Letlole CEO, Kamogelo Mowaneng
‘In the world of investments, nothing is foolproof’
Reflects on P100m impairment
Highlights pitfalls of relying on a single tenant
'Investment monitoring process is still ongoing'
‘Too early to establish a timeline for any developments’
Letlole has the option to increase investment to 50%
Kamogelo Mowaneng, the Chief Executive Officer (CEO) of Letlole La Rona remains hopeful about the broader African landscape, asserting that Kenya still holds promise despite its current economic challenges.
The group’s investment in East Africa led to a staggering 66% drop in profit before tax in the 12 months to 30 June 2024. In taking accountability, Mowaneng highlighted the pitfalls of relying on a single tenant, noting that a diverse tenant mix could have softened the blow.
P100m impairment loss
“In the world of investments, nothing is foolproof,” Mowaneng said in response to questions about the company’s P100 million impairment loss on Orbit Africa Logistics (OAL) in Nairobi.
Letlole also had to impair the asset by P5.5 million, representing the equity portion. Effectively, Mowaneng said, the asset's value dropped from approximately P109 million to P3.7 million in the 12 months to 30 June 2024. These provisions significantly impacted the Group's overall results, with profit before tax from continuing operations declining by 66%, from P119.3 million to P41.1 million.
Distribution nosedives 27%
To preserve value for stakeholders, the company adopted a more cautious cash management strategy due to the ongoing underperformance of its associate company in Kenya. As a result, lower distributions were declared for the current period. The total distribution for the financial year amounts to P40,298,678, reflecting a year-on-year decrease of 27.1%, or P14,961,962.
OAL asset
OAL is a special-purpose vehicle incorporated in Mauritius, owning an industrial asset in a prime industrial node in Nairobi, Kenya. The Orbit facility is situated on a prime industrial site on Mombasa Road, the principal route south of Nairobi center, serving the main industrial node, the port of Mombasa and the industrial town of Athi River. It is strategically located 11 kilometers south of the international airport and 9.6 kilometers from the Inland Container Depot.
Letlole made its entry into Africa through this investment, aiming to diversify the group’s portfolio geographically and achieve higher returns. At the time, she described it as a sale-and-leaseback transaction. The industrial asset measures 29,000 m² in gross lettable area and is leased to a single tenant, according to Mowaneng.
The acquisition totaled approximately P100 million, with the majority financed through a shareholder loan and a small portion for equity. Mowaneng revealed that the reason for this split was primarily for tax planning purposes.
The shareholder loan accrues interest at 4% per annum and is repayable over five years. In 2023, the first year of the investment, Mowaneng said that shareholder interest was received from OAL.
Challenges in remitting
However, during this financial year, the tenant began experiencing challenges. The tenant's inability to pay the rental led to cash flow challenges for the company, preventing it from remitting interest on the shareholder loan, according to the CEO who highlighted key learnings from the situation.
One of the key points she cited is tenant concentration risk; If the 29,000 m² were occupied by ten or even five tenants, the struggling tenant would have had less impact, as the others could still cover the rental payments.
Tenant mix hedge
Letlole is a proponent of a tenant mix strategy, proven effective during COVID. In a property with ten tenants, Letlole aims to ensure that at least 7 or 8 are strong enough to withstand economic challenges, while SMEs may be included occasionally. This approach is applied across all its assets in Botswana, ensuring that the majority of tenants can continue trading through cycles like pandemics.
“I think one of the key learnings for us is really the tenant concentration risk. Had it been multi-tenanted, we would be talking a different story right now,” Mowaneng said adding that “going back to how they are adjusting the strategy is to look at tenant concentration risk, currency risk, exchange rate risks”.
Risk Mitigation
Since the company predominantly operates in Botswana, it mitigated risk by seeking country partners to manage the asset. Grit Real Estate is a co-investor and is responsible for managing the asset. Mowaneng disclosed that they continue to actively engage with the asset managers to explore ways to turn the investment around. Among the options being considered are restructuring the lease and bringing in new tenants.
“With any other property management, those are some of the options that you will look at as well as being closely involved with the tenant to look at the forecast that they have for their businesses, when they expect to turn around the business, and then look at what other options are available.”
However, Mowaneng could not commit to turnaround timelines or exit plans, noting that the investment monitoring process is still ongoing. With an initial 30% equity stake in OAL, Letlole has the option to increase this investment to 50%. But at this point, Mowaneng stated that it's still too early to establish a timeline for any developments.
“The asset managers are looking at turning it around because it's impacting both of us negatively.”
Letlole Still believes in Go-To-Africa
When asked about the implications for the Go To Africa strategy, Mowaneng said they continue to seek yield-accretive investments in Africa while applying the lessons learned from OAL. From a Kenyan perspective, she believes it remains a strong investment market, especially given the exchange rate depreciation.
Despite the ongoing challenges and high interest rates, she noted, “We are seeing the Government of Kenya making deliberate efforts to address these economic issues.”
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