It’s hard to make investors happy these days. It’s even harder to make them appreciate your value. Someone put it like this—there are three kinds of stocks – the good, the bad and the ignored.
When you’re a pioneer, you’re most likely to belong to the latter—ignored, unnoticed and misunderstood. Just to make it plain, REITs (Real Estate Investment Trusts) is what I am referring to.
A good game everyone is afraid to play. Like treasure hidden in plain sight, everyone passes by, undervaluing it. Today, I get to defend the pioneer REIT listed at the Nairobi Securities Exchange (NSE)—STANLIB Fahari REIT.
To begin with, REITS are not a boutique thing. Global REITs is an approximately Sh170 trillion market, according to the Global REITS survey by Ernst and Young. The number of countries now offering this asset class has almost doubled in the last 10 years to 37.
Global capital raise and initial offering (IPO) activity has trended up—a sign that the sector is a resilient one. In other words, the use of REITs has become better understood and more widely accepted around the world as an investor-friendly and tax-efficient vehicle for real estate investment.
That said, let’s proceed to Fahari. A couple of points for investors to consider. One, its price dislocation (price is down 61 percent from its IPO price) gives it a nice distribution yield of 9.88 percent based on last Friday’s closing price (Sh7.88).
This compares favourably to NSE’s 5.5 percent average dividend yield, 9.78 percent Treasury bill (364-day), 8.2 percent residential rental yield and 7.9 percent rental yield for office spaces.
Additionally, its 11.7 percent vacancy rate (2018) is better than the average vacancy rate (16 percent) found within the rental and commercial spaces in Nairobi according to Cytonn Research.
Further, although the lack of competing REITs makes it hard to have a better idea of the share of yield due to its investments (which might mask a lack of astuteness on the part of a REIT’s investment manager), its current yield stands out as best in the park.
Two, how REITs are structured makes them ideal for income investors. REITs are mandated to deliver 80 percent of taxable income back to shareholders.
Going forward, should the proposed amendments in the Finance Bill 2019 to exempt REIT investee companies from corporate tax succeed, Fahari REIT investors could see increase in distributable earnings. The REIT has an average dividend pay-out ratio of 95 percent. Last year, its distribution per unit was Sh0.75.
Three, their diversification strategy is welcome. The current four holdings are not adequate for proper risk cover. Proposal to use asset swaps-for-units to increase their slate is, therefore, well-advised.
More importantly, the approach overcomes its structural dilemma – due to mandated distributions, it may not finance new acquisitions from retained earnings – that many REITs face.
However, on this point, retail investors would have to weigh the benefit of increased distributions against the risk of share dilution. Nonetheless, a properly diversified REIT should help mitigate this risk.
All things being equal, Fahari REITs is a fantastic opportunity. This unloved and out-of-favour stock is what every retail portfolio should have.
Mr Mwanyasi is managing director at Canaan Capital Limited.