Grit Real Estate Income Group (LSE:GR1T) — HY25 Results

0:06 Good morning, ladies and gentlemen, and welcome to the GRIT REAL ESTATE INCOME GROUP Half Year twenty five Results Update. Throughout today's recorded meeting, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Simply type in your question at any time and press send. The company will publish responses to these questions where it's appropriate to do so after the meeting has ended, and we'll notify you when these are available for your review. Before we begin, we'd like to submit the following poll, and I'd now like to hand over to CEO, Bronwyn Knight. Good morning.

0:36 Good morning, and thank you, Mark. I was just chatting to Mark that it's very dark and cold in The UK, but not so much Mauritius. So on that note, welcome to our December results. Today, we're positioning as an update. As you know, you have seen me recently in October with our June 2023 results. So today is an update which I'll be taking our audience through today just to really around what we are seeing from a macro perspective, but also what we are seeing from a recovery perspective and the business perspective. So just to remind our audience, what we pride ourselves on is that we are definitively a family of partnerships. So this is demonstrated throughout our presentation today specifically about the core and heart of our African business and the relationships.

1:25 We continually set global benchmarks. We are here to develop smart business solutions. It's all about impact real estate, impact infrastructure and we are a business, both GRIT and GRIT that goes beyond buildings. Just a reminder to the audience around the structure of the business and where we are today. So obviously with the consolidation of Grier, which I'll touch on, we have the property investing side of the business and then we have the services side of the business. With our outsourcing of our property management and facilities management, the core focal areas are development management and asset management of the business going forward. We are multi geographic investing across a multiple of geographies across Africa, 33 assets.

2:16 The combined property portfolio sits just under $1,000,000,000 and again focusing on global tenants, global conglomerates and being and as we have for the last ten years, their real estate solution. So when I saw you in October last year for the presentation of our full year results, We have continued to make slow progress, but it's been good progress. We have to realize, which I'll touch on today, we're dealing with a magnitude of macroeconomic challenges, but in that we are still seeing a good recovery. So what have we done? What has the management and what has the board done since I last saw you? The importance that we finalize the recapitalization of GROUP, that was addressing the material uncertainty that was sitting in our orders report.

3:06 That was a very, very, very big achievement and the reduction of debt with that capital. We have on the February 1 successfully implemented the BROUP LIMITED facilities management property management contract. What does that mean for our bottom line? It's effectively over a million dollar saving a year. 'll see me speak about our NOI strength, the performance of our underlying property portfolio which we saw somewhat a 13% increase in this NOI. Cost optimization the ability to now leverage off economies of scale with both GRIT and GRIA and a further just under 20% reduction in the costs of the business. One of the things I'll touch on is the balance sheet management, the significance of reduction of debt and the optimization of the cost of our debt. We have already seen a trajectory of this reducing to close on just over 9.3% with further hedging taking place.

4:05 So what are we facing? Where are we today? We continually face, like other businesses in the market, continually higher interest rates. We are seeing the ability to hedge in a number of other initiatives which we have implemented. We are seeing external factors. We've seen what's happened in Mozambique. We've seen what's happened with The US. What does this mean? It creates a level of uncertainty. But what are we doing? We're making sure that we are on the ground with this family of partnerships. We have businesses, people, assets and we are strongly embedded in the assets to ensure the resilience over this time. But yes, there is an impact on NAV and yes, there is an impact on valuation and we are seeing this pressure in the business. We have seen delays in our development projects with regards to the capital raising and closing of the recapitalization, but that hasn't taken away the fact that we are still sitting on very attractive pipeline around the core assets, which I reiterate today.

5:06 And then one of the other assets sort of programs we've announced to the market is our asset disposal program, and that's continually in progress. So what I try and do with our management team and what I have discussed with the board is what we need to do and what we have done is what have we said? What have we said to the market and how have we performed against what we've said? We've said that our property portfolio, our NOI is resilient. That's what we've said. And we've seen that in the numbers already now for December with a 13% increase. We've continually said that we are the platform, both GRIT and GREA, for African infrastructure outside of South Africa and we've seen the strong support from GPF and PRC and some of our other DFIs.

5:54 We've come to the market on the optimization of our costs and we've seen significant progress on this. The balance sheet focus, I'll touch on some of the hedges that we've entered into and the impact on the business already. The strong leasing and asset management activity. The focus on our occupancy rate. I was actually very, very proud to see yesterday that in our INCO building, we really had the opening of Navas, their tenth store in Kenya, just under a thousand square meters, which is absolutely fantastic seeing the leasing activity and take up on that asset. And then the focus into the future. What does the future look like? It looks like these core asset classes: data centers, core centers, industrial, American Embassy, and health care the core asset focus of the future of the group.

