Victoria Mutual Investments Limited (VMIL) has taken an associate stake in real estate investment company Kingston Properties Limited (KPREIT) following a $1.05-billion transaction last Friday.

The investment company made its first direct investment in KPREIT during its $1.552-billion (US$10-million) additional public offering (APO) in June 2022 where it purchased 67,061,740 ordinary shares at $7.50 for a consideration of $502.96 million. Other unit trusts, pension funds and managed funds under VM Wealth Management Limited’s management increased their exposure during the APO including the VM Wealth Property Fund owning the largest stake of 257,885,079 ordinary shares or 29.15 per cent of the company up to September 30. VM Wealth Management is VMIL’s wholly owned subsidiary.

On December 30, a buy order at 9:31 am resulted in KPREIT’s sell queue shrinking as orders ranging from $6.77 to $8.20 were processed which resulted in it halting for an hour since it triggered the circuit breaker. When the stock unhalted at 10:31 am, six orders of 20,400,000 units and one order of 13,083,871 units traded a minute later at $7.75 per share. These cumulative orders totalled 135,483,871 ordinary shares with overall volume for the day amounting to 136,036,412 ordinary shares valued at $1.054 billion from 64 trades.

KPREIT’s stock price closed 2022 at $7.75 with a best bid order at $8.49. KPREIT made up 66 per cent of volumes traded on Friday and 65 per cent of the combined index’s traded value of $1.62 billion. KPREIT ended the year down 14 per cent with a market capitalisation of $6.86 billion. However, some of its other equity holdings like Stanley Motta and Radio Jamaica experienced double-digit gains on Friday with best bids of $5.32 and $2.50, respectively.

“This acquisition is in line with VMIL’s thrust to expand its real estate investments. The addition of KPREIT to the VMIL portfolio adds significant strength to its balance sheet and enhances its business development capacity. VMIL will now have an opportunity to diversify its real estate investments outside of Jamaica, based on KPREIT’s expansive portfolio in other Caribbean jurisdictions and North America,” said the VMIL disclosure posted to the Jamaica Stock Exchange last Friday.

The VMIL release mentioned that it will benefit from dividend income as well as being able to participate in the strategic direction going forward. VMIL had underwritten KPREIT’s 2019 rights issue and lent it $700 million as a bridge loan in June 2021.

Based on KPREIT’s recent share buy-back of 542,621 shares relative to the 884,609,294 ordinary shares outstanding, VMIL’s stake in KPREIT stands at 22.91 per cent. With VMIL Chief Executive Officer (CEO) Rezworth Burchenson also sitting on the board of directors of KPREIT since July 2021, VMIL will account for KPREIT as an associate as per IAS (International Accounting Standards) 28 which speaks to significant influence. The VMIL release also stated that it would report a share of KPREIT’s profit which means that it will account for it through the equity method.

KPREIT reported an eight per cent increase in net profit to US$1.45 million ($221.48 million) for its nine months up to September. For its 2021 financial year, KPREIT earned US$3.02 million ($468.08 million) in net profit which was largely supported by US$1.37 million in fair value gains on its investment properties.

VMIL’s net profit declined by 45 per cent to $334.78 million for the nine months as its gains from investments activities declined and expenses increased. A share of KPREIT’s nine months net profit would translate to $50.74 million on VMIL’s consolidated income statement. Also, VMIL’s share of KPREIT’s shareholder equity/net assets of US$43.16 million would amount to US$9.89 million ($1.51 billion).

VMIL already has an associate company in the form of Barbadian Carilend Caribbean Holdings Limited where it has a 30 per cent stake that it purchased for $106.10 million in August 2019. However, VMIL’s unaudited balance sheet showed its interest being carried at a negative $3.32 million as the peer-to-peer lending company continues to generate losses while growing its operation.

VMIL also agreed to make an equity injection into Home Choice Enterprise Limited last May which is one of its other private equity investments. VMIL had been de-risking VM Wealth during 2022 in a tumultuous period of heightened volatility. VMIL injected $600 million in equity to VM Wealth through two tranches in 2022 as the decline in the fair value of securities would have impacted the regulatory ratios of its subsidiary. Also, VMIL suspended dividend payments as it focused on capital and liquidity preservation of its $27.57 billion balance sheet.

Despite the decline in on-balance sheet assets, VMIL has been focusing on diversifying its business operations through the growth of off-balance sheet assets which includes unit trust and portfolio management segments. VMIL had sought to raise $5.8 billion through the issuance of an unsecured bond to finance various corporate investment activities, refinance existing debt and cover transaction related costs. The bond was supposed to have been issued on December 30 through four tranches split between variable and fixed interest rates with tenures between three to five years.

VM Wealth is also introducing minimum holding periods and early redemption charges to eight of its unit trusts and preliminary charges to four of its unit trusts effective January 19. VM Wealth is also increasing the management fees charged on its four income unit trusts, property, classic protector and constant stream portfolios by 50 basis points (0.50 per cent). VM Wealth’s constant stream and RED (Real Estate Development) portfolio unit trust products aren’t currently shown on the unit trust rates section of the website but are included in VM Wealth’s unit trust offering circular. Both require a minimum investment of $250,000 and subsequent investments of $50,000.

The RED portfolio will invest in the financing and development of residential and commercial properties and is suited for investors who are seeking an opportunity to take part in potential equity gains inherent in those transactions. Unlike the other funds which have a management fee charged under two per cent of the portfolio’s net asset value (NAV), the RED portfolio has a 3.50 per cent management fee along with the VM Wealth being entitled to 20 per cent of the gains above a hurdle rate of eight per cent. VMIL also increased the interest rate on margin loans in 2022.

VMIL earned 40 per cent of its $832.09 million in net fees and commissions from unit trust funds in 2021 valued at $22 billion. Unit trust assets were valued at $23.47 billion with managed client funds standing at $44.89 billion as of September. VMIL and its unit trust was involved in a US$18 million acquisition of a business process outsourcing (BPO) commercial property at the Barnett Technology Park in September 2022.

KPREIT Developments

KPREIT is currently advancing on different real estate projects in Jamaica and the Cayman Islands. The Gum Tree 5 mixed-use development was set to be complete at the end of 2022 while its Cross Roads project will be a joint venture with Relmac Construction Limited valued at US$2.7 million.

When asked about the Dumfries Road development, KPREIT CEO Kevin Richards said, “There has been a new development on that front, but we will make a disclosure on that very early in the new year.”

The Dumfries Road property is a half-acre space that was purchased on a sale and leaseback arrangement in March 2021 which was supposed to be developed into a multi-storey commercial building. KPREIT had near 100 per cent occupancy at the end of September with most of its economic exposure being towards Jamaica and then the Cayman Islands and United States of America. It also received a green business certificate from the National Environmental and Planning Agency (NEPA).

KPREIT paid US$1.43 million in dividends in 2021 at a yield of four per cent. KPREIT also added 2,511 shareholders during its APO which brought its ownership base beyond 3,500 shareholders. KPREIT and VMIL’s audited financials are due by March 1 but might face delays related to the auditor shortage associated with KPMG.