Grit’s Diversified African Real Estate Buoys Portfolio Against Covid Volatility

Summary

• Geographic diversification into both investment grade and high-growth countries mitigates risk and provides underpin for income and capital growth.
• Focus on counter party strength with hard currency leases from international operators a touchstone for sustainability.
• Balancing exposure to several asset classes allows alignment to property cycles.

Grit Real Estate Income Group (LON:GR1T) is a real estate major with a presence across Africa (excluding South Africa), focussing on investing and actively managing a diversified portfolio of assets underpinned by mainly US$ and Euro denominated long-term leases with high-quality multinational tenants in judiciously selected countries.

To mitigate concentration risk, Grit generally limits its exposure to any specific asset-class and country to less than a quarter of the overall portfolio value. Depending on the cycle, the Company may temporarily exceed this limit.

36% of Grit’s portfolio is in Investment Grade African countries, comprising Morocco, Mauritius, and Botswana. The Company is asset agnostic, holding assets ranging from corporate offices, light industrial, corporate accommodation, hospitality, and retail.

Geographic split

De-risked approach to capture major parts of the value chain

The Company’s primary business activities are property investment, property development and asset management/co-investment, which enable Grit to capture significant parts of the value chain.

Property investment

The considerable growth potential of the continent’s emerging markets has always come with some amount of risk involved with it. However, company’s investment strategy allows it to maintain exposure to that growth capability, while significantly de-risking it by leasing property to blue-chip multinational companies, comprising government embassies, on US dollar and euro-denominated leases secured by guarantees.

For the financial year ended 30 June 2020, the Company reported 89.1% of its income in hard currency with 90.2% of its portfolio occupied by multinational tenants, including the likes of Carrefour, Club Med, Lux, Total, KPMG and the US Department of State’s Bureau of Oversees Building Operations.

The Group’s focus on counterparty strength with hard currency leases from international operators has proven a touchstone for sustainability both during the Mozambican debt crisis in 2018 and now during COVID-19.

Property development

Grit is mandated to invest up to 20% of its gross asset value in property development or development pre-funding. This provides direct and indirect exposure to yield uplift, whilst limiting overall development risk.

Asset management and co-investment

The Company has a full suite of on-the-ground capabilities and has a proven ability to generate attractive returns for a sound risk profile given the quality of tenants and security of cash flows. Grit is currently exploring opportunities to co-invest into direct real estate portfolios with asset management fees charged on full asset value.

Alignment to property cycles

Capital recycling

The expected economic downturn as a result of COVID-19 accelerated Grit’s asset recycling programme, as the Group recently disposed of a 39.50 per cent indirect interest in Anfa Place Shopping Centre (“Anfa Place”) in Casablanca, Morocco, reducing its exposure to the single largest asset in the portfolio.

Following the disposal, Grit’s overall portfolio exposure to retail reduced from 32.1 per cent as at
31 December 2019 to 24.9 per cent currently.

In addition, Grit reduced its interest in Acacia Estate, a 76 residential units condominium property located in Maputo, Mozambique from 80% to a combined direct and indirect interest of 62.65%.

Although Acacia Estate remains a core asset, the asset reached an attractive valuation yield of 7.93% at 30 June 2020, representing a 9.4% increase on the August 2018 acquisition value. Post the disposal, Grit will continue to asset manage the structure and shall continue providing full property management activities.

Grit realised c.US$12 million in cash from the part disposal of its share in the property which has been earmarked  to replenish its working capital reserves and for redeployment into the Company’s yield accretive pipeline over the medium term.

A company with a resilient financial performance despite COVID-19

Although the impact of COVID-19 continues to test the resilience of the Group's portfolio, collections have remained strong since the onset of the pandemic and, despite the economic headwinds, collection trends have continued to improve with August and September collection rates averaging over 90% of contracted rental revenue.

Management's modelling suggests that the Group has sufficient financing facilities through to December 2022. Hospitality and retail assets, which now make up 49.1 per cent of the Group's property portfolio, are presently in the restoration and recovery phase and their current trading performance and collection trends are higher than the budget for the quarter July 2020 to September 2020.

Road Ahead

Grit Real Estate Income Group is a prominent real estate player in the African region (excluding South Africa).

The Group is making decent progress toward its aim to step up to the premium listing segment of LSE’s Main Market. These actions are expected to enable UK-oriented investors better access to Grit's shares, to support the Group's eligibility for inclusion in the FTSE UK Index Series, to significantly improve liquidity in the Company's shares and to further expand its investor base, all aligning the Group for growth by the Company's 2021 financial year and the long term.

The Company expect to deliver value to its shareholders by continuously emphasising on boosting the yield of the current portfolio and unlocking value through its operational capability and proactive asset management, selective asset divestment strategies and financial strength.