LLR favors rights issue for raising capital
LTV at 46%
“We exhausted our headroom with the banks”
Group seeks funding strategy sustainable for the business
Historically, Letlole La Rona (LLR) has had assets and kept them as long as they were returning a profit. But the group has been grappling with whether it was really achieving the maximum returns it could possibly get from its assets. Against this background, the property company embarked on an exercise to really look at each asset of the P1.4 billion portfolio to see “if we are getting the maximum out of it”, according to CEO Kamogelo Mowaneng.
If not, the questions management pondered were “How can we improve performance? Importantly, were these assets meeting “our current minimum return of 12% being a combination of dividend, yield and capital appreciation?” If not then what should Letlole do? Should they consider recycling them? Alternatively, should the group consider repurposing them? It is a list of endless questions that Mowaneng said had prompted the ongoing exercise that the group embarked on in 2022. She said Letlole is quite deliberate about asset management strategies.
“With rising interest rate/cost of funding, it means we have to have higher net operating income,” Mowaneng said during the group’s results presentation for the full year ended 30 June 2023. For the assets that the group currently has or which they are investing in, she said they must at a minimum exceed the cost of funding. This is why she said management took a keen interest in two of the group’s assets (Red Square and Moeding) which did not meet this criteria. “The cost of funding was significantly higher than the return we were getting meaning that overall it was eroding the returns,” Mowaneng said explaining that this “was what really drove us to sell them and obviously seek assets with superior returns. “So what we have done with the assets we are selling is we are looking at re-investing in higher-yielding assets.”
The group is still in the process of selling Red Square residential flats as part of its balance sheet optimization; a deliberate asset management strategy to unlock value thus maximising returns. “We pride ourselves in returning superior returns to our shareholders. Our superior returns are in two forms. In the form of consistent distribution and capital appreciation,” Mowaneng said. The company completed the sale of Moedi House in Gaborone for P53 million.
While Pulafela Isaacs, the group’s CFO said part of the funds were to reduce debt levels in light of high interest rates, some of it is to expand into superior yielding assets like Rail Park Mall. LLR first bought 32.79% of JTTM last year (holding Rail Park Mall). The offer put on the table by Letlole was P152.0 million, being 32.79% of JTTM’s net asset value as at 30 June 2021 of P463.5 million. The group announced this week the conclusion of the acquisition of the additional 25% shareholding in JTTM. This has resulted in JTTM now being a subsidiary of Letlole, which now holds a majority stake of 57.79% in JTTM. The total investment including this transaction is estimated at P292 million with the group forecasting to increase the portfolio size.
While this transaction was concluded post reporting period, LLR saw its finance income for the full year 2023 results grow from P8 million to P21 million mainly driven by the income the group gained from JTTM (before the additional stake). Isaacs said this is a testament to the fact that “our investment is bearing fruit”. Out of that P21 million, he said JTTM contributed about P13 million which is “a significant increase”.
Letlole reported “other gains” of P11 million from P300 000 the previous year mainly driven by foreign exchange gains on another investment in Kenya. Orbit Africa accounted for P10 million and the CFO said this was driven by the strength of the Dollar against Pula during the period. Letlole acquired a 30% equity stake in Orbit Africa Logistics in Nairobi, for US$7.2 million in 2022, as part of the Go-to-Africa Strategy. “We will focus on growing our portfolio and also optimising it. Here we will be looking for opportunities locally and regionally, but regionally on a risk-adjusted basis,” Isaacs said.
With borrowings sitting at P476 million, one of the options that LLR sees in the immediate short term for raising funds for its expansions is “probably an equity raise”, according to Isaacs. He cited a 46% Loan-to-value (LTV) ratio, commonly used in real estate transactions by lenders to determine your eligibility for a loan. The group wants to lower this to 40% wary that “if there are other unfavorable conditions and valuations had to drop, we would not breach covenants”.
“We got to a point where we were like we exhausted our headroom with the banks given where our LTV is,” Isaacs said at the group results presentation for the full year ended 30 June 2023. What he said they need to do is “explore other opportunities of funding our balance sheet”.
These could be in the form of rights issue, or notes issue which the company is “going to be focusing on over the next couple of months to come up with a funding strategy sustainable for the business to fund the goal we want to pursue,” Isaacs told his audience.
As part of the balance sheet optimisation and funding strategy, Isaacs said they will be looking toward diversifying borrowings, especially to the point of “our go-to Africa strategy”. He recalls that the Orbit loan was in Pula although it was funding a Dollar investment. Perhaps what the company needs to do is determine pros and cons to assess the liability of getting dollar funding for those opportunities, he said. “That’s part of the work we will be looking into as part of our funding strategy.”
With the group’s borrowings flat at P476 million, the Interest coverage ratio dropped from 5.7x to 4.1x but the CFO said “This is still healthy primarily because of a slight increase in debt from P471 million”. Gearing was still low at 34% having dropped from 36% in the previous year. Cost of debt was up slightly from 7% to 7.2%.
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