REG - Grit Real Estate Inc - Update on proposed acquisition of majority stakes

Grit Real Estate IncomeAnnouncement

11/04/2022 07:00

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RNS Number : 8777H  Grit Real Estate Income Group  11 April 2022

 GRIT REAL ESTATE INCOME GROUP LIMITED

 (Registered in Guernsey)

 (Registration number: 68739)

 LSE share code: GR1T

 SEM share code: DEL.N0000

 ISIN: GG00BMDHST63

 LEI: 21380084LCGHJRS8CN05

 ("Grit" or the "Company" or the "Group")

 

UPDATE ON THE PROPOSED ACQUISITION OF MAJORITY CONTROLLING INTERESTS IN

GATEWAY REAL ESTATE AFRICA LIMITED

AND

AFRICA PROPERTY DEVELOPMENT MANAGERS LIMITED

 

 

Grit Real Estate Income Group Limited, a leading pan-African real estate
company focused on investing in, developing and actively managing a
diversified portfolio of assets underpinned by predominantly US Dollar and
Euro denominated long-term leases with high quality multi-national tenants,
today provides a further update on the proposed acquisition of majority
controlling interests in Gateway Real Estate Africa Limited ("GREA") and
Africa Property Development Managers Limited ("APDM") (the "Proposed
Acquisition"). The Proposed Acquisition was announced by the Company on 22
November 2021 and in the combined prospectus and circular published on the
same date (the "Prospectus and Circular"). Today's update is provided further
to the long stop date extension announced by the Company on 31 March 2022
(link here)
(https://polaris.brighterir.com/public/grit/news/rns/story/xlgo6pr) . Terms
not otherwise defined in this announcement have the meanings given to them in
the Prospectus and Circular.

 

Background to the transaction

The Proposed Acquisition was announced in conjunction with an open offer and
placing of new ordinary shares of nil par value ("Ordinary Shares") at an
issue price of US$0.52 per new Ordinary Share (the "Issue Price") to reduce
Grit's overall indebtedness and to provide future capital for the further
expansion of Grit's core and expanded business.

 

The Proposed Acquisition will provide Grit with access to GREA's attractive
pipeline of accretive development opportunities, and the Grit Board believes
the medium-term NAV growth prospects of the Grit Group will be significantly
improved upon completion. The acquisition of a controlling interest in APDM
provides Grit with significant influence over GREA's operational activities
and is further expected to allow Grit to earn substantial development and
asset management fees into the future from internal and third-party clients
and joint venture partners.

 

On 20 December 2021, the Company issued 146,342,312 new Ordinary Shares at the
Issue Price, raising gross proceeds of US$76.1 million. The completion of the
acquisition of majority controlling interests in GREA and APDM were subject to
the fulfilment or waiver (as applicable) of certain conditions precedent
before the long stop date of 31 March 2022, which was recently extended to 8
April 2022.

 

Summary of Amendments to the Proposed Acquisition

Grit has agreed certain amendments to the existing sale and purchase
agreements in relation to the Proposed Acquisition (the "SPAs"), allowing them
to proceed, and has now agreed the acquisition of 77.95 per cent. of APDM and
an increase in its interest in GREA to 26.29 per cent.

 

Additionally, Grit has committed to acquiring a further 8.72 per cent. of GREA
by 31 July 2022 for a further payment of US$19.44 million (payable in either
cash and/or by the issue of new Ordinary Shares at the Issue Price, at the
election of the Seller), which will increase its shareholding to 35.01 per
cent.

 

Grit has also been granted an option by Gateway Africa Real Estate Limited
("Gateway Partners") (the "Option") to acquire their remaining 13.61 per cent.
interest in GREA and an additional 1 per cent. of APDM owned by Gateway
Partners, by 15 December 2022 which, if exercised, would increase Grit's
direct shareholding in GREA to 48.62 per cent. and APDM to 78.95 per cent. The
Option exercise price will be settled either in cash and/or by an issue of new
Ordinary Shares at the Issue Price at the option of Gateway Partners.

