Businessuite Markets
Victoria Mutual Investments Already Has Effective Control of Kingston Properties.
Rezworth Burchenson Chief Executive Officer of Victoria Mutual Investments Limited (VMIL) needed to move quickly. The net profit recorded during the September 2022 quarter contributed to the 1.77% or JA$54.09 million growth in retained earnings. However, this was not sufficient to offset the $1.64 billion deterioration in investment revaluation reserve, which resulted in a 34.04% or JA$1.55 billion decline in total shareholders’ equity.
Rezworth Burchenson and Kevin G Richards Chief Executive Officer Kingston Properties Limited separately released two significant announcements over the last two weeks. Separately the two announcements may seem unrelated or even connected, but Businessuite has however found interesting links between them.
Kevin G Richards Chief Executive Officer Kingston Properties Limited
Based on these links we were forced to ask the following questions: Is Victoria Mutual Investments Making A Strategic Move To Acquire Kingston Properties and Does Victoria Mutual Investments Already Have Effective Control of Kingston Properties.?
The most recent came on January 3, 2023 from Richards advising the JSE, the RMOD and the wider investing public that a total of 66,673 units of KPREIT shares were purchased under a current share buy-back programme on December 29, 2022, at an average price of $7.04 per share.
The transaction was executed through their broker VM Wealth Management Limited, which is a subsidiary of Victoria Mutual Investments Limited (VMIL), itself a part of the Victoria Mutual Group.
The other release was made on December 30, 2022 by Rezworth Burchenson
announcing that his company Victoria Mutual Investments Limited (VMIL) had acquired 135,483,871 units of Kingston Properties (KPREIT) shares for a combined consideration of JA$1,050,000,000.
This transaction increased VMIL’s stake in KPREIT to a total of twenty-three per cent (23%), up from 7% as reported in September 2022, making KPREIT an associate company of VMIL.
It should also be noted that based on Kingston Properties September 2022 Shareholding Report:
• VMWealth Property Fund exercised control over 257,885,079 shares in Kingston Properties amounting to 29% of the shareholdings.
• Prime Asset Management JPS Employees Superannuation Fund exercised control over 138,584,772 amounting to 16% of the shareholdings.
Prime Asset Management, was formed in 1996, as a division of Prime Life Assurance Company Limited and was subsequently taken over and renamed VM Pensions Management Limited (VMPM).
Based on the above, as at the September 2022 reporting, Victoria Mutual was able to effectively leverage a total of 52.3% of the shareholding of Kingston Properties.
Prime Asset Management JPS Employees Superannuation Fund and VMWealth Property Fund held the two largest blocks of shares in Kingston Properties, and so it could be argued that Victoria Mutual Investments acquired its increased position from either of those two. Our investigation revealed that the acquisition came from the VMWealth Property Fund.
So, we were able to answer one of the two questions: Yes, Victoria Mutual Investments already has a greater that 50% effective control of Kingston Properties.
This first move by Burchenson and VMIL is essentially to directly account for the share of profits on its balance sheet, effectively shoring it up. Burchenson also expects to benefit from dividend income.
“With the acquisition of the additional shares, VMIL’s 23% stake in KPREIT will result in the Company reporting a share of profit.”
Previously as part of the VMWealth Property Fund they could not do this.
Why Kingston Properties?
Market correcting actions by the Bank of Jamaica (BOJ) coupled with investor sentiment in the US declining further in Q3 2022, this as prices and interest rates rose, where all impacting on the performance of VMIL.
In his Consolidated Financial Statements for the Third Quarter ended September 30, 2022 Burchenson noted that the Bank of Jamaica (BOJ) added a total of 100 basis points to the overnight rate during Q3 2022, via two 50-basis point rate hikes that brought the rate to 6.50% as at the end of the quarter. As the interest rate increased, the yields on Treasury notes fluctuated and the money market remained liquid for short-term placements.
For Burchenson “The third quarter of 2022 was turbulent, as we saw interest rates reaching an 11-year peak, as the central bank sought to put a lid on domestic inflation. As rates across the market soared, the performance of bonds and the fixed income markets deteriorated significantly, in conjunction with the negative impact of higher inflation on the equities market.
As a result, our Gains from Investment activities experienced a 23.77% decline over the quarter, while interest expenses grew 48.22% to $285.47 million.
These market conditions were the main impetus to the 75.82% decline in net profit for the third quarter. We ended Q3 2022 with a net profit of $84.08 million, which was primarily due to net fees and commissions of $227.67 million.
Our net fees and commissions increased 7.15% year-to-date as at September 30 or by $52.20 million, as we sought to increase our capital markets and brokerage activities.”
Burchenson also reported other corrective measures as total assets of $27.57 billion as at September 30, 2022 represented a decline of 9.31% or $2.83 billion over September 30, 2021.
