KLE chairman lays out new direction
In the midst of transition, KLE Group is currently a company without core income.
But in an in interview with the Financial Gleaner this week, Chairman David Shirley says the company that began as Kingston Live Entertainment Limited is clear-eyed on the path it wants to take and the zone in which it intends to operate into the future.
The company was founded as a nightclub operator, but has now ended up in real estate and property services as a principal business activity.
And in line with that shift, the directors of KLE Group Limited are mulling over the buildout of complementary commercial ventures around its long-standing Bessa Villas, St Mary project.
KLE Group appeared to have meandered its way into a business model, after a series of restructurings, but a review of its prospectus shows that the company had long laid out its interest in hospitality and real estate from the time it came to market more than a decade ago.
Now, Shirley says, KLE intends to follow through on the plan to marry entertainment with real estate development.
Essentially, the company will continue to own minority shares in restaurant operator FranJam, but no longer as managing partner, while also pursuing real estate projects and bringing new developments to market.
Back in 2012 when KLE Group Limited went public and listed on the Jamaica Stock Exchange as a junior company, its plan then was to deepen its nightclub operations and, later, to build out a dining component as a complement to that.
But the nightclub business fizzled quickly, which then saw the company focusing on the buildout of the branded Usain Bolt Tracks & Records casual dining operation. That operation, too, eventually lost much of its sparkle after a years-long effort of building out franchises through associate company FranJam.
Along the way, KLE struck an agreement with Sagicor Group to develop its lifestyle-themed resort, Bessa, as partners.
Bessa still holds promise, and in the midst of the coronavirus pandemic and its devastation of the country’s hospitality sector, KLE finally decided to unburden itself by shifting the operations and assets of its casual dining business to FranJam, in which it maintains a 49 per cent stake, and to refocus on the resort project.
UBTR at peak was present in 18 locations – three in Jamaica, and a 15-outlet franchise operation in the United Kingdom. The operation was downsized in 2020 when KLE restructured the business.
The last round of reorganisations at the end of 2021, which saw KLE exiting its direct involvement in the restaurant business, freed up resources for the company to put more muscle behind securing sales for the Bessa vacation residences, and more time to review the St Mary-based development with fresh eyes.
Now, its refreshed plan is centred around entertainment and commercial activities in St Mary.
But Shirley was cagey on the specifics of what those activities would look like.
“We have discussed at the management level some of the commercial real estate that would complement the area. Bessa is 15 minutes from Ocho Rios, so it’s still a bit like old-time Jamaica, which is nice because we don’t want it to become too commercialised. But there is still a need for convenience,” said the KLE chairman.
“When we invested in the area, it was not only about Bessa. It was also about a vision of what can happen in that area as it relates to sports, lifestyle and entertainment … anything that compliments real estate. We are open to new opportunities, but what we have learnt is that not everything we have to do ourselves; we can partner to develop the community,” he said.
KLE has identified several properties for acquisition and redevelopment, and talks have ensued with external parties, the chairman added, but the company is yet to enter contractual arrangements with potential partners.
Higher on the agenda, Shirley says, is finalising sales for Bessa Villas to the general public and the furnishing of 15 units that will be held by KLE and Sagicor Group in a rental pool. KLE will own 12 of the units for rental purposes, while Sagicor will own three.
KLE Group has a 25 per cent stake in the project and is in charge of its management. Majority shareholder Sagicor was responsible for the construction of the 86 units. The properties, comprising 24 ocean condos priced between US$260,000 to US$795,000, are being sold through Sagicor Property Services Limited.
So far, 30 of the units have been sold, Shirley said, and another 10 are under contract for sale. Buyers are being hunted for another 31 units, while the rest will be held as rental properties.
Bessa Villas sales contract allows property owners to purchase the units for private use or rental purpose. However, if an investor decides to rent their property, it must be done through rental management company Bessa Resort Management Limited.
Through Bessa Resort Management, KLE Group has a three-year exclusive management contract for the property with the option to renew.
“Based on sales so far, the majority of the owners intend to put their property in the rental pool; and if more buyers do that, then it opens up the development to become more an income-generating property,” Shirley said.
KLE Group will be spending about US$1 million on furnishing the rental unities and amenities for the complex, using funds it’s in the process of borrowing from an unnamed financial institution.
“We are pretty close to signing that deal. Once that transaction closes we’ll be working to get the units open for the winter season,” he said.
Additionally, discussions are under way with restaurateurs to operate under lease at the complex. However, Shirley said, it’s yet to be decided whether UBTR would become one of them.
The revenue flows from the refreshed KLE business are expected to begin post-June.
Last year, the company had no core revenue, but booked other income of $18 million, which was mainly a one-off payment by related company T & R Restaurant Systems Limited. KLE made a profit of $24 million for the year, but was still left with a deficit of $91 million to clear off its balance sheet.
In the March quarter, other income was a minor $11,000, which led to losses of $14 million.
However, in the April-June quarter, KLE Group expects to book commission income from the Bessa units that have already been sold.
Thereafter, Shirley says, the company will begin to see revenue flowing from three business segments: real estate rental income, property rental and management income, and income from KLE’s 49 per cent stake in FranJam. KLE is projecting about $70 million in annual earnings from the property rental and management arrangement for Bessa.
The company’s transformation “is all aimed at generating investor confidence. People will measure you based on what you say you are going to do,” said Shirley.
“In our prospectus years ago, we said we were going into the real estate business and Bessa has materialised. We just need to tidy it up now, so that these other opportunities that we have tied to Bessa also become a reality, which will then flow to shareholders,” he said.
On paper, KLE Group still holds the 25 per cent interest in Bessa, but will have to share its returns with Zuar Jarrett, one of its directors.
Shirley estimates that some US$2 million will flow to KLE from the sale of the units, but after payouts will net US$1 million.
In a deal completed in December 2021, KLE agreed to pay over an undisclosed portion of its share of profit from Bessa to Jarrett, in exchange for US$501,00 in fresh capital, which KLE pumped into the servicing of bank loans and Bessa resort offerings.
“We have another US$450,000 to get from the sale of the properties, which we will put down as deposit for the acquisition of the rental units. That deposit will allow us to leverage up to US$4 million from our financial partner,” said Shirley.
“Once everything is finalised, the units will go on the books of KLE as assets and the rental income will pay the mortgage. If there is additional cash flow from that, then it will flow to KLE,” he said.