Grit Real Estate Income Group Ltd

Grit Real Estate Income Group Limited (GR1T) is a Mauritius-based income fund concentrating on African real estate assets. The group's operations are differentiated in five operating segments: Morocco, Mozambique, Zambia, Kenya and Mauritius. The group has investments in light industrial, retail, corporate accommodation, and office sectors. The company earlier was known as Mara Delta Property Holdings Limited.

Trading Update (as on 26^th June 2019)
With the company’s board expectations, the present portfolio continues to deliver a secure and growing income. The company’s successful leasing activity contains a Vale lease extension at VDE in Mozambique, a ten-year lease renewal to Anadarko in Commodity House Phase 1 in Maputo and a new five-year office lease to Exxon Mobil in Commodity house Phase 2 in Maputo.

The Company will deliver its estimated total shareholder return of around 12 per cent and positive growth in dividend for the financial year 2019.

Financial Highlights (H1 FY19, US$’000)

(Source: Interim Report, Company Website)

The company’s reported gross rental surged by 25.9 million to US$18.7 million as compared to US$14.9 million in H1 FY18. Reported revenue increased from US$15.3 million in H1 FY18 to US$19.4 million in H1 FY19. Net property income stood at US$15.4 million, an increase of 28.24 per cent from the corresponding period of the last year data.

Profit from operations rose by 75.7 per cent to US$7.3 million against the US$4.1 million in H1 FY18. Profit for the period before tax was US$24.6 million, a surge from the US$ 17.5 million in H1 FY18. Profit for the period climbed from US$17.3 million in H1 FY18 to US$20.9 million in H1 FY19.

Distributable earnings were US$6.06 cps in H1 FY19, a slight decrease from the previous year same period data. EPRA (European Public Real Estate Association) NAV portfolio performance surged by 5.15 per cent to US$143.1 cps. Operating cost to income ratio, including associates, decreased to 15.2 per cent as compared with the financial year 2018 of 18.6 per cent. The Loan-to-value ratio stood at 43.4 per cent. The board declared the interim dividend per share of US$5.25 cents, a decrease of 13.5 per cent against the US$6.07 cents in H1 FY18.

Share Price Performance

Daily Chart as at June-27-19, before the market closed (Source: Thomson Reuters) 

On 27th June 2019, at the time of writing (before the market close, GMT 12.27 PM), GR1T shares were trading at GBX 1.3850 and remained same against the previous day closing price. Stock's 52 weeks High and Low is GBX 1.48/GBX 1.29. The company’s stock beta stood at negative 0.07, reflecting a negative correlation of the stock as compared to the benchmark index.

Key Risks
Multi listed on JSE, LSE and SEM compliance, multi-jurisdictional legal compliance, Non-compliance with debt covenants, Repatriation risk, Reputational risk, Foreign Exchange risk, Country risk, Destruction of investment property, Liquidity and refinance risk, Skills shortage for finance staff in certain jurisdictions, Credit risk, Interest rate risk, Underperformance of property managers, Language barriers, Contracts required to be recorded in the official language of the specific country, Arrears and bad debts, Information technology (IT) failures, Vacancy risk, Physical deterioration of properties, Unplanned departure of key personnel, and Default by a major tenant.

Conclusion
The company notes the uncertain political risk and potential nationalisation, although they believe the latter would face significant hurdles.

These inherent risks associated with investments in the various sector could result in a material adverse effect on the company's performance and value of Ordinary Shares.

The current ratio was decreased in the current period as compared to the industry median data. The company’s D/E ratio for the H1 FY19 stood at 0.86x whereas industry median stood at 0.77x respectively.

The performance of the company over the past six months had its foundations laid during the period when the company's asset base was built. The Company has successfully deployed its existing equity and debt capital and is considering its options in respect of raising further capital to fund the pipeline in due course. The Company is intending to expand its current strategy to include a limited number of development opportunities in the short to medium term.

Based on the headwinds faced by the company, we recommend the investors to “Avoid” taking fresh positions at the current market price of GBX 1.3850 (as on 27 June 2019).
 

Urban Logistics Reit PLC

Urban Logistics REIT PLC (SHED) is an investment company and it is based in the United Kingdom. The group focuses on an expert sub-sector of the UK real estate division, investing in logistics and industrial assets that enable businesses to operate supply networks. It invests in the UK based industrial and logistics properties to deliver capital returns and dividends to its stockholders. Pacific Capital Partners Limited is the alternative investment fund manager and the company's manager. The company is earlier known as Pacific Industrial & Logistics REIT plc.

Financial Highlights (FY2019, £’000)

(Source: Annual Report, Company Website)

The company’s reported rental income stood at £10.8 million, an increase of 93.6 per cent as compared with the financial year 2018 of £5.6 million. IFRS profit before tax increased by 90.1 per cent to £18.7 million as compared with the financial year 2018 of £9.9 million. ERPA earnings per share surged by 42.7 per cent to 7.01 pence against the 4.91 pence in FY18. The total dividend per share declared in the financial year 2019 of 7 pence, an increase of 10.8 per cent from the previous data. Total accounting return stood at 17.7 per cent as compared with the financial year 2018 of 10.9 per cent. ERPA NAV per share rose by 12.6 per cent to 137.96 pence as compared to 122.49 pence in FY18. The company’s valuation uplift stood at 7.2 per cent. The loan to value of 33.7 per cent was slightly below the company’s target range of 35 – 40 per cent.

Share Price Performance

Daily Chart as at June-27-19, before the market closed (Source: Thomson Reuters) 

On 27th June 2019, at the time of writing (before the market close, GMT 1:55 PM), SHED shares were trading at GBX 120 and decreased by 1.64 against the previous day closing price. Stock's 52 weeks High and Low is GBX 132/GBX 111. The company’s stock beta stood at 0.13, reflecting lower volatility of the stock as compared to the benchmark index.

Key Risks
Strategy risk, property risk, financial risk, economic uncertainty, inadequate systems and financial controls of the manager, and impact of Brexit.

Conclusion
Group's performance in FY19 was relatively higher than the year-ago period, and also, its business is substantially exposed to the Brexit related headwinds. Also, from the leverage standpoint in terms of Debt-to-Equity ratio, SHED's D/E ratio for the FY19 stood at 0.59x whereas industry median stood at 0.53x respectively. We have seen an increased debt position of the group as on March 31, 2019.

The company believe that the logistics sector continues to show resilience in the context of wider economic uncertainty. Underlying market conditions remain favourable for domestic UK business with ongoing activity over the occupier base is centred proportionately across SMEs, third party logistics operators and FTSE listed entities. The sector’s superior returns in 2018 allied to projected rental growth prospects have proven highly attractive. With alternative real estate assets generally providing low returns, there is a continuous search for yield and growth, with the pricing gap between logistics and ten-year gilt yields remaining wide. The company is well positioned to continue to achieve the target returns for the investors.

In the current financial year, it is difficult to predict the outcome of the political process surrounding Brexit. While politicians continue to do battle, uncertainty will likely impact the equity markets and the property market in general.

However, the company believe that the market for last mile logistics will remain decent due to end customer needs and the portfolio, which comprises urban logistics assets where tenants’ activities revolve around essential everyday products and will remain attractive as e-commerce’s share of the supply chain continues to grow.

Based on the headwinds faced by the company, we have given a “WATCH" recommendation at the closing price of GBX 122 (as on 26 June 2019), while we look for any upcoming catalysts.

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