“We continued to de-risk the on-balance sheet assets of our wholly-owned subsidiary VM Wealth Management, to safeguard against the sporadic changes in the bond and equity markets.
More resources were shifted towards strengthening and expanding our Corporate Lending Solutions and Margin Loan business lines. In light of this, cash and cash equivalents, resale agreements and investment securities declined 78.82%, 73.31% and 11.03%, respectively, year-over-year, while our loans receivable grew by 67.07% or $1.75 billion.
Conversely, the recent purchase of a commercial property boosted our property, plant and equipment by $713.38 million or 420.61% year-over-year.”
At the end of the third quarter of 2022, VMIL’s total liabilities declined by 4.95% or $1.28 billion, owing predominantly to the reductions in repurchase agreements, lease liabilities, income tax payable and employee benefit obligations.
In particular, Burchenson noted that “the 16.46% or $3.18 billion decrease in repurchase agreements was part of our de-risking strategy. The net profit recorded during the quarter contributed to the 1.77% or $54.09 million growth in retained earnings. However, this was not sufficient to offset the $1.64 billion deterioration in investment revaluation reserve, which resulted in a 34.04% or $1.55 billion decline in total shareholders’ equity.”
Burchenson we suspect saw Kingston Properties as a low hanging fruit that could be easily picked, and create an immediate positive impact on the balance sheet of VMIL.
Leverage Their Collective Real Estate Competence
Victoria Mutual full acquisition of Kingston Properties or a shareholding move to exercise more control over the company would be consistent and in line with the VM Groups vision.
VM Group wants to leverage the collective Real Estate competence embedded within the Group. The acquisition would also be 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 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.
Brian Frazer joins the VM Group
Brian Frazer Deputy CEO at VMIL and VMWM
Rezworth Burchenson is already a board member of Kingston Properties, and could push to get Brian Frazer to join him on the Kingston Properties board so as to increase participation in the strategic direction of KPREIT, going forward.
Brian Frazer joined the VM Group in September 2022 as the Deputy CEO at VMIL and VMWM, working closely with Burchenson.
Brian joined the team with over 20 years of experience in the financial services industry and has vast experience in Trading, Treasury, Asset Management,
Risk Management, Compliance, Corporate Governance, Operations, and Product Development.
Brian is expected to further foster VMIL’s growth and contribute to providing oversight to VMIL’s operations as well as all aspects of the fiduciary, financial and operating performance.
Skin In The Game
Burchenson we suspect is hoping that these strategic moves will be sufficient to offset the deterioration in investment revaluation reserve, and restore the billion decline in total shareholders’ equity at Victoria Mutual Investments.
For Rezworth Burchenson this is also personal as he has ‘skin in the game’ with a personal stake of 421,146 Kingston Properties shares and 6,400,330 in Victoria Mutual Investments.
Kevin Richards is listed as a senior manager and not a director at Kingston Properties, and he has more ‘skin in the game’ with 2,000,035 units.
In relation to the other question, Is Victoria Mutual Investments Making A Strategic Move To Acquire Kingston Properties?
We conclude that the answer for now is No. The holdings and arrangement as of January 2023 is exactly where Burchenson and VMIL wants to be. We suspect however that over time VMIL will increase its holdings and make Kingston Properties a full subsidiary.
To be updated
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Barita Reporting Treasury, Trading And Brokerage And Investment Banking Business Lines As Largest Contributors FY24 Performance
Net profit after tax (“NPAT”) for Q4 FY24 increased by 200% to $999 million, bringing NPAT for FY 2024 to $3.9 billion, 14% ahead of 2023. The improvements achieved in Q4 FY24 reflected the effects of management’s strategy to influence improvements in operating revenue through a focus on active balance sheet management, revenue diversification and expense management, in particular the management of funding costs.
Revenue growth in Q4 FY24 was both robust and well-distributed, led by an exceptional performance in our Treasury, Trading and Brokerage business line, which accounted for 56% of total revenue. This improvement was supported by the continuation of the uptrend in net interest income which rose 3% to $164 million relative to the comparable quarter in financial year 2023.
Directionally, this performance aligned with expectations, buttressed by a pivotal shift in the monetary policy stance of the Bank of Jamaica and the US Federal Reserve, both of which reduced their benchmark policy rates by 25 and 50 basis points respectively, during the fourth quarter. While an additional 25 basis point cut was announced at the end of September, to come into effect at the beginning of October, the BOJ had communicated a shift in its policy posture during Q3 FY24, to which the market began to react via the downward repricing of liabilities, by extension, benefitting our Net interest income. The balance of risks points towards continued improvement in our net interest income as our interest-bearing liabilities reprice with a more frequent cadence.
