Rating company, Agusto & Co has assigned a “Bbb-” rating to Smart Residences Limited (SRL), affirming the company’s satisfactory financial condition and adequate capacity to meet obligations as and when they fall due.
The rating agency noted that while the real estate firm presented satisfactory profitability and cash flow levels, which are supported by the steady growth in the Company’s operating capacity since its inception in 2020, as well as the favourable terms with customers and creditors, the rating takes into consideration the susceptibility of SRL’s operations to exogenous factors such as, the rising energy and other business costs exacerbated by inflationary and exchange rate pressures and the potential adverse impact on margins.
Smart Residences Limited is a unique hospitality and real estate company with operations in the Federal Capital Territory, Abuja. The Company commenced operation at the peak of the COVID-19 pandemic in 2020 as a provider of serviced short-let apartments to corporate and individual clients, generating revenue and cash flows from rental income.
The demand for flexible accommodation in Nigeria became pronounced in 2020, during the COVID-19 lockdown period, when many hotels across the country were shut down for months. This favourable demand has continued even after the lockdowns.
In its future plans, SRL plans to establish new apartments in carefully selected neighbourhoods to leverage the rising demand for luxury short-let apartments in Abuja with plans to expand to Kano and Lagos over the medium term.
In addition, SRL intends to widen its portfolio with the establishment of food and beverage retail outlets to meet customers’ demand as well as diversify its revenue stream from rental income.
Agusto expects the successful actualization of these initiatives to potentially enhance the Company’s earnings over the near to medium term.
In the financial year ended 31 December 2021 (FYE 2021), SRL recorded revenue of ₦474.1 million a significant increase from ₦120 million in the prior year on account of the launch of additional 30 apartments and the price increases implemented in the period.
SRL recorded an operating expense to revenue ratio of 59.8% in 2021 (2020: 83.2%) amid the positive impact of economies of scale, thus resulting in a much-improved operating profit margin of 30.7% in FYE 2021, compared to the 5% recorded in its first year of operation.
The Company posted a pre-tax profit and post-tax profit margins of 30.7% and 21.5% respectively (2020: 5% and 4.1%). Consequently, SRL recorded higher return on assets and equity ratios of 25% and 29% respectively in 2021
(2020: 2%, 3%). Although the Company’s profitability metrics in FYE 2021 seemed acceptable, due to its limited track record, sustainability over the near to medium term remains to be seen, particularly amid the rising energy and maintenance costs.
In its 2021 full year account, SRL posted an operating cash flow (OCF) of ₦224.9 million to reflect the increased scale of operations during the period. This OCF represented 47% of revenue given that the bulk of its sales is mostly on a cash basis. Subsequent to the 2021 year end, Smart Residences recorded an OCF of ₦72.9 million, representing 36% of sales in the three months ended 31 March 2022 (unaudited).