 

Furthermore, Grit's total (direct and indirect) shareholding in GREA would
increase to 51.66 per cent. following the issue of APDM's 10.0 per cent. free
carry in GREA, which is to be issued to APDM upon the achievement of minimum
performance requirements, measured and issued at year five or year seven from
GREA's inception or upon on a defined exit event, which the Option exercise is
expected to be.

 

GREA's year five anniversary from inception is in December 2022.

 

The acquisition by Grit of interests in GREA and APDM (together the
"Transaction"), when aggregated, is considered a Class 2 Transaction under the
FCA's Listing Rules.

 

Bronwyn Knight, CEO of Grit Real Estate Income Group Limited, commented:

"We are pleased to announce today the acquisition of a majority controlling
interest in APDM and to agree amendments to the SPAs that set out a clear path
for Grit to purchase a controlling shareholding in GREA by December 2022.
These are expected to contribute meaningfully to Grit delivering enhanced
profitable growth and superior returns to our shareholders, through GREA's
extensive attractive pipeline of accretive development opportunities and for
Grit to capitalise on new fee income streams through APDM's substantial
development and asset management fees. We also expect to deliver additional
value to our shareholders from the potential optimisation of the balance
sheets of Grit and GREA.

 

We continue to be well positioned to capitalise on the significant recovery
potential across Grit's unique high-quality property portfolio. As a Board, we
expect significant further potential value to be created through increasing
Grit's capital allocation to limited, risk mitigated development returns
through servicing existing and target tenants."

 

Details of the Amendments to the Proposed Acquisition

APDM

Grit acquires a 77.95 per cent. controlling interest in APDM, as previously
envisaged, and on broadly the same terms announced in November 2021 and set
out in the Prospectus and Circular, through the acquisition of:

·      Dorado's 21.05 per cent. interest in APDM for US$5.16 million
through an issue of 9,917,788 new Ordinary Shares, at the Issue Price;

·      The GREA Executive Share Trust's 26.32 per cent. interest in APDM
for US$3.73 million through an issue of 7,173,077 new Ordinary Shares, at the
Issue Price; and

·      Gateway Partner's 30.58 per cent. interest in APDM for US$7.59
million paid in cash by 15 April 2022 following the confirmation of closure of
the final administrative conditions precedent.  This is paid in cash, which
is a change to the terms of the original agreement with Gateway Partners that
envisaged the consideration would be satisfied by an issue of new Ordinary
Shares at the Issue Price.

 

Grit has an Option to acquire an additional 1 per cent. of APDM owned by
Gateway Africa Real Estate Limited ("Gateway Partners"), by 15 December 2022.
The Option exercise price will be settled either in cash and/or by an issue of
new Ordinary Shares at the Issue Price, at the option of Gateway Partners

 

APDM provides development management, asset management, advisory and
administrative services to GREA under the provisions of Asset Management and
Advisory Services Agreement ("AMASA"), whereby APDM is entitled to charge
development management fees to GREA equal to approximately 4.0 per cent. of
the total project costs of each development owned by GREA. APDM is also
further entitled to a standard annual fee of 1.5 per cent. payable on fair
value of the completed properties owned by GREA.

 

Grit's controlling interest in APDM affords the Company significant influence
over GREA's operations by virtue of the services APDM provides under the
AMASA, and APDM's management team will additionally become participants of
Grit's long term incentive scheme, further aligning the objectives of GREA and
APDM to long term value creation for Grit shareholders.

 

GREA

Grit also increases its interest in GREA from its existing ownership of 19.98
per cent. to 26.29 per cent. as a result of the following two transactions:

·      Grit is purchasing a 0.10 per cent. interest in GREA held by
Dorado for US$0.22 million satisfied by the issue of 423,616 new Ordinary
Shares issued at the Issue Price, as described in the Prospectus and Circular;
and

·      Grit is acquiring an additional 6.21 per cent. shareholding in
GREA from Gateway Partners at a purchase price of US$13.86 million paid in
cash by 15 April 2022 following the confirmation of closure of the final
administrative conditions precedent. This is a change to the terms of the
original agreement with Gateway Partners that envisaged the consideration
would be satisfied by an issue of new Ordinary Shares at the Issue Price.

