1st August, 2018

Valuation:

• 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: