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Grit’s risk removal recipe

May 09 2019 10:09
Glenda Williams

While many South African companies have had mixed successes when venturing into Africa, the multi-listed Pan African REIT (real estate investment trust) Grit Real Estate Income Group, is proving that the right recipe will reap rewards.

Robust risk mitigation has been key to Grit’s success, which included multiple listings, multiple geographies and multiple asset classes. 

Key partnerships and multinational tenants further insulate the company from the risks that often face investments in the region.

“The success of our African business has been partnerships,” says CEO Bronwyn Corbett. 

Corbett was instrumental in forming Delta International, Delta Property Fund’s Africa offshoot that listed separately on the JSE as Mara Delta Property Holdings in 2014. 

In 2017, the company was rebranded to Grit Real Estate Income Group. 

Grit remains the only Africa-focused REIT on the JSE, paying dividends in hard currency. 

That ability to pay dividends in dollars came with its listing on the Mauritius Stock Exchange (SEM) in 2015. 

Last year Grit also listed on the London Stock Exchange (LSE).Grit’s property portfolio of 25 assets is valued at $796.4m. 

It is headquartered in Mauritius, with further investments in Botswana, Ghana, Kenya, Morocco, Mozambique and Zambia. 

Grit has been careful to only forge into stable markets as opposed to high-risk jurisdictions. 

Margins of safety include security of tenure, ability to get debt in the country and most importantly, ability to move money out of the country.

“We wanted to be multi-geography. We had seen too many real estate businesses being commodity focused in only one or two countries. 

Then the commodities cycle turned on them,” explains Corbett.Grit views the continent in two parts.

Half of its investments goes into investment-grade countries, and the other half into what Corbett terms “growth Africa”. 

Investment-grade countries like Morocco, Mauritius and Botswana attract a lot of pension fund money, says Corbett. 

“You won’t get super returns but you are going to get that stability, which anchors the portfolio,” she explains. 

Growth countries, on the other hand, offer higher returns but somewhat more risk. 

Corbett sites countries like Kenya, Uganda, Mozambique, Ghana and to some extent Zambia. 

“We see the ability to work with global tenants in markets like these because they have long-term strategies for these countries,” she says. 

The REIT also invests in multiple asset classes determined by the economic drivers of the particular markets, like tourism in Mauritius that drew Grit’s investment in hospitality. 

Hard currency income, which comes with global tenants able to pay in euro or dollar leases, ties together Grit’s multi-pronged mantra.

Hard currency comprises 93.2% of income, with 92.3% of that coming from multinational tenants. 

Global tenants include Barclays, Beachcomber, ExxonMobil, Lux Resorts & Hotels, Shoprite and Vodacom.

Many leases are signed out of country with parent companies signing as guarantors, further mitigating Grit’s risk. 

“Whenever you have an international tenant you have recourse to the parent company in the event of default, not the local company,” explains chief financial officer Leon van de Moortele.

The company also has political risk insurance through Lloyds that covers dollar liquidity and expropriation of funds.

Mauritian hospitality

Close on 25% of Grit’s investment sits in investment-grade country Mauritius, where it has four hospitality assets and one office asset. 

The island accounts for around 21% of net property income.With favourable tax treaties and exchange controls, Mauritius is increasingly considered as a financial services hub, but tourism remains a mainstay. 

The island, with a population of 1.3m, welcomes 1.4m tourists annually.

Tourism resilience and steady growth drew Grit to acquire three four-star Beachcomber hotels (a co-owned investment with anchor tenant Beachcomber) and one four-star LUX hotel. 

The hospitality assets come with fully servicing triple net leases with the parent companies of Beachcomber and LUX signing as guarantors. 

Hotel exposure comprises 21% of Grit’s total assets.

The beach area around Mauritius where Grit’s hotel assets are, is owned by the Mauritian government. Sixty-year land leases are the norm, says Van de Moortele. 

“Our minimum requirement to purchase an asset is 30 years.” 

There are few beach sites left for new builds. 

Plenty of focus is therefore on expansion, by creating additional rooms, or on upgrading of rooms.

Grit operates in the four-star/four-star-plus market where year round occupancy is north of 80%. 

At its Tamassa Resort occupancy last year was around 92%.