 

Additionally, Grit is committed to acquire a further 8.72 per cent.
shareholding in GREA for a further payment of US$19.44 million, which will
increase its shareholding to 35.01 per cent. This payment is to be made no
later than 31 July 2022 and is payable in either cash and/or by the issue of
new Ordinary Shares at the Issue Price, at the option of Gateway Partners.
Grit will not therefore, at this time, gain control of GREA as originally
envisaged.

 

However, Grit has been granted an option by Gateway Partners (the "Option") to
acquire their remaining 13.61 per cent. interest in GREA by 15 December 2022
which, if exercised, would increase Grit's direct shareholding in GREA to
48.62 per cent. The Option exercise price will be settled either in cash
and/or by an issue of new Ordinary Shares at the Issue Price at the option of
Gateway Partners. Grit's total (direct and indirect) shareholding in GREA
would increase to 51.66 per cent. following the issue of APDM's 10.0 per cent.
free carry in GREA, issued upon the achievement of minimum performance
requirements, measured and issued at year five or year seven from GREA's
inception or upon on a defined exit event. GREA's year five anniversary from
inception is in December 2022.

 

Applications have been made with the FCA, the LSE and the SEM for the listing
of, in aggregate, 17,514,481 new Ordinary Shares being issued on the premium
segment of the Official List of the FCA and to be admitted to trading on the
Main Market of the LSE and for such new Ordinary Shares to be admitted to
trading on the Official Market of the SEM with effect from commencement of
trading on Tuesday, 19 April 2022 ("Admission").

 

Following Admission of the new Ordinary Shares issued pursuant to the
Transaction, Grit will have a total of 495,092,339 Ordinary Shares in issue.

 

1.   Description of the Business

1.1.  Grit

Grit is a leading pan-African real estate company focused on investing in,
developing and actively managing a diversified portfolio of assets in
carefully pre-selected African countries (excluding South Africa). These
high-quality assets are underpinned by predominantly US Dollar and Euro
denominated long-term leases with a wide range of blue-chip multinational
tenants across a diverse range of property sectors, with the aim of delivering
strong sustainable long-term income. Grit currently has a premium listing on
the Official List of the FCA and a secondary listing on the Official Market of
the SEM.

Given the high economic growth experienced in a number of countries in Africa
and the resultant rapid expansion of, and investment in, infrastructure to
support this growth, Grit was founded to offer investors direct participation
in property markets in Africa (excluding South Africa), whilst earning
predominantly Euro and US Dollar-based income from leading international
tenants at emerging market yields. The Grit Group's current portfolio includes
assets in Mauritius, Morocco, Mozambique, Zambia, Kenya, Botswana, Senegal and
Ghana. Further details on the Existing Portfolio are set out in paragraph 9
(Existing Portfolio) of Part II of the Prospectus and Circular.

The Company has a strong management and support team, supported by in-country
asset and property management teams.

1.2.  GREA

GREA is a private real estate development company specialising in risk
mitigated turnkey construction of real estate solutions for multinational
companies wishing to expand their operations in Africa.

GREA partners with blue-chip multinationals seeking real estate solutions on
the African continent and develops properties for these companies backed by
USD-denominated or USD-linked long-term lease contracts.

GREA:

·      was co-founded in 2018 by Grit and Gateway Partners with the
support of anchor shareholders such as the PIC and Prudential Financial. At
launch GREA raised US$175 million in equity commitments from these principal
shareholders;

·      is managed by APDM, an experienced team of professionals with an
established track record in African property development, investment and
management, delivering projects on time and within budget;

·      has strong risk management policies in place to mitigate
developmental, operational and other risks associated with African real estate
investments;

·      is equipped with an extensive knowledge and understanding of
Africa, as well as benefiting from an extensive network of trusted partners;

·      targets value creation through the active management of both
assets under development and completed as tenanted by blue-chip multinational
companies; and

·      provides investors with high-yielding US Dollar denominated real
estate exposure with robust growth potential maximising return for its
shareholders.

