Stanlib Fahari I- REIT Earnings Update – H1’ 2018

By Cytonn Research Team, Aug 2, 2018

Stanlib Fahari I- REIT Earnings Update – H1’ 2018

1st August, 2018


  • We are of the view that the Stanlib Fahari REIT is a “Hold” with a target price of Kshs 13.0, representing an upside of 23.9%, from the current price of Kshs 10.5 as at 1st August 2018, inclusive of a projected FY’2018 dividend yield of 5.7%, assuming the dividend payout ratio remains at 91.0%, similar to the FY’2017 payout. This is because, despite the relatively high upside of 23.9%, the yield of 5.7% is relatively low, compared to the market average of 9.6% rental yield for retail space and 9.3% yield for office space. The low yield is attributable to the poor performance of assets in its portfolio, e.g Greenspan Mall which has an occupancy of 74.0% compared to the market average at 79.5%,

  • The Fahari I- REIT is currently trading at a P/B of 0.5x and P/E of 28.9x, versus an emerging markets average of 0.9x and 14.9x, respectively,

Key Highlights in H1’2018:

  • The REIT acquired Kshs 850.0 mn property, 67 Gitanga Place in May 2018, in order to diversify their portfolio and meet the Capital Markets Authority (CMA) requirement of investing at least 75.0% in real estate, within 2-years. The new property has a total lettable area of 3,780 SQM and is expected to generate annual revenues of Kshs 73.8 mn, which is a yield of 8.7%, compared to the Nairobi office and retail market yield currently at 9.3% and 9.6%, respectively. This brings the total properties owned by the REIT to 4, the others being; (i) Greenspan Mall, (ii) Signature International Limited, and (iii) Bay Holdings Limited. The properties in total have a Gross Lettable Area(GLA) of 23,161 SQM,

  • The REIT has 92.0% of its total asset value invested in real estate, recording a 26.0% points increase from 66.0% in H1’2017. The REIT has therefore complied to the CMA (Capital Market Authority) regulation that requires it to invest at least 75.0% in real estate,

  • The REIT kicked off the construction of a 3-screen cinema with 100 seats each, at Greenspan Mall that will be complete in December 2018. This is intended to increase foot traffic in order to boost existing tenant customers and increase rental income, thus increasing the rental yield going forward

Income Statement:

  • The REIT registered a 16.3% y/y drop in earnings to Kshs 0.36 from Kshs 0.43 per unit in H1’2017, driven by a 7.7% decline in operating income, which outpaced the 0.9% decline in operating expenses,

  • Rental income declined by 2.1% y/y to Kshs 135.1 mn from Kshs 138.0 mn despite the rental income contribution by newly acquired property. The company, however, noted that this is attributable to a temporary increase in vacancies, coupled with some tenants bargaining for reduced rentals upon the renewal of leases. For example, the Greenspan Mall had an occupancy of 74.0%, which is 5.5% points

    lower than the Nairobi retail market average at 79.5%,

  • Interest income decreased by 18.0% y/y to Kshs 41.9 mn from Kshs 51.1 mn recorded in H1’2017, and

    this is attributable to the increased expenditure of cash in the acquiring of the new property, and the company also noted that for liquidity purposes cash was invested in call deposits yielding lower interest rates,

  • Total operating expenses declined slightly by 0.9% y/y to Kshs 111.5 mn from Kshs 112.5 mn in H1’2017, driven by a 9.5% y/y decrease in property expenses to Kshs 38.1 mn from Kshs 42.1 mn in H1’2017. 65.9% of expenses were attributed to fund-operating expenses, mainly acquisition fees for the newly acquired building in Lavington, while property expenses that include maintenance of tenants and properties, filling vacancies, marketing, and public relations accounted for 34.1% of the total operating expenses. A large portion of revenues, at approximately 54.4%, are going into professional fees, hence the low returns to the investor. The REIT may, however, rely on economies of scale to increase profits from the additional properties hence lowering this percentage, 

  • The net profit declined by 16.0% y/y to Kshs 65.8 mn from Kshs 78.3 mn in H1’2017, and this is attributable to the 2.1% decline in rental income and the 4.3% increase in fund operating expenditure, following the one-off business acquisition costs incurred in acquiring the new property. With a net profit of Kshs 65.8 mn, the REIT achieved a 2.0% rental yield from its properties, and a projected annual yield of 3.6% assuming performance growth rate remains the same, which is low compared to the market average of 9.6% rental yield for retail space and 9.3% yield for office space,
  • The poor performance is in tandem with the increasing supply of space in both the Nairobi retail and office market leading to decreased occupancy,

Balance Sheet:

  • Total assets increased by 0.8% y/y to Kshs 3.72 bn from Kshs 3.69 bn in H1’2017, attributable to a 36.1% y/y increase in investment property to Kshs 3.3 bn from Kshs 2.4 bn in H1’2017, with the purchasing of the 67 Gitanga Place office building in Lavington at Kshs 850.0 mn. The acquisition has contributed to the sectoral diversification of the portfolio, increasing exposure to the office sector and semi-industrial from 12.0% to 34.0%,

  • Total liabilities increased by 5.1% to Kshs 127.3 mn from Kshs 121.1 mn in H1’2017, driven by a 9.6% y/y increase in payables to Kshs 127.3 mn from Kshs 116.1 mn,

  • Shareholders’ funds grew by 0.6% to Kshs 3.59 bn from Kshs 3.57 bn in H1’2017,

  • For the H1’2018, the REIT has a return on assets of 1.8% and a return on equity of 1.8%, compared to 2.1% and 2.2%, respectively in H1’2017,

Key Take-outs:

  • On the bourse, the REIT’s performance has been on a decline since its listing at Kshs 20.0 in November 2015. The REIT is trading at an average of Kshs 11.3 per unit in H1’2018, compared to Kshs 11.4 in H1’2017 thus losing 0.9% of its value y/y and 43.5% from its listing, an indication of the continued lack of investor appetite for the instrument

  • Despite, i) the increased diversification of the portfolio, with the purchase of 67 Gitanga Road building, and ii) the kicking off of the construction of a 3-screen cinema with 100 seats each, at Greenspan Mall, which is intended to increase foot traffic and boost existing tenant customers, we project a decrease in the rental yields by 3.4% points y/y to 3.6% from 7.0% in FY’2017. This slow- down is attributed to the decreased occupancies in the Nairobi retail and office market, where the commercial office has an oversupply of 4.7 mn SQFT, resulting in decreased occupancy by 4.8% points y/y to 83.2% form 88.0% in 2017

Below is a summary of the key line items in the balance sheet and income statement;

Figures in Kshs unless stated otherwise

Balance Sheet



H1’2017/H1’2018 Change

Total Assets




Total Equity




Total Liabilities





Income Statement



H1’2017/H1’2018 Change

Rental Income




Income from Other Sources




Operating Expenses




Profit Before Tax




Basic EPS





Ratios Summary



H1’2017/H1’2018 Change









Debt Ratio




PBT Margin




Rental Yield