Van de Moortele says the hospitality assets are good cash flow generators for Grit. 

“Our hospitality approach is different to that typically seen in South Africa. We are not looking to take any hotel operational risks from a cash flow perspective. We just want rolling consistent, solid returns. The fact that these are euro-based means we are getting quite a lot of upside.”

Rael Colley, real estate analyst at Anchor Stockbrokers, tells finweek that Grit’s exposure to the hospitality market in Mauritius is appealing. 

He cites reasons like long lease terms and healthy occupancy rates in Grit’s hotels (average of 85% vs. the average in SA of 65%). 

“The RevPAR (revenue per available room) rate has been strong over the last few years as well.“Five-star hotels have been struggling of late, however Grit does not have any exposure to this segment of the market,” adds Colley.

Grit also owns Barclays House, a modern office building tenanted by Barclays, and located in Ebène Cybercity, a vibrant business hub.

There’s plenty of office construction taking place in Ebène but Grit is not planning further office investment.

“We don’t see our pipeline including offices. We don’t think there are enough tenants for that,” says Corbett.

Game-changing London listing

Grit’s listing on the LSE gives it the ability to attract international investors who are now able to access African markets through a listed structure.

The London listing was a “game-changer”, says Van de Moortele. 

UK institutional investors now comprise around 20% of Grit’s stock. 

“We invested in Grit because the price was right, the yield was high and the stock was pregnant with opportunity,” says London-based Nicholas Hooper, director at London Investment Management. 

“Our clients have dipped their toes in with an initial $500?000. We like Grit and the approach they have to become the best in class property partner for global companies who have properties in some of the more stable African economies.”

The $132.2m of capital raised for the LSE listing was deployed into acquisitions in Ghana and Mozambique. 

That had a positive impact on net asset value (NAV).Creating NAV is high on Corbett’s agenda and redevelopment opportunities is a means of achieving that. 

The redevelopment completion of Anfa Shopping Centre in Morocco will push Grit’s occupancy to 99% and will allow Grit to keep its distribution yield while at the same time hold back some cash that can be used for redevelopment opportunities. 

Opportunities that are being explored include co-investment with pension funds in Africa, and asset managing the real estate portfolios that many of these pension funds have.

“Redevelopment opportunities and being able to add value to these pension fund portfolios allows us to play the NAV angle,” says Corbett.

Grit does much of its own property and asset management in the countries it is invested in. 

That, together with the need to control its own development pipeline, brought about the creation of Grit’s development partner, Gateway Delta. 

It’s an unlisted business, with four shareholders. 

Grit’s stake in Gateway is just under 20%. Corbett says Grit won’t necessarily be the outtake for all Gateway Delta’s assets. 

The company will be co-investing with Gateway Delta on the $100m ExxonMobil residential compound project in Maputo, Mozambique. 

“We want some of that NAV upside,” explains Corbett. 

“The development yield on the Exxon project is 12%.”

Investor attraction

The London listing brings with it additional investors and another level of corporate scrutiny. 

This, says Garreth Elston, portfolio manager at Reitway Global, is always a plus. 

“Grit has become a comforting investment,” he says. 

“It has done what it set out to do and that includes mitigating a lot of risk.”

Colley says the counter offers an attractive US dollar yield (of around 8.5%). 

“However, liquidity in the stock remains constrained. I think South African investors still struggle to grapple with various country risks that Grit has exposure to. Although to mitigate this, Grit has strong partnerships and relatively sticky tenants which should bode well in the long term.”

Grit’s loan-to-value (LTV) sits at 43.4%, but it has committed to an even lower LTV of around 35% to 40%.

“We’ll be able to get our gearing to 30% should we do another capital raise without impacting our dividend yield,” says Corbett, explaining that refinancing measures will drop funding costs. 

A refinancing deal in Mozambique will drop Grit’s dollar cost of funding by 1% and add $2.5m annually to the kitty.

Grit maintains a target of 3% and 5% dividend growth, and a total annual net shareholder return of 12% in dollars for its full 2019 financial year. “…[P]rovided, of course, the share price tracks our net asset value,” says Corbett.  

Glenda Williams was a guest of Grit in Mauritius.

This article originally appeared in the 9 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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