As at 30 June 2021, GREA had unaudited net assets of US$193 million, gross
assets of US$199 million and pre-tax profits for the six months ended 30 June
2021 of US$5.7 million.

1.3.  APDM

GREA has appointed APDM, a private company incorporated and domiciled in
Mauritius, as its asset manager and adviser with respect to the investment,
reinvestment, administration and disposal of GREA's investments. APDM holds a
Category 1 Global Business Company license issued by the Mauritian Financial
Services Commission (FSC) as well as an Asset Management license pursuant to
Section 14 FSC Activity License.

APDM provides development management, asset management, advisory and
administrative services to GREA under the provisions of the AMASA.

APDM's services to GREA are mandated under the AMASA with terms of service and
fees summarised as follows:

Services

·      provide a senior management team and directors to deliver
strategic planning, operational control, and management advice and services to
GREA's portfolio companies;

·      to source and investigate potential projects/investments;

·      to provide management services in respect of projects during and
post construction, which includes (but is not limited to) leasing,
maintenance, financial management, and marketing services with a view to
maximising the returns possible from a project;

·      to hire, oversee, manage and control the functioning of
third-party contractors, local parties and support services engaged with
regard to the acquisition, development and management of a project;

·      to provide finance, risk and compliance services to GREA and
portfolio companies as required by GREA from time to time in connection with
the management of its risk, compliance with applicable laws, reporting, and
its general financial functions;

·      to provide ongoing portfolio management and monitoring of
projects, including where applicable the provision of nominating and providing
directors to sit on the boards of portfolio companies;

·      to assist GREA in preparing its operational and financial budget,
and to prepare APDM's budget in accordance with the agreed budgeting process;

·      to furnish all administrative services, including, bookkeeping,
secretarial and clerical personnel and services, as may be necessary for the
proper conduct of the affairs of GREA and its portfolio companies; and

·      to make recommendations to the GREA Board with respect to the
disposal of investments.

Fees

·      APDM shall charge development management fees to GREA equal to
approximately 4 per cent. of the total project costs of each development owned
by GREA;

·      a standard fee of 1.5 per cent. per annum is payable on fair
value of the completed properties owned by GREA; and

·      on achieving minimum performance requirements, APDM is entitled
to a free carry of 10 per cent. of GREA, to be measured and issued at year
five and year seven of GREA's inception or on a defined exit event. The year
five anniversary is in December 2022, upon which date the relevant return
hurdles will be measured.

Further details on businesses to be carried on by Grit, GREA and APDM are
available in the Prospectus and Circular, which can be viewed on the Company's
website. (link here)
(https://grit.group/wp-content/uploads/2021/11/262293-project-glow-web-prospectus.pdf)

2.   The assets the subject of the Transaction

2.1.  Acquisition of ADPM

In relation to the acquisition of a controlling stake in APDM (an entity that
will be consolidated into Grit):

·      Gross Assets the subject of the Transaction are US$1.36 million.

·      Liabilities assumed as part of the Transaction are US$0.71
million.

·      Net Assets the subject of the Transaction are US$0.65 million.

The loss attributable to the assets the subject of the Transaction is US$ 0.30
million, being 100% of the profits attributable to APDM.

All figures as per the latest signed financials of APDM dated 31 December
2020.

2.2.  Acquisition of GREA

In relation to the increased shareholding in GREA (an entity that shall
continue to be an associate of Grit):

·      The Gross and Net Assets the subject of the transaction are
US$33.52 million (being the consideration payable for 15.03 per cent. being
acquired in GREA).

3.   The effect of the Transaction on Grit

The amendments to the Acquisition agreed today will result in Grit paying, at
minimum, US$21.45 million in cash to Gateway Partners to effect the
Acquisition. This would have increased Group reported LTV on a pro forma basis
as at 31 December 2021 by 0.7% to 42.10%.

Should Grit exercise its Option and gain control, and therefore consolidation,
of GREA, the current low leverage in GREA would still be expected to result in
a reduction in consolidated Grit Group LTV, as further described in the
Prospectus and Circular.

