Currently, Mixta Real Estate Plc (“the Company”) has two 2021 ratings reports issued by two of the leading agencies – Data Pro and Global Credit Rating (GCR), with national ratings of BBB and CCC respectively. Contemporaneously, GCR upgraded the senior guaranteed bond of the Company to AAA while downgrading the secured bond to B. The unusual divergence in the ratings, notably, the recent one released by GCR necessitates a reaction by Management of the Company.
GCR attributes its downgrade of the Company’s rating to what it termed a deterioration in credit protection metrics, owing to factors such as material increase in debt, insufficient cashflow generation, weak earnings and short duration of debt portfolio.
In responding, Management notes that while the impact of Covid-19 had adverse effects on the overall economy and in particular the real estate sector, the underlying trends in the Company’s business are at variance with some of the conclusions drawn by GCR.
For context, Mixta has a large land bank that constitutes over 80% of its assets (by book value). The Company has been developing the asset in phases, starting with the phased rollout of infrastructure and other amenities to give value to the asset and enable the development of the large township planned for the Lagos New Town. Projects of this nature and magnitude will naturally involve upfront deployment of funds to develop the asset, provide infrastructure and amenities and enhance its value before full scale sale of homes and assets reach the cash flow inflexion point.
It is important to highlight that the increase in the debt level in 2020 was a natural consequence of this approach – more so in a year marked by a Covid 19 lockdown for the most part. The Company in 2020 converted certain non-interest-bearing loans to interest bearing loans in line with the requirements of the creditor – leading to the increase recorded. It must be noted however that the increase in debt was matched by an increase in shareholder capital through the conversion of debentures to ordinary shares, as approved by shareholders in the Annual General Meeting.
Cash inflow from sales between Q4 2021 and end of Q2, 2022 is expected to be about N25Billion, out of which the Company plans to utilize up to 50% to retire maturing Commercial Papers “CPs” and other loan notes issued by the Company. It is noteworthy that, about a third of the outstanding interest-bearing loans are not due until after 1 year, and these will be managed in the ordinary course of business sale and expansion. The Series 1 Bond will be fully liquidated in January 2022 by which time only about N5Billion will be outstanding on the Series II Bond. Tenor extension on other short-term loans will also be pursued opportunistically over the period.
Notably, while the Company continues to execute on its outlined strategy to sustain investment in infrastructure on its land bank, despite the adverse impact of Covid-19, 2020FY revenues of N13.5Billion exceeded 2019 levels by over 100%, while contracted sales by the end of 2021 are expected to have climbed to N16Billion. Investments made in infrastructure over the years translated to a marked-to-market (MTM) valuation of over 5 times the book value of assets, out of which fair value gains of N10bn in 2020 were recognized – further lending credence to the soundness of the strategy. Consequently, operating income rose over three-folds, while cash flows (despite additional investments in roads, power, sewage and water systems) improved significantly during the year.
Management appreciates the concerns raised about the need to reduce the debt level to improve debt service cover ratios, although the company’s gearing ratio, at only c. 1:1, remains conservative. If assets were to be MTM, the Company’s gearing will be less than 30% of asset value. Management does not however share the view of GCR to aggressively sell valuable assets of the Company during the pendency of a weak global operating environment, when an induced excess supply in the localized area where those assets are situated can only be inimical to the goal of monetizing assets in a profitable and sustainable manner. In this regard, the Company will continue to execute land transactions in an orderly and focused manner to achieve the right balance between cash generation and assets preservation. Management’s decision to maintain calm by focusing on its long-term strategy has further strengthened the valuation of its asset portfolio in 2021.
So far in 2021, further improvements have been registered across all metrics, and with the greater improvement seen in the valuation of the company’s land bank, an orderly and systematic strategy has been put in place to raise cash for debt reduction purposes. Revenues for 2021 are expected to close higher than the record level reported in 2020 by at least 50%, while reported cash flows as at Q3 have already surpassed 2020 levels.
It remains on record that the Company has met all obligations in respect of all debts, including the Series I & II Bonds and all maturing commercial papers. Management sees no reason why meeting all future obligations promptly will not continue. The Company will remain focused on its strategy and stands ready to further expatiate on its business and strategy to its stakeholders
