Fahari IREIT Analysis

Hey there dear reader 😊,

I hope you are well. Today’s blog is a little bit different; it’s an analysis I did on the Stanlib Fahari I-REIT listed on the Nairobi Securities Exchange. It’s an addition to the blog series on REAL ESTATE INVESTING that I have written in the most recent blogs (you can find them on the home page, with the first real estate blog highlighting what REITs are).

Though today’s blog is heavily inclined to financial analysis, I hope you enjoy the visuals and some finance stuff of how Kenya’s only publicly listed REIT is performing.

Disclaimer; The views and analysis in this blog are meant for general information only and do not warranty or represent any form of advice concerning how you should invest. The reader is always advised to seek the advice of a registered investment advisor in all circumstances. This blog is for sharing information with each other and growing our understanding of how the finance world works.

PROPERTY ANALYSIS (Income)

Stanlib Fahari IREIT has invested a large portion (about 75%) of its Assets Under Management (AUM) in real estate properties as mandated by the regulatory body, CMA. It then invests the remaining portion in other investment products such as bonds. A look into the income statement over the four years of reporting reveals that most of the funds’ income is generated from the retail sector which has averaged a total income of KES 281 million. Total revenue from the office and light industry has been on an upward trend.

PROPERTY ANALYSIS (Occupancy and Market Value)

For the four properties currently under management, occupancy levels have generally been very positive; two properties (Bay Holdings and Starling Park) have had 100% occupancy since acquisition. Greenspall mall has had relatively good occupancy levels despite the decline over the four years. Signature International is currently unoccupied and has been losing value which means the firm should try dispose it to avoid further losses from this property.

PROPERTY RETURNS

Stanlib Fahari I-REIT has had positive property returns from rent and capital appreciation which have averaged at 8.4%. Total portfolio returns which includes properties and investment products has also been performing well at an average of 8.5%.

FINANCIAL STATEMENTS ANALYSIS

The I-REIT has proved to be a profitable company in the four years of analysis; this is evident from a four-year average net profit of KES 161 Million. As expected, the firm has most of its net assets as property and equipment. Healthy and stable net profits have also been witnessed from the property income.

DISTRIBUTIONS

Stanlib Fahari I-REIT has maintained a unitholder distribution of KES 0.75 over the past three years. However, given the reduced economic activity due to the pandemic, it is expected that this distribution will remain the same next year and maybe grow in the year 2022 afterwards.

Details	2016	2017	2018	2019
DISTRIBUTIONS
Dividends from wholly owned prop. Companies	190,597,729	184,894,243	201,460,125	230,724,761
Interest Income	111,209,231	99,852,345	56,646,680	24,611,177
	301,806,960	284,746,588	258,106,805	255,335,938
LESS
Fund operating expenses	(180,422,344)	(135,632,948)	(130,221,511)	(111,301,743)
Interest paid	(23,374,328)	0	0	0
Total potential distributable income (FFO)	98,010,288	149,113,640	127,885,294	144,034,195
Distributions	90,486,150	135,729,225	135,729,225	135,729,225
Distribution as a % of distributable Income	92.32%	91.02%	106.13%	94.23%

FREE CASH FLOW ANALYSIS

In terms of free cash flow (FCF) available to the firm after netting capital expenditure and distributions paid, the company appears to have insufficient cash to be able to fund its expenses in the future. However, it is worth noting that the negative FCFs are as result of heavy investment in infrastructure real estate projects. Thus, despite the undesirable cash flows, we can expect positive cash flows possibly in the years 2022 afterwards, as businesses resume operations especially in the retail industry.

Details	2016	2017	2018	2019
Operating CF/Net Sales	24.72%	50.77%	39.08%	32.59%
Net cash (outflow)/inflow from operating activities	83,438,364	137,441,215	129,843,795	115,335,771
Distribution paid	0	(90,486,150)	(135,729,225)	(135,729,225)
Net cash (outflow)/inflow from investing activities	3,151,452,661	201,048,503	379,482,068	186,366,123
FCF	(3,068,014,297)	248,003,568	(385,367,498)	(206,759,577)

VALUATION

The dividend discount model (DDM) was used to determine the intrinsic value of the I-REIT share. The following assumptions were made

• Calculated Ke = 19%…given that they have 100% Equity and 0% Debt. [Ke = D1/MPS *100]
• TV = Terminal value
• TV (r-g) = 14%…assuming g = 5% ‘infinite growth rate’.
• Dividend growth rate = 10.67% [g = nSQRT (Latest dividend/Earliest dividend) – 1]

Dividend Discount Model	2020	2021	2022	2023	2024	2025 (TV) TVg=5%	TV
DIV growth	0.83	0.92	1.02	1.13	1.25	1.31	9.34
Disc. Rate	1.19	1.42	1.69	2.01	2.39	2.84
Intrinsic Value (IV)	0.70	0.65	0.60	0.56	0.52	3.29
IV	6.32

Given the current retailing price range of about KES 5.30, the Stanlib Fahari IREIT (FAHR) is currently undervalued.

FINANCIAL RATIOS

Details	2016	2017	2018	2019
Trade and other receivables	102,059,051	80,298,716	55,148,773	71,245,082
Trade and other payables	124,435,477	95,446,371	128,677,648	115,006,176

Details	2016	2017	2018	2019
Operating Margin	38.32%	63.22%	58.24%	49.52%
Profit Margin	31.40%	63.22%	58.24%	49.52%

Details	2016	2017	2018	2019
Outstanding shares	180,972,300	180,972,300	180,972,300	180,972,300
EPS	0.59	0.95	1.07	0.97
ROE	2.96%	4.67%	5.20%	4.66%

Details	2016	2017	2018	2019
Non-Current Assets	2,439,729,976	2,464,138,729	3,370,840,466	3,472,215,047
Fixed Asset Turnover	0.14	0.11	0.10	0.10
Total Assets	3,715,011,411	3,761,627,663	3,852,621,474	3,878,449,025
ROA	2.85%	4.55%	5.02%	4.52%
Total Value of Equity (BS)	3,585,541,033	3,666,181,292	3,723,943,826	3,763,442,849