The Grit management team has sought to improve the growth rate of Grit, and
specifically views incremental risk mitigated development returns, limited to
no greater than 20 per cent. of the Grit Group's gross asset value, as being
key to achieving this goal.

Grit's ability to control its own pipeline and fully service its tenants' real
estate needs remains strategically important. Although Grit remains confident
of delivering superior total returns in the medium to longer term and is well
positioned to capitalise on the significant recovery potential across its
unique high-quality property portfolio, the Grit Board additionally sees
significant further potential value creation through increasing its capital
allocation to limited, risk mitigated development returns and would expect
these to increase the Grit Group's total targeted shareholder return over time
from 12 per cent. to 13-15 per cent. per annum (this is a target only and is
not guaranteed. It is based on a number of assumptions which may or may not
materialise).

APDM has a team of highly skilled development staff and can develop in over 15
African countries. With extensive experience delivering projects across the
continent, there exists opportunities to provide fee generating professional
services to clients external to GREA and to further deliver value to its
shareholders.

The Grit Board believes that the Proposed Acquisition therefore brings the
following benefits for the Grit Group:

·      GREA is the only development company covering every region in
Africa and with a multi asset class focus delivering real estate solutions for
international global tenants within Grit's existing and target client lists;

·      GREA's existing pipeline is fully funded through the existing
shareholders' equity contributions (as well as secured construction debt
facilities) and is expected to deliver strong NAV growth as projects are
completed over the next 24 to 36 months;

·      GREA has access to an extensive further pipeline of OBO (US
diplomatic housing) and data centre development opportunities which are
expected to be accretive to NAV, are extremely resilient asset classes and
offer exposure to highly rated tenants to underpin future income levels;

·      acquiring a majority stake in APDM offers Grit the potential for
new revenue and fee income streams, asset and facilities management with
respect to OBO and other discrete asset classes and accelerates Grit's
strategy of increasing its exposure to the provision of professional services
to its clients and other third parties;

·      the Proposed Acquisition would further diversify the Grit Group's
geographic exposure (and in particular, will reduce the Company's current
exposure to Mozambique, which is currently greater than the target of 25 per
cent. of the portfolio in any one country);

·      the transaction builds upon an already close working relationship
between the management teams of Grit, GREA and APDM; however significant
benefits may arise under a streamlined group structure because of current
"duplicate functions" within each business; and

·      debt funding for the Enlarged Group could be further optimised
due to increased geographic and sector diversity and balance sheet size.

Grit would have the ability to significantly influence (and should Grit
exercise the Option, ultimately control), additional activities that would
create potential value, which include:

·      Balance sheet optimisation and disposal of non-core assets
specifically reducing exposures to the retail segment. Such asset recycling
would be expected to free up capital that can be recycled into new project
opportunities within GREA.

·      When combined with Grit's balance sheet upon potentially gaining
control, and therefore consolidation, GREA's current low leverage would be
expected to result in a material reduction in consolidated Grit Group LTV
metrics.

·      Whilst GREA is expected to remain relatively lowly geared, its
construction debt facilities will be amortising and are relatively expensive
compared to Grit's debt facilities and a potential consistent and consolidated
Grit Group approach would be expected to provide GREA with cheaper debt
funding and, crucially, the ability to recycle operational cashflow into new
projects rather than debt repayments, thereby securing enhanced levels of
growth.

4.   Details of key individuals

·      GREA has a strong board and, through APDM, an equally strong
executive management team and investment committee comprising individuals with
exceptional track records in creating, building and managing property
development and investment companies. This will be supplemented by Grit senior
management through the appointment of Grit nominees to the relevant Boards and
investment committees, which is expected to occur shortly after obtaining the
controlling interest in APDM.

·      APDM's management team and staff will become employees of the
Enlarged Group on, essentially, the same employment terms as they currently
enjoy at APDM, immediately upon the acquisition of the controlling interest in
APDM. The consideration payable by Grit to the GREA Executive Share Trust
pursuant to the GREA Executive Share Trust Share Purchase Agreement shall be
settled by Grit shares. Such shares are to be retained by the GREA Executive
Share Trust, for the benefit of designated participants under a long-term
incentive plan, vesting on a future date or earlier if sufficient value is
achieved in GREA. Certain participants will also be enrolled to the Grit
long-term incentive plan and awarded shares upon the fulfilment of specific
key performance indicators.

