The Stanlib Fahari I-REIT offers an alternative investment avenue to invest in real estate.

I don’t know about you, but when I buy shares, I am not looking for immediate gratification. Being a long-term investor, I hope to generate stable returns over the long haul.

The fundamental business for any REIT is to manage the real estate asset to produce strong returns. Strong operating performance is achieved by maintaining high occupancy rates and strong rent growth. For a REIT that trades on the stock market, we recognize that the share price is determined by market forces. That is why we always choose to focus on the fundamentals and ignore the scorecard.

The Stanlib Fahari I-REIT ScoreCard

The REIT has since shed almost 50% of its value since its listing and the price has remained in narrow distribution oscillating between KES. 10 and KES.14.

The Stanlib Fahari I-REIT scorecard:

Source: Financial Times

A Focus on Fundamentals

Here is the Stanlib Fahari I-REIT’s review and outlook summarized in four statements:

1. Stanlib Fahari I-REIT results in 2016 and 2017 were overlooked and undervalued.
2. In 2016 and 2017, the Stanlib Fahari I-REIT exhibited strong operating performance.
3. The Stanlib Fahari I-REIT is poised for outperformance in 2018.

Results in 2016 – 2017: Overlooked and Undervalued

The Stanlib Fahari I-REIT has been overlooked by investors largely because of knowledge. This has resulted in a negative performance at the Nairobi Stock Exchange (NSE). So, let’s ignore this scorecard and  take a look at the Stanlib Fahari I-REIT’s fundamentals since listing:

Earnings

Is there an anticipation for the growth of earnings per share?

The REIT’s earnings per share (trailing 12 months) stands at 0.7254. The Stanlib Fahari I-REIT performance in 2017 was somewhat normal given prevailing economic conditions. According to Rich Data, the basic earnings per share for the year 2017 is 0.95, up  +61.017% from 0.59.

Expected Return

Is there anticipation for greater total return on the share i.e. higher expected price change and higher prevailing dividend yield?

The Stanlib Fahari I-REIT reported a total return (capital and income return) of 8.4% in 2017, a drop from 8.8% in 2016. The annualized income return for the year 2017 increased to 7.5% from, 7.2% in 2016.  While the capital return dropped to 0.9% from 1.6%. These low returns were attributed to unfavourable economic conditions faced by tenants, higher vacancies during the period and conservative decision-making around lease renewals.

Is the current dividend yield relative to other yield-oriented investments (i.e. shares, bonds and other high-income investments) better?

The Fahari I-REIT’s current dividend yield stands at 6.52%, which is lower than the government bond yields and other high-income investments. However, in relation to the stock market, the current dividend yield is relative.

Valuation

Are the underlying assets of real estate/mortage/ and other assets properly valued? Compare to the market to arrive at an overvaluation or undervaluation decision. Invest, if undervalued. 

In 2016, the net asset value of real estate was at Kes.3,495,054,883, given the total 180,972,300 units in issue, the net asset value per unit stood at Kes. 19.31. By the end of 2016, the market value of a unit in the Stanlib Fahari I-REIT was well below this, resulting in an undervaluation decision.

Now in 2018, the current market value stands at  2,081,181,450, while as the current asset value of real estate is Kes. 3,530,452,067, the net asset value per unit is at 19.50. This is will well below the current market price – resulting in an undervaluation.

Results in 2016 – 2017: Strong Operating Results

In 2017, the Stanlib Fahari I-REIT recorded strong net profit of KES. 171M.

Dividend Payout Ratio

Is the current dividend payout ratio as a percentage of the REIT FFO (funds from operations) reasonable?

The current dividend payout ratio expressed as a percentage of the REIT FFO is 91%. This is an ideal percentage as the rule of thumb is that real estate trusts must distribute 90% of their taxable earnings to existing shareholders.

Notes:

• FFO = Net Income + Dep + Amort – Gain on sale of property
• Dividend Payout Ratio = Dividend/Net Income
• The 2017 FFO is Ksh. 149,704,887, distribution per unit is 0.75 and the total shares outstanding are 180, 972,300
• Dividend payout ratio as a percentage of the FFO is 90.7%

Results in 2016 – 2017: Poised for outperformance in 2018

GDP growth translates to growth in demand for real estate so continued moderate expansion in macroeconomic growth should support continued moderate expansion in demand for  REIT-owned properties. With the earnings increasing from Ksh. 106M in 2016 to Ksh. 171M last year, we look forward to an outperformance in 2018.

Bottom Line

In short, by focusing on the fundamentals of the Stanlib Fahari I-REIT and ignoring the scorecard (daily price fluctuations), REIT investors can look forward to good returns in the future. By avoiding heard mentality of looking at price, rather than assessing the underlying asset valuation, investors can be sure to sleep well at night.

Sources: Stanlib Fahari I-REIT, Financial Times, Rich Data

Meanwhile, You can click on the following links to read more about real estate investing: 

• Top 5 Ways To Begin Investing In Real Estate
• Should You Invest in a Property with a Friend?
• Ways to Turn Single-Family Homes Into a Cash Cow
• How to Buy Stocks Online on the Nairobi Stock Exchange
• How to Invest in REITs in Kenya
• 7 Common Mistakes to Real Estate Investing to Avoid
• How to Determine Which Shares to Buy the on the NSE

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.