tenants across the African continent that deliver strong and sustainable income for shareholders, with the potential for income and capital growth. This transaction demonstrates the Group’s ability to deliver value from its assets, as since 2018 we increased Acacia’s net operating income from US$5.1m to US$5.4m and its valuation yield shifted from 8.25% to 7.93%. The Property remains core to the Group and with our remaining majority ownership, Grit remains committed to effectively servicing our tenants in their properties and property management needs.”
The nuts and bolts of the transaction
Acacia is owned by a Mozambican property SPV Cognis 1 Limitada (“Cognis“) in which Grit Services Limited has an effective shareholding of 80.0% through its subsidiaries. The balance of the equity interest in Cognis (20%) is held by external third parties.
Gateway Real Estate Africa (GREA), a private real estate development company in which Grit has a 19.98% shareholding, is increasing its exposure to assets with embassy and multinational tenant profiles, and has acquired the 19.9% interest in Acacia from the external third parties. Grit has additionally agreed to sell 26.65% of its stake in Acacia, reducing its direct interest to 53.35%. GREA’s ownership in the Property will move to 46.6% at the conclusion of the Transaction.
By virtue of Grit’s 19.98% ownership interest in GREA, the Group’s combined direct and indirect interest in Acacia will only reduce to 62.65%. GREA is regarded as a related party as a result of common shareholding by the Public Investment Corporation of South Africa which owns 48.5% of GREA and 27% of Grit.