·      The APDM team is led by chief executive officer, Greg Pearson.
Greg is a co-founder of Grit and was instrumental in sustaining its rapid
growth from its inception in 2014 through to 2018, when he left Grit to focus
his attention on GREA. Greg has successfully completed a series of
developments across the office, retail, leisure, education and healthcare
sectors and also sits on the Board of GREA as its de facto CEO.

·      Greg is supported by the following executive team members:

o  Krishnen Kistnen, Chief Financial Officer

o  Andre Janari, Chief Investment Officer

o  Craig Glutz, Head of Developments

o  Shevira Bissessor, Chief Operating Officer

Except as disclosed, there has been no significant change affecting any matter
contained in the earlier notification and no other significant new matter has
arisen which would have been required to be mentioned in that earlier
notification if it had arisen at the time of the preparation of that
notification.

By order of the Board

11 April 2022

FOR FURTHER INFORMATION, PLEASE CONTACT:

 Grit Real Estate Income Group Limited
 Bronwyn Knight, Chief Executive Officer                           +230 269 7090
 Darren Veenhuis, Chief Strategy Officer and Investor Relations    +44 779 512 3402

 Maitland/AMO - Communications Adviser
 James Benjamin                                                    +44 7747 113 930 / +44 20 7379 5151
 Alistair de Kare-silver                                           Grit-maitland@maitland.co.uk

 finnCap Ltd - UK Financial Adviser
 William Marle/Teddy Whiley (Corporate Finance)                    +44 20 7220 5000
 Mark Whitfeld/Pauline Tribe (Sales)                               +44 20 3772 4697
 Monica Tepes (Research)                                           +44 20 3772 4698

 Perigeum Capital Ltd - SEM Authorised Representative and Sponsor
 Shamin A. Sookia                                                  +230 402 0894
 Kesaven Moothoosamy                                               +230 402 0898

 Capital Markets Brokers Ltd - Mauritian Sponsoring Broker
 Elodie Lan Hun Kuen                                               +230 402 0280

NOTES:

Grit Real Estate Income Group Limited is the leading pan-African real estate
company focused on investing in, developing and actively managing a
diversified portfolio of assets in carefully selected African countries
(excluding South Africa). These high-quality assets are underpinned by
predominantly US$ and Euro denominated long-term leases with a wide range of
blue-chip multi-national tenant covenants across a diverse range of robust
property sectors.

The Company is committed to delivering strong and sustainable income for
shareholders, with the potential for income and capital growth.

The Company holds its primary listing on the Main Market of the London Stock
Exchange (LSE: GR1T and a secondary listing on the Stock Exchange of Mauritius
(SEM: DEL.N0000).

Further information on the Company is available at www.grit.group

Directors:

Peter Todd+ (Chairman), Bronwyn Knight (Chief Executive Officer)*, Leon van de
Moortele (Chief Financial Officer)*, David Love+, Sir Samuel Esson Jonah+,
Nomzamo Radebe, Catherine McIlraith+, Jonathan Crichton+, Cross Kgosidiile and
Bright Laaka (Permanent Alternate Director to Nomzamo Radebe).

(* Executive Director) ((+) independent Non-Executive Director)

Company secretary: Intercontinental Fund Services Limited

Registered office address: PO Box 186, Royal Chambers, St Julian's Avenue, St
Peter Port, Guernsey GY1 4HP

Registrar and transfer agent (Mauritius): Intercontinental Secretarial
Services Limited

SEM authorised representative and sponsor: Perigeum Capital Ltd

UK Transfer secretary: Link Assets Services Limited

Mauritian Sponsoring Broker: Capital Markets Brokers Ltd

This notice is issued pursuant to the FCA Listing Rules and SEM Listing Rule
15.24 and 15.36A and the Mauritian Securities Act 2005. The Board of the
Company accepts full responsibility for the accuracy of the information
contained in this communiqué.

 

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