6:46 I'll touch on this on a number of times through our presentations but the resilience of our portfolio and what we're seeing in Mozambique which I'll touch on today, you know we're still sitting with a portfolio that is predominantly very highly occupied. We are seeing that April vacancy actually significant traction made up of vacancy uptake, specifically the INCO building. We are still securing predominantly hard currency leases. And whilst we are seeing pressure on rental reversions, we are still securing those tenants for long dated leases. So the whale is still sitting at somewhat over 5% on the portfolio. So you'll always hear me talk about strong counterparty, strong tenant base, resilient asset base, and this is the strength of the portfolio now and into the future going forward.

7:35 There has been a significant amount of press around Mozambique. You know, the reality is what you read is not necessarily happening on the ground, but what we are doing is we're making sure that we're keeping our ears to the ground with regards to our family of partnerships. We have very strong partners locally. We have political risk insurance. I always call it our doomsday insurance that covers covers us in the eventuality that we have to safeguard our assets. We've got portfolio strength in relation to the American embassy, Vodacom. It is not ideal what we're seeing happening across Africa, and this is obviously capitulated now by what we're seeing what's happening with America. But what we are doing is that we know that we are performing or developing an infrastructure assets, which are the asset classes that are the most resilient going forward and the macros are something that we're dealing with on a day to day basis.

8:29 Just touching on the financial review and where we have seen success and where we're still seeing pressure. This graph gives you an ideal picture of what the actual valuation business, what the real estate is looking like from a performance perspective. Yes, the NOI is performing and, yes, we've seen a growth on the NOI of over 13%. With the GREA consolidation GRIT, it's been very favorable for the numbers. But where are we seeing pressure? We're still seeing pressure on retail, specifically our Anfa shopping center. You'll see some valuation pressure on office, specifically Vodacom. So we have secured Vodacom, we've secured a new lease, but just to remind the audience, we came off a ten year lease with Vodacom. So those rentals will be being rebalanced.

9:14 So we have seen rental impact, which is obviously having valuation impact. So on the portfolio overall you would have seen a somewhat $20,000,000 decline and that's obviously had an impact on the net asset value NRV per share of somewhat just over $04 The cost optimization in the business is absolutely key. So there's two components of costs that we manage. It's the operating cost of the portfolio with the broader outsourcing we've seen and we'll see significant impact on these costs. There's also the administrative costs. This business has been very expensive to run because it's multi geographic, it's across the African Continent, and what's very important is the optimization plan. So with us now consolidating GREA, we've been able to look at the platform and say how do we optimize this platform.

10:03 So we are well underway to meeting our June 2025 target, which is effectively the 1.25 and ultimately going to that 1%. So there has been significant progress already. And if we go on to the next slide, you'll specifically see and the make mention of the implementation of the BROUP strategic relationship. A reminder to our audience, what have we done? We've outsourced the property management administration of the functionality of that business that is seen and will see over a million dollars of saving and will has seen already an operating cost reduction of 14.9 to 14.2% on the operating cost of the business. But this is a strategic partnership for GROUP to benefit from the economies of scale and us.

10:49 So our focus now will be development management and asset management for the business going forward. We are further just reiterating the importance of disposing of non core assets. So you would have may heard me mention a number of times of what we define as non core, hospitality, retail, other corporate accommodation we've noted under there. The core focus assets of what we are doing and through our association and now our subsidiary, GRIT, is focusing on core asset classes. That is infrastructure, platform type assets focusing on industrial, American embassy, data centers, BPOs, future jobs of the future, 1,500,000 jobs moving from The Philippines to the African Continent.

11:36 That is the focal point of where we're going. And then it's the disposal of noncore assets. We have had success already in selling off over a $160,000,000 of assets, and we've actually had success of selling these those close to net asset value. So this extensive disposal program is extending. The proceeds of that will be used to reduce debt. Our cost of funding and the reduction of our debt is a core focus of myself and the board going forward. Some of the important things that happened since I last saw you, which was in October, was, yes, the closure of a capital raise for GR1T. That money was fully deployed into the business and used to reduce debt. So you'll see from this particular slide, if you look to the bottom, we have settled just over $55,000,000 of debt since we were with you previously.

12:30 That has had a positive impact on our LTV. So we've already seen LTV come down to just over 51%. And the continuation and working with our financiers who have been hugely supportive in this recovery plan going forward, specifically around covenants of the group and working with us to ensure either a further capitalization to the group, the asset disposal strategy, and allowing some of these initiatives to now roll out in the next twelve months to see ultimate recovery. I made mention of this in our key highlights, but what we've already seen is where we have been able to secure further hedges. We are close on 75 hedged on SOFA for the group now. Those positive hedges already have seen a reduction in the cost of funding. So the reduction you see from 10% to 9.4%.

13:24 What is really important though is where that 9.4% needs to land and from a target perspective, which I'll touch on now in relation to where the property yields are sitting, where the cost of funding is sitting. So as I've made mentioned on the previous slide, we are sitting at close to 75%. We have, whilst we've seen the trajectory of interest rates mostly stabilizing, we have seen the ability to enter into some very favorable hedges. I'll show you the impact of actually what those hedges mean on the group on the next slide. So if you look at this particular slide, should interest rates decrease by another 1% okay, what you will see is you will see the weighted average cost of debt reduced from what I've shown you today to just over 8.7%.