The macroeconomic landscape has also evolved favourably. Domestic inflation has moderated, now averaging within the BoJ’s target range for the last 6 months, and a similar moderation has taken hold in the U.S.A., even as the Federal Reserve continues to signal a cautious, data-driven approach to future rate cuts. While these developments suggest a more stable financial environment prospectively, potential global risks remain. Slowing growth in key global markets, coupled with geopolitical uncertainties and the impending change in administration following the recent election in the US could introduce volatility; however, Barita’s diversified revenue streams and resilient business model position us well to navigate these headwinds.
Operating Performance
Barita generated net operating revenues of $10.0 billion for FY24, representing an increase of 10% or $901 million relative to FY23. The increase was broadly distributed across our various business lines, with income from the treasury, trading and brokerage and investment banking business lines being the largest contributor.
Net profit was $3.9 billion for FY24, rising 14% relative to FY23. The resulting earnings per share (“EPS”) was $3.24, up 14%.
Quarterly Performance
For the quarter ended September 30, 2024, Barita registered revenue of $3.0 billion, $1.2 billion or 72% higher than Q4 FY23, driven by a material uplift in the Treasury, Trading and Brokerage business line during the quarter. In the quarter, Barita produced NPAT of $999 million, $667 million (200%) higher than the prior year. This resulted from the aforementioned higher operating revenue, partially offset by a 26% or $346 million increase in operating expenses. Profit before taxation amounted to $1.3 billion, which was an improvement of $888 million or 207% relative to the prior year.
Shareholders’ equity closed the period at $35.5 billion, an increase of $71 million, marginally higher than the $35.4 billion outturn at the end of FY23. This was driven by an improvement of $734 million in the fair value reserve, offsetting the decline in retained earnings due to dividends declared and paid during the year. Our capital levels remain resilient, with capital adequacy of 25.45% compared to the FSC’s early warning level of 14%.
Investment Strategy & Capital Management: Our Outlook
The outlook for monetary policy continues to evolve over the course of the fourth quarter of FY24, transitioning from the tightening cycle that has dominated the past two years. Both the Bank of Jamaica (BoJ) and the Federal Reserve, along with other major Central Banks, have reduced their policy rates amidst a sustained moderation in inflation. This shift is expected to lay the groundwork for a more favourable investment environment in the coming quarters.
In the United States, recent economic indicators suggest that the cooling effect of tight monetary conditions has begun to take hold. Core PCE inflation has moderated to 2.7% from a pandemic peak of 5.7% in February 2022. Unemployment remained low at 4.1% in September but has attracted more focus from policymakers at the Federal Reserve given the upward trend since the beginning of 2024. The U.S. economy delivered solid GDP growth of 3.0% in the second quarter of 2024, exceeding expectations, but leading indicators continue to suggest potential weakness ahead. Against this backdrop, the Fed opted for a 50-basis point rate cut in September 2024, bringing the federal funds target range to 4.75%-5.00%. Markets have since priced in the expectation of further rate cuts as inflation trends towards the Fed’s 2% target.
Locally, Jamaica has seen similar progress. Annual headline inflation in Jamaica stood at 5.7% as of September 2024, back within the BoJ’s target range following the uptick in August to 6.5% due to the impact of Hurricane Beryl. Moreover, the BoJ’s recent cumulative reduction of its policy rate by 50 basis points to 6.50% during the quarter, reflects growing confidence that average inflation will remain within the target range in the near term, supported by stable domestic demand, a relatively stable exchange rate, and the continued moderation of global commodity prices. Jamaica’s economy remains resilient, albeit with moderating growth in key goods-producing and service sectors.
Looking ahead, we anticipate a further shift toward more expansionary monetary conditions, both locally and globally, which will likely enhance our ability to optimize our balance sheet and improve the net interest margin. As funding costs stabilize and earning assets continue to reprice upward, we expect to see a positive impact on our financial performance. Additionally, more favourable market conditions should provide increased opportunities for trading gains, and we foresee a gradual acceleration in deal-making activity, further boosting revenue growth.
However, we remain cognizant of the risks that persist in the global macroeconomic environment. Slowing growth in key global markets, coupled with geopolitical uncertainties and the impending election in the world’s largest economy, may introduce volatility that could impact our investment activities. Despite these headwinds, we continue to prioritize the diversification of our revenue streams, particularly through our alternative investment platform, which includes our real estate ventures that are poised to deliver significant returns in the medium to long term.
In this context, prudent capital management remains central to our strategy. We will continue to ensure strict compliance with regulatory requirements while maintaining the flexibility to capitalize on emerging opportunities. Through these efforts, we are confident in our ability to navigate the evolving economic landscape and deliver sustained value to our shareholders.
Mark Myers, Chairman Barita Investments Limited (“Barita” or “the Group”)
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