The market doesn’t normally take kindly to potentially NAV dilutive capital raises but in the case of Grit Real Estate Income Group, which announced this week a proposed open offer and placing to raise up to $215.6m, we feel it is justified.
The pandemic has heavily impacted the value of the company’s portfolio, which is invested in African real estate (outside South Africa) that is predominantly let to multinational companies in US dollar or euro leases, that has sent its loan to value ratio (LTV) to an unsustainable level of 53.1% (close to its lowest applied debt covenant of 55%).
The group plans to use the proceeds of the raise, for which it has commitments for around 68%, to pay down some debt and to acquire controlling stakes in development company Gateway Real Estate Africa (GREA – which it already owns 19.98% of) and GREA’s management company Africa Property Development Managers (APDM).
If fully subscribed, the group’s LTV will drop to 33.6% and the acquisition of GREA will give it access to a pipeline of de-risked development projects that it says will see its EPRA net reinstatement value (NRV – Grit’s favoured net asset reporting metric, which measures NAV adjusted to reflect the value required to rebuild the portfolio) recover to its current level (it is estimated to drop to $0.715 per share from its most recent reported level of $1.024 at June 2021) in two years.
It should be noted that, if existing shareholders take up their full open offer entitlement, they will not suffer any dilution to their ownership and voting interests in the company. Arguably reflecting the potential benefits of the transaction, Grit’s largest shareholder, the PIC, is understood to be comfortable for around half of its 25.5% shareholding in Grit to be diluted and distributed to new shareholders. Although we have not spoken to the PIC, this suggests to us that it may recognise that the scale of its own shareholding is too large and reducing its dominance is in all shareholders interests.
GREA/APDM
GREA has a portfolio of 12 projects across nine countries in various stages of development, most notably providing the United States Bureau of Overseas Buildings Operations (OBO) with embassy housing across Africa and developing data centres for leading IT services and solutions providers.
The main attraction of GREA’s development pipeline is its tie-up with the US embassy through OBO. It currently has three OBO-let assets in various stages of development and has a further pipeline across other African countries. The OBO Ethiopia corporate accommodation tower recently completed, while it is constructing another scheme in Kenya and has one approved in Mali.
As at 30 June 2021, GREA had unaudited net assets of US$193m. Since that date, GREA has completed the OBO US Embassy compound in Ethiopia and Grit calculates GREA’s unaudited net asset value will be around US$197.2m by 31 December 2021 (the agreed date of the proposed acquisition). Grit estimates that the net asset value of GREA’s portfolio on completion of all the developments by the end of 2023 will be US$280m.
Debt consolidation
Grit recently secured maturity extensions for the bulk of its $410m debt, with average expiry now 1.83 years. If the capital raise is successful, Grit plans to secure and lock-in longer-term, more cost-effective debt funding through a consolidated debt strategy, potentially through a bond issuance.
Sustainable footing
If fully subscribed, the issue will not only result in the LTV dropping to a far more sustainable 33.6% but will allow Grit to address its short-dated debt and be a catalyst for a re-rating of its discount to NAV. The accretive development pipeline and a resumption of dividend payments (with a target to pay 5 to 6 US cents per share for the financial year to June 2022) has led the group to raise its annual NAV total return target to between 13% and 15%, should the proposed fund raise be successful. The capital raise has the potential to see Grit not only survive the pandemic, but thrive in the future.
QD view – showing some grit