Watershed Piazza in Mahalapye owned by LLR Properties
I first decided to be a shareholder in Grit Realty (GRT), when they were still known as Delta Africa and controlled only three properties: A mall in Morocco (which has since been renovated), a building in Mauritius and an office block in Maputo. I spent a long weekend in Maputo in 2015 and the energy, vibrancy and potential of the city was palpable. The country is on a path to becoming a major gas exporter and the capital city’s infrastructure is woefully under equipped to deal with the expected influx of people, business and wealth.
Grit is a way to benefit from growth in demand for quality property in dynamic African destinations and I have been accumulating shares in the group since that first experience in Maputo. The business has grown to encompass 24 assets in 7 countries across Africa. Whether it is office building in fast growing business friendly cities, logistics warehouses, housing for expats, hotel properties, that benefit equally from a growing European travel market and an increasing African traveller, or malls for the rising middle class, Grit is diversified to benefit from all these trends.
This rapid growth has been supported by strong discipline. In an environment where “shady” counter parties and local currency fluctuations are the norm, Grit has acquired only assets with solid international tenants in US$ or EUR denominated leases. Often they ensure that the seller maintains “skin in the game” by partially paying for assets with Grit stock. I have previously commented on an acquisition of a Mozambican mall and in November they announced another deal that perfectly reflects the investment discipline shown by this team.
Letlole La Rona Ltd (LLR) is a property holding company in Botswana, a country with enviable growth and stability in Southern Africa. Grit already held around 6% of LLR and in November 2019 they announced the acquisition of a further 23.75%. LLR has an NAV of $70m, but Grit are paying US$13.8m a discount of 20% to the NAV of their stake. Furthermore, they are paying for this stake by issuing Grit shares at NAV of $1.40/share. In South Africa, these shares currently trade at R16.50 or a further 20% discount to NAV. This means that JSE shareholders are actually receiving the LLR assets at a 40% discount to NAV at their current prices. LLR made $5m in profits last, year implying that the Grit acquisition is at a PE of around 10, but this assumes that no additional leverage will be introduced into the properties.
It is this type of deal discipline that has ensured that, despite the rapid growth in asset base, the dividend has grown steadily in US$ terms. In 2019 a dividend of US$12.20c or R1.75 was paid. At current prices, this puts the stock on a dividend yield of 10.7% in US$ with no exposure to South Africa. Even better, Grit is not actually a REIT on the JSE. They do not require this status as all property income is outside South Africa. Practically, this means that dividends are taxed at the dividend withholding tax rate of 20% for private investors and not at the personal income tax rate.
The growth and discipline has attracted new investors, with a listing on the LSE completed in 2017. This brought several institutional, yield driven shareholders to the registry.
I happened to be in Mauritius last week, so I decided to attend the Grit AGM at their offices in la Croisette shopping centre in Grand Baie. Imagine Melrose Arch in the middle of a northern Natal sugar cane field at the height of summer and you may be able to visualise la Croisette. The Grit team is striking in its youth. CEO, Bronwyn Corbett is in her late 30’s and the CFO is just over 40. I met other senior staff, all young, dynamic South Africans, eagerly hinting that there were more exiting deals in the pipeline.
Given the recent developments at Nampak, I asked how management ensure that they can repatriate cash from countries that may impose currency controls in the future. Grit has full cash repatriation insurance, covered by Lloyd’s. Whilst this insurance is not cheap, I am happy that this is a further safeguard to maintain the dividend in the long term.
In summary, Grit remains my favorite REIT. The dividend yield is in US$, not subject to marginal tax rate and not exposed to the South African economy. The management team is young and dynamic and has a proven record to execute disciplined and conservative growth via acquisitions. They are growing with quality properties in a continent that has the highest global population growth and may well be at the forefront of global economic growth in the coming decades. While I wait for the thesis to play out, I am happy to collect my dividend of just under 11%.