Shareholders in property group, Letlole La Rona (LLR) on Tuesday approved a P235 million transaction to exit the hotel sector through the sale of four iconic properties to the Cresta Marakanelo group.
The hotels are President Hotel, Cresta Lodge, both in Gaborone, Thapama Hotel in Francistown and Cresta Bosele in Selebi-Phikwe.
The deal is classified as a related party transaction as the Botswana Development Corporation holds 66% equity in Letlole and 27% in Cresta. Cresta is the current tenant of the properties it is taking over under a 10-year lease due to expire on June 30, 2020. The leases are held on a fixed rental structure with an annual compounded escalation, an arrangement that is increasingly uncommon in the hospitality industry.
On Wednesday, BusinessWeek established that the transaction received strong shareholder support at an Extraordinary General Meeting held on Tuesday. An announcement was due to be flighted on the Botswana Stock Exchange by press time.
The deal sailed through despite the sale amount representing a 7.7% discount on the value of the four properties, which was pegged at P254.7 million in December 2018. Ahead of the deal, LLR directors cautioned that while the deal was a discount, there was a danger that Cresta would not renew after June 2020 and that even if a new tenant was secured, LLR would incur renovation costs of the new tenant’s requirements. There would be a loss of rental revenue during any renovation and the new tenant’s rental agreement could be less lucrative than Cresta’s.
LLR CEO, Chikuni Shenjere-Mutiswa told BusinessWeek recently that the local hotel industry had become increasingly competitive leading to rentals drifting above market at a time when occupancies were under pressure.
“After failing to reach an agreement with Cresta, we decided to explore options to secure a replacement tenant as all potential operators preferred either to enter into management contracts or variable rental agreements. “Out of the six offers we got, only one made a verbal binding offer of P170 million,” he said.
Shenjere-Mutiswa said had LLR opted to retain the properties, it would have suffered a greater financial loss when the Cresta leases expire. According to LLR, there was a possibility that the property group would find itself with unoccupied hotels. The hotel sector represented 28% of Letlole’s property portfolio, which was recently valued at P970 million.
LLR intends to use the proceeds of the transaction to acquire more properties.