14:13 That has a $3,300,000 saving or reduction of finance costs and ultimately an increase in our operating profit on the bottom line. So the importance now of going forward with regards to these hedges and the importance of the reduction of the interest rates is is absolutely a key focus for us. This is a very important slide. Okay. This slide tells you where things had gone right significantly when we were in a dividend paying position. It shows you when things went against us in relation to the cost of funding rising significantly, and it shows you on the journey or the path that we're going to going forward. So if you look at this particular slide, you'll see the blue line is depicting the interest rates.

14:59 You'll see that somewhat in 2021 where interest rates were sitting at 5.7% and the trajectory up, and you'll see where our asset yields are. Now what can we do to resolve this? What is the solution? What is the recovery plan? So what we as management are doing is we're doing the following. We're looking at ultimately repaying debt, ultimately refinancing our debt, ultimately looking at the margins of some of our existing debt that is just very, expensive especially in the GRIA portfolios. We're looking at making sure that we are reducing that cost of funding. The sweet spot with that cost of funding obviously we want it as low as it can be, but ultimately sits at around 8%. You then look at the property yields of sitting at 8.1%.

15:45 How do we how do we get that to get to closer to 9%? We dispose of assets, assets like Tomasa that are sitting at yields of 6.5%, non core assets. We allow the development company GRIT to develop because ultimately they're building at development yields of circa 11%, 12%. So that is how that green yellow and blue line swaps around in the trajectory. So we have a definitive plan to map out the next twelve to twenty four months in relation to this trajectory that we're seeing which allows us to get into a better position from a profitability perspective, a loan to value perspective and ultimately going back to paying distribution. So this particular slide will take you to sort of where we're going to. So as I've shown you is where we've come from.

16:38 So what are our targets? As I mentioned earlier, our targeted asset yield is around 9%. We need to get that spread to around 2%. We obviously are seeing the portfolio still struggling from a valuation perspective, but we do believe that we are somewhat at the bottom of that cycle. We are seeing assets that are actually performing from a valuation perspective, the data centers, the BPOs, the American embassies. So, ultimately, it's to go back to that shareholder value. What is that shareholder value creation? It's NAV growth back to four to 7% and ultimately getting us into a dividend paying position now in the next twelve to twenty four months. So really in summary to the audience, I think what's really important is to note that, one, we obviously have seen you quite recently in October.

17:28 Secondly, there actually has been a lot that's happened in relation to recovery underway. We've set ourselves some definitive focus areas and some definitive targets and this really just summarizes where we're going to and actually what has been achieved thus far. So the portfolio continues to be strong. With now the consolidation of the Grier portfolio, which are our core assets, the portfolio is even more resilient into the future and that is demonstrated clearly by the growth in the NOI of just over 13%. The ability now to focus on our asset management development management, the outsourcing of role, the reduction of funding or the reduction of costs from the outsourcing model, the ability to dispose, shrink before we can grow, dispose of assets, rebalance the balance sheet, reduce debt, renegotiate debt, get that cost of funding down, The cost reduction, there has been significant progress already.

18:26 The continuous continually deleveraging and improving our balance sheet. That is an absolutely core focus of ours with our asset disposal strategy, with our capital raising strategies going forward. And then I think just in summary, what we have created over the last ten years is a significant infrastructure platform for Africa. We have got asset classes that are resilient, we've got a portfolio, we've got people on the ground, and we've created a billion dollar portfolio that is facing macroeconomic headwinds. We all know what's happening currently, but it's the importance of making sure that the resilience of this portfolio through the management, through these strategies that you see here today and actually that have already been adopted and ensuring that we are on track now for the next twelve to twenty four months to ensure that we make our targets.

19:21 So on that note, I'd like to please thank our audience. I'd like to thank our investor base and shareholders and possibly a lot of financiers dealing in dialing in today for the continuous support. As you can see, we are a resilient management team that is flexible and fluid to what we're facing from a macro perspective. And on that note, just from my side, from the board, we are looking forward to what's coming next, and we're looking forward to the opportunities that we see into the future. But there are things that we need to manage now that we have made enormous, enormous traction on. So personally, I'd like to thank my board and my management team who are literally working day and night to making sure the objectives of this business are met.

20:07 And on that note, I know that there was some sort of questions about how to put questions. There is an email address on here. I think Mark made mention of putting questions through the system. Between myself and our investor relations team, we will reply to every single one of those questions. We will be on roadshow quite soon as well. So on that note, have a wonderful, do I say dare say, Valentine's Day on the February 14, and have a wonderful either morning or afternoon wherever you are placed in the world. Thank you. That's great, Bronwyn. Thank you very much indeed for updating investors. If I could please ask investors not to close this session as we'll now automatically redirect you so that you can provide your feedback so the management team can really better understand your views and expectations. This may take a few minutes to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of GRIT REAL ESTATE INCOME GROUP LIMITED, we'd like to thank you for attending today's presentation, and good morning or afternoon to you all.