Commuters of the popular “danfo buses” in Lagos are terrified of getting into “One Chance” for obvious reasons. One Chance in local parlance, is often the last available seat in a bus for desperate passengers rushing to get on a bus during the rush hours. The terror here is that kidnappers and thieves often use “one chance” as a ploy to woo unsuspecting passengers into the bus, only to rob them of their belonging and in worst cases have them kidnapped.
We were surprised in August 2020 when Custodian Investment decided it was hopping on a ride with UACN to lead UPDC out of the doldrums of insolvency. Custodian announced it had reached an agreement to acquire 51% of UPDC from UACN. This was at the height of the pandemic where the economy was teetering on the edge of disaster as uncertainty over the long-term effect of a global shutdown dried up investable funds globally and in Nigeria.
Yet, this deal had to be consummated if UPDC, one of Nigeria’s premier real estate companies, were to avoid going out of business. As of 2019, UPDC had recorded a combined N34 billion in losses in 4 years and was staring at insolvency forcing it to embark on a painstaking restructuring. UPDC was in its 3rd year of restructuring after Themis Capital acquired its then-parent company UACN Plc.
It had also just concluded a successful N16 billion rights issue all of which it deployed towards paying its debt. The parent company, UACN, also embarked on an unbundling of the shares it has in UPDC, which would have effectively taken it off its books as a subsidiary. And then, comes, Custodian Investment, the beautiful bride joining UACN on a journey to save UPDC from an implosion. The journey is so far looking like a “one chance” for Custodian Investment and its shareholders.
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When Custodian acquired 51% of UPDC in 2020 it provided the following rationale for the acquisition:
“The rationale for the Transaction is that Custodian and UAC share the view that their ambitions for capturing opportunity in the real estate industry will be better achieved working in partnership. The transaction will provide Custodian with a platform to capture arising real estate opportunities. It also immediately provides recurring cash flow visibility and attractive yields as a result of its direct exposure to Nigeria’s leading real estate investment trust (“UPDC REIT”) with a track record of profitability and annual dividend distribution which offers a good compliment for our product portfolio.”
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None of the above rationales is yet to materialize. Rather, UPDC is wallowing into more losses and ending the year with far less cash than expected. The property development and sale side of the business is not just robust enough to deliver expected returns. UPDC makes money from rental income, sale and management of properties under its portfolio.
The company’s 2021 FY interim results reveal UPDC reported a loss for the period of N2 billion up from the N605 million loss reported in the pandemic year of 2021. Top line revenue went from N1.6 billion in 2020 to N824.2 million in 2021. The company’s expenses were nearly twice its revenues. The 2021 results is a major setback from the slow recorded in 2020 when we saw a drastic reduction in losses.
When it reported its 2020 results, the company blamed the 23% drop in revenue to a slowdown in real estate demand in the wake of the Covid-19 pandemic. It promised that a better 2021 is expected on the back of a “focus on core competency (property development and facility management of real estate assets) while divesting from non-core business lines” expected to drive growth.
One of its core deliverables for 2021 was the expected sale of N8 billion valued Festival Hotel, Conference Centre & Spa which has been on the market since 2017. The location of the hotel and the bad roads in the surrounding environs has made it difficult to consummate a sale. Thus, it had to take another loss of N113 million from discontinued operations of the hotel business.
Time is unfortunately not on the side of Custodian if it is to avoid a contagion. It has by our estimate put in over N12 billion in UPDC inclusive of its acquisition cost and could bail the company yet again this year. Its shareholders expect such as acquisition to improve its overall bottom line does not reduce it. The fact that Custodian Investment reported a 26% decline in profit after tax for 2021 is also not a good sign.
So far so good, Custodian’s share price is holding up well with a 43.7% return in the last one year. It is unlikely to replicate this return this year and dealing with a baggage like UPDC will not help matters either.