JSE-listed property group Grit Real Estate Income Group (GRIT) is in the news today with institutional investors raising issues about a related party transaction between group CEO Bronwyn Corbett and the company.

This could potentially be another blow for the beleaguered JSE property sector but also raises questions about Long-Term-Incentive-Plans for executives.

Before we take a look at the transaction, let us take a look at the key numbers related to GRIT.

– Listed on the JSE in 2014, GRIT says it has built up a portfolio valued in excess of $700m or R10bn
– GRIT was previously known as Mara Delta
– The company has a market capitalization of around R6bn
– GRIT trades on a price to earnings multiple of around 11.4 and offers a 8.2% dividend yield
– GRIT has seen a 30-day average traded volume of 112 000, which is relatively illiquid.
– The price-to-book ratio is 1.04
– The group counts Ghanaian businessman Sir Samuel Jonah on its board of non-executive directors (February 2019 announcement)

The below graph shows the performance of GRIT over the past 5 years looking at its JSE listing:

This second graph tracks GRIT against the Coreshares Proptrax exchange traded fund (ETF) although it is not necessarily a fair comparison based on the composition of the GRIT asset base which is primarily in Africa.

However it does highlight what a poor year 2018 was for listed property on the JSE.

The GRIT portfolio

One of the potential appeals for investors in GRIT is its exposure to the African continent – somewhere where the other listed property groups have less exposure.

 

The below is a breakdown of the GRIT portfolio by geographic region:

In delivering its interim results to the end of December 2018, CEO Bronwyn Corbett talked up the opportunities that would be presented by its London listing – the counter is now listed on the JSE, London and Mauritius bourses – as well as regions like Maputo which is enjoying solid economic growth and demand for office space.

 

In the video below, Corbett takes investors through the interim results focusing on the fact that the Group maintains its targeted annual dividend growth of between 3% – 5% and a minimum total annual net shareholder return target of 12%+ in US Dollars in 2019. She also mentions that the property portfolio is underpinned by hard currency lease income from large, multinational tenants, diversified across 7 countries and 4 regions spanning various asset classes.

There was some further analysis of the interim results from Capital Network Analyst Ed Stacey. Stacey explains what the group does, how their portfolio of properties works, where they are and who tenants them, in this case it’s blue-chip clients:

Share incentive question marks:
One of the positives identified by GRIT investors early on was that directors – Corbett in particular – was a regular buyer of the shares in 2017 and early 2018.

This was followed up by further purchases by Greg Pearson, an executive of a major subsidiary, who purchased shares in February 2019. The company announced that Pearson had bought further shares on the open market in March 2019.

Up until this point, the GRIT story appeared to be one of a pioneering property group with a long-term investment timeline.

This was until an announcement hit the JSE Stock Exchange News Service (SENS) announcing that the company had paid R47.87m of shares (2.45m shares at R19.50/share) “to enable it to comply with its obligations in terms of the GRIT Real Estate Income Group Long-Term Incentive Plan”

The majority of these R48m in shares were purchased from Corbett – a transaction which was announced on the same day via SENS.

This transaction represents roughly 45% of Corbett’s holding in GRIT (according to the 2018 annual report).

With Corbett receiving an annual salary package of nearly R7.6m (2018 salary at current exchange rate), and being a recipient of over 1m shares via the GRIT share incentive plan, investors might feel that this is a very good deal for the CEO.

While there is a counter-argument to be made, that the share is relatively illiquid, the 8% dividend yield on the R48m shares translates into a further R3.8m/year in dividends. If the company management believes that the share will continue to outperform and grow its dividend, management is well compensated.

Having raised over R1bn in capital through its London listing, the company is unlikely to have struggled to raise a further R48m through an additional share issue if liquidity was the issue.

Market commentators on Twitter were vocal in the criticism of the transaction.

Cy Jacobs, co-founder at 36One, tagged JSE CEO Nicky Newton-King, flagging the transaction. He also indicated that he believed that property group Redefine – who hold a minority stake in GRIT – would have been a potential seller of shares if approached.

Piet Viljoen from RE:CM tweeted: “On 27 Feb, they announced an intention to buy shares on market to satisfy the share scheme. Subsequently, no shares were bought on market. This could have been a blatant attempt to “juice” the share price before Corbett sold to the company/scheme. If not illegal highly unethical.”

Sygnia CEO Magda Wierzycka also pointed out that the Public Investment Corporation (PIC) was a major investor in GRIT. She made the comment on Twitter: “The empowerment deal was funded by the PIC, then switched to a Bank of America loan underwritten by the PIC. Perhaps the CEO knows that questions are being asked about the relationship of one of the shareholders to PIC’s suspended staff member?”

This story is likely to raise a number of questions about the structuring of Long-Term-Incentive-Plans (LTIP) and finding ways to link performance with remuneration, it does raise some important questions about disclosures.

With the JSE property sector having suffered a torrid 2018 due to question marks about asset pricing, cross-ownership of the various property stakeholders and corporate governance issues, this kind of issue will not do the sector much good.

The share was un-traded on 7 March 2019 and closed at R19.50/share.