LLR’S FINANCIAL PERFORMANCE
A solid performance saw total rental income increase 7% to P81.3m from the prior year’s P75.8m.
This was again driven by a remarkably low vacancy rate (under 1% of gross lettable area), above inflation escalation and favourable lease renewals. The topline performance actually came in under expectations, directly as a result of the delay in the closing of the Watershed transaction.
Earnings per unit rose 6% to 31.12 thebe on the back of an increase in profit before tax to P94.8m from last year’s P88.9m. With a debt load of P194m, LLR remains conservatively geared, moreso in the light of its excellent cash conversion rate which is in the 80% territory.
This headroom provides ample opportunity to fund acquisitions without resorting to relatively expensive equity.
THE GLOBAL ECONOMY
Botswana’s economic performance during the year under review was sluggish but with indications pointing to a pick up in the 3% GDP growth figure achieve. Inflation was tame at 3.1% which lent itself to fairly historically low interest rates (Bank of Botswana’s base rate closed the year at 5%) and the Pula was stable.
Globally, growth accelerated particularly in the US economy where the so-called Trump boom – fueled by tax cuts and a loosening business regulatory environment - saw equity markets advancing to historic highs. However, the growth has been uneven with concerns about the increasing oil prices and the fallout from an escalating trade war between the US and China, the world’s two largest economies, leading the IMF to recently shave global growth projections to 3.7%.
On the continent, strong commodity prices have pulled up the resource based economies such as Zambia, Nigeria and Ghana and helped buttress the buffeting suffered by other emerging markets such as South Africa, Turkey and Argentina. This good luck was not a moment too soon – regional countries such as Kenya, Mozambique and Zambia have come under increasing scrutiny of possible default as the cost of servicing their sovereign debt take up to 40% of GDP.
CORPORATE ACTIVITY AND PORTFOLIO GROWTH
As alluded to by the Board Chairperson, LLR made a significant retail acquisition via the purchase of the Watershed Mall in Mahalapye. This P149m acquisition has seen the portfolio’s allocation to the retail sector increase from 10% to a material 24% as well as broaden the company’s geographical footprint in Botswana. Overall, the portfolio growth was 24% to P970m (2017 – P778m).
The acquisition was funded by debt, financing which increased the company’s loan-to-value from 6% in 2017 to the present 24%. This gearing is well in line with the strategy of optimizing the company’s capital structure by sweating LLR’s relatively lazy balance sheet.
PROPERTY MARKET OVERVIEW
As an asset class, real estate was not without its own turbulence in the year under review, particularly in the pockets of the residential and office markets. However, the resilience of the sector as a whole and a dependable store of value and generator of reliable income streams was apparent during a year when many other economic segments suffered hiccups.
It was as you were in the industrial niche – robust demand which has stretched over the medium to long term. The market, whose key drivers are logistics and manufacturing, continued to maintain its markedly better performance relative to the other sectors. Industrial prime rentals currently stand at P45/m2, with yields at 9%. Despite its seemingly healthy demand especially in Gaborone, development in the sector has been surprisingly low, with only 15,000m2 in GLA entering the market recently.
The retail sector has experienced its own share of robust growth over the past 15 years and this did not slow during the period under review; most of the major existing shopping centres, such as Airport Junction and Game City are expanding. About 70,000m2 in GLA is expected to enter the market within the next 18-24 months, indicating that despite longstanding concerns of overtrading and overborrowed consumers, retail demand is still on the rise. Rentals in the sector are testament to the sector’s resilience with the anchors still ranging between P80-90/m2 and yields at 8%. Notwithstanding the amount of space coming into the market, the market continues to enjoy good occupancy rates and inflation beating escalations.
The last few years have seen an introduction of a good number of hotel rooms into the market, more especially in Gaborone. This development has led to a decline in ADR and occupancy levels as the market becomes more competitive
Increased market stock in the sector has seen rental growth flatlining over the past five years. Downward market reversions have become the norm during lease renewals, sometimes resulting in dramatic decline in rentals.
Prime rentals continue to hover around the P100/m2 mark with yields in the 7 - 8.5% range; secondary rates vary between P65 – P75/m2. Despite the above dynamics, the sector continues to experience expansion, with a number of new office developments nearing completion stage, particularly in the new CBD where a number of land development covenants are expiring.
The Gaborone residential market has seen a slight improvement after a 5-year of subdued spell. The improvement has been particularly notable in the low to middle. end of the market, while the high end is still experiencing a weaker demand.
Upcoming developments in the short to medium term include Gaborone North, Thobo Hamlet/ Peto Estate and KHill Developments’ Kgale Lake City in the southern part of the city is billed to the next major residential development.
THE ROAD AHEAD
The company is embarking on a new strategic path whose underlying pillars are an annual double digit growth in the property portfolio with a focused acquisition of industrial, retail and prime grade commercial real estate assets while diversifying into selected markets in Africa. This shall be underpinned by a prudent, efficient capital structure.
As we make the first bold steps on this exciting journey, my team and I are confident of delivering a transformed LLR: domestically strong, with a laser focus in the key property segment and a significant regional presence. All this having delivered portfolio growth and increasing, consistent distributions.
In conclusion, my sincere thanks to Board and the entire LLR team.
They delivered a strong performance in the face of the economic headwinds while Watershed Piazza also managed to secure a key asset which will make a significant contribution to the bottom line for many years to come earnings from many years to come. It indeed has been a short while since I joined the company yet, with each day’s interaction,my conviction only gets deeper and strong: we will dramatically grow this business and drive it to where it should be.
Chief Executive Officer
Mr Chikuni Shenjere - Mutiswa