Letlole la rona: life after cresta

Selling its hotel properties to sitting tenant Cresta Marakanelo has ‘liberated’ LLR to chart a course to LLR’s restructuring in which the company is keenly looking at retail space in vibrant, yet underserved secondary towns in Botswana and exploring opportunities in neighbouring countries

Letlole la rona: life after cresta
Letlole la rona: life after cresta

Letlole La Rona’s 2018 has been marked by financial pressures since the property company decided to dispose of its hotel properties to restructure. The company divested from the hospitality sector when it disposed of all its hotel interests via a sale to the sitting tenant, Cresta Marakanele Limited.

This was in line with its strategy to dramatically reduce risk profile and remove exposure to the single tenant who occupied up to a third of its portfolio. It was also seen as a move to unlock capital needed to chart its restructuring and growth path. Cresta is recognised in the Botswana market as the largest hotel operator both in the number of rooms (eight hotels and 724 rooms) and in the geographical spread of its hotels, according to its website which says there is no other hotel operator that has such a dominant presence in the larger cities of Botswana, as well as in the country’s key tourist areas.

It was a key tenant to Letlole. However, when competition became intense in the tourism industry, Cresta reportedly struggled and could not keep up with the rentals while negotiations with its landlord, Letlole, hit a snag. But it was Letlole which eventually opted to sell the properties that Cresta was occupying. The property company sold Plot 50719 Cresta Lodge, Gaborone, Plot 1169 Main Mall, Gaborone, Plot 6348, Thapama Hotel, Francistown and Plot 267, and Bosele, Selibe-Phikwe to then tenant Cresta Marakanelo. The properties were sold for P235 million, which took into account market realities and the fact that the consideration of the properties would be in cash. CEO Chikuni Shejere-Mutiswa promised to deploy the sale proceeds during the course of the coming financial year, which was this year. But the strategy to prune out this portfolio came with its pain: a year-long financial pressure.

As at June 30, 2019 the sale of the hospitality assets saw the investment properties value decline from P970 million to P780 million. According to Letlole, the sale of the four hotels led to a book loss of P27 million on this disposal as at June 30, 2019. But even as Letlole had sold the hotels, total revenue for the year ended 30 June 2019 reflected a 28 percent growth from the prior year’s figure of P82 million, cautioned by the contribution of Watershed Mall (accounting for 12 percent of total revenues). The asset came into the portfolio at the tail end of the 2018 financial year when Letlole embarked on selling its hotels.

In the six months ending 31 December 2019, Letlole La Rona’s contractual revenue reported P37.4 million, coming 21 percent below the past corresponding period when the company posted P47.5 million. According to Shenjere-Mutiswa’s statement, the fall was directly as a result of the sale of the hotel portfolio, which he says accounted for 25 percent of total group revenues. During the six months ended 31 December 2019, leisure portfolio profit reported P1.4 million compared to P8.32 million.

Shenjere-Mutiswa says the company is well on its way to honouring the commitment made to shareholders last year that proceeds from the disposal of the hospitality portfolio would be re-invested within 24 months. He says substantial progress has been made in acquiring value-accretive assets to add to Letlole’s portfolio.  “During the coming months, the company will be seeking stakeholders’ approval for a number of attractive, yield-enhancing acquisitions in Botswana and within the region which shall dramatically re-position LLR’s portfolio,” he wrote.
Last week, he told this publication that Letlole La Rona had received asset offers from some South African property funds planning to exit certain African countries. “Our focus is on Africa light - countries with legal or political stability such as Namibia and Zambia,” he said in an interview with The Business Weekly & Review on Tuesday recently.

Letlole currently has no assets outside Botswana. Its property portfolio is concentrated in this country where it owns a mix of commercial and industrial properties representing a diversified, yet balanced portfolio of long-term and short-term rentals in the tourism and industrial sectors of the economy.
Shejere-Mutiswa wrote in the financial results that there are opportunities ahead in the retail space, particularly in vibrant, yet underserved secondary towns outside Gaborone. According to the CEO, Letlole has identified a partner with whom to exploit these opportunities.  “LLR’s strategic focus shall continue to be a consistent and sustainable distribution growth, underpinned by a diversified property portfolio holding strong covenants,” he said.

When Letlole listed on the Botswana Stock Exchange (BSE) on 15 June 2011, it had 21 properties under its belt. By 2018, the portfolio had increased slightly to 24, meaning during the intervening period there had been little growth. The property company was not as aggressive as other property companies on the BSE which went onto the market to buy new assets.
Letlole was dealt a blow last year when it was forced to sell its commercial immovable hotel properties to Cresta, the sitting tenant, after both parties opposed each other over renewal of a mutually beneficial lease agreement. In the event that Letlole retained the properties, concerns were that there would be a greater financial loss when the lease between Cresta and Letlole expired and in subsequent years. In addition, the company said it would be left with unoccupied hotels, properties which constitute 28 percent of the property portfolio.

Hotels are unique, specialised assets and Letlole was worried that any new operator would, in line with global hospitality industry trends, demand the company to pay for refurbishing and re-modelling them to its specifications and accept a lease agreement where the rentals varied with the performance of the hotel.  As such the group chose to restructure its portfolio, and the CEO says its performance remains solid with average escalations being maintained at 7.5 percent per annum and low vacancies of 2.3 percent of gross lettable area.
Shenjere-Mutiswa says declining vacancies and rental arrears, competitive lease escalations and increasing contributions from the recent acquisitions have enabled LLR to bridge the period between the sale of the hotel properties and their imminent replacement without compromising its distribution. “The substantial increase in the portfolio’s weighted average lease expiry (WALE) from 32 months to 40 months, in an economy which is yet to return to the robust growth of yesteryear is testimony of the quality of LLR’s assets,” he says.

The company’s core market is industrial property, which is by far the best performing sector. Its core assets of industrial are mostly in Gaborone, which is the hub of the country’s industrialisation. During the reporting period, Letlole’s industrial profit grew from P31.8 million to P35 million.
During the six months ending 31 December 2019, Shenjere-Mutiswa says a much sought-after property was added to LLR’s industrial assets. “The tenant has already approached LLR with a proposal to develop additional space at the site,” he says. “Similarly, our second largest tenant, also in the Gaborone West industrial hub, is also seeking the addition of 7,000 sqm to the present 22,000sqm warehouse by end of 2020, together with a renewed long-term lease. Negotiations have begun and these envisaged projects will further cement LLR’s position as the country’s leading’s industrial space player.”  
The CEO says Letlole has a very solid asset and tenant base, leading to the 6 percent year-on-year capital appreciation in market values of the underlying properties, which now stand at P761.0 million from P699.1 million in the previous reporting period.
Profit before tax (PBT) from continuing and discontinued operations of P35.7 million is 9 percent lower than the P39.4 million achieved in the prior year. Shenjere-Mutiswa attributes this to fair value gains on investment properties of P10.6million (P4.1 million in 2018).

The group’s property and administrative costs were 13 percent above the prior year figure of P12.5 million mainly as a result of increase in staff complement and increase in the minimum wage which has seen escalations in property costs, according to the CEO. “Management continues to implement tight cost control measures to maximise profitability,” he says, adding that the company’s debt burden remains at a low level, reflecting available capacity, in terms of both operating cash flows and prudent borrowing guidelines, to continue with the strategy of portfolio growth and diversification.