STANLIB Fahari I-REIT, Kenya’s first Real Estate Investment Trust (REIT), has posted a 12.8 per cent growth in net profit for the year ended December 31 2018, buoyed by a net revaluation gain on its investment property of KSH65 million(US$644,777).
The firm’s profit for the year was Ksh193 million(US$1.9 million) up from the Ksh171.1 million(US$1.7 million) in 2017, as the firm remains the first and only real estate investment trust in Kenya listed on the Nairobi Securities Exchange(NSE).
“The portfolio’s market valuation was bolstered by the addition of a modern 300 seat capacity, 3- screen cinema at Greenspan Mall which will be commissioned in the second quarter of 2019 underpinned by a 10-year lease. Recent successful renewal of key tenant leases also contributed to the mall’s improved future cash flows and expiry profile and will counter the challenge of vacancies in the portfolio.” said the Fund’s Acting CEO Ms. Nozipho Makhoba.
However, despite the increase in net profit, distributable earnings declined by 14 per cent to Ksh127.9 million (US$1.3 million) compared to 2017’s Ksh149.1 million (US$1.5 million) as a result of increases in vacancies.
The smallest and single- tenanted property in the portfolio, known as Highway House, remained vacant for nine months in 2018 following the exit of the tenant at the expiry of the lease. Although not material in size, it did put a dampener on the current year’s earnings.
Rental and related income increased by 11 per cent to Ksh309.8 million(US$3.1million) while interest income decreased by 43 per cent to Ksh56.4 million (US$559,468) in line with the utilization of excess cash to purchase an A-grade three storey office building situated in Lavington, Nairobi.
The transaction was completed on May 29, 2018, with rental income from this property accruing from that date.
Property expenses increased by 13 per cent to Ksh108.9 million (about US$1.1 million) in line with the incorporation of the expenses from the new property acquisition, the firm reported on Friday. Most of these expenses are funded out of the service charge income.
Irrecoverable withholding tax expenses also increased as more tenants were appointed as withholding tax agents by KRA in 2018.
“This tax leakage at a property subsidiary level is expected to be resolved through the anticipated update of the tax legislation to expressly exempt REIT owned subsidiaries from income tax. The tax leakage contributed to the fall in distributable reserves by Ksh13.5 million (US$133,915) in 2018,” the company says in its financials.
Fund management expenses decreased by four per cent to Ksh130.2 million (US$1.29 million ) in line with the downward review of the REIT Manager’s fee which took effect from July 1, 2017 and was implemented for the full year in 2018.
The recoupment of Value Added Tax (VAT) input expense that had previously been capitalized to fund expenses in the past also contributed to the cost reduction.
At December 31 2018, investment property accounted for 90 per cent of assets under management while the balance of the funds (Ksh386.6 million-US$ 3.8 billion) was invested in cash and other instruments, which confirms that the REIT portfolio is in compliance with the regulatory requirement to invest at least 75 per cent of net assets in investment property.
Meanwhile, STANLIB Fahari I-REIT has laid out plans to grow its property portfolio which currently comprises four properties valued at a total of Ksh3.4 billion(US$ 33.7 million).
The Fund’s strategy is to position itself as a strategic partner of pension schemes as well as insurance companies that are currently overweight investment property, and desire to rebalance their portfolios in line with the relevant pension and insurance regulations in Kenya.
The REIT manager’s board has recommended and the Trustee has approved a final dividend of Ksh0.75 per unit which will see the distribution remaining flat year-on-year, despite the reduced distributable earnings.
This move underlines management’s confidence in the REIT’s current fundamentals as well as future prospects.
STANLIB Kenya is a leading fund manager in East Africa and is owned by Liberty Holdings Limited. It manages assets worth over Ksh121 billion (US$1.2 billion.
Its clients are mainly institutional and corporate investors with short-term cash management and medium- to long-term investment needs, including retirement funds, asset management and retail investors seeking to invest at regular intervals or in once-off lump sum investments.