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Key things to consider when investing in real estate investment trusts

One of my avid readers has asked me about how he can get into investing in Real Estate Investment Trusts.

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Short-stay apartments record boom, amid COVID-19 second wave fears, Real Estate Investment Trusts

One of my avid readers has asked me about how he can get into investing in Real Estate Investment Trusts. He even asked me why he should and whether he should invest directly in real estate properties or in Real Estate Investment Trusts (REITS). I like the audacity, though, because, “my people perish because of lack of knowledge”.

What Is A Real Estate Investment Trust

Traditionally, a Real Estate Investment Trust (REIT) is essentially a closed-end fund created exclusively for holding real properties, mortgage-related assets, or both. In most cases, the purpose of REITS is to provide investors with the opportunity to invest in real properties while at the same time, enjoying the benefits derivable from investment trusts.

Before the advent of REIT, investors could only invest in real properties from the property market by buying completed houses or building one from scratch. Now, with REIT it has become possible to trade units of real properties in the stock market. REIT has afforded the small or retail investor the rare opportunity to invest in real estate.

Understanding is Key

Granting the fact that REITS are pools of properties and/or mortgages traded in the stock market, REIT investors or intending investors need to understand not only the stock market but also the property market so as to be able to make informed investment decisions. Unfortunately, while some investors have a good understanding of the property market, and some understand the workings of the stock market, only a few, if at all, have a proficient understanding of both. That is what makes investing in Real Estate Investment Trusts a little tricky.

Actually, the property market differs from the stock market in many ways. The pattern of price movements in the stock market differs from what it is in the property market. while prices move or change rapidly in the stock market, they do not change so rapidly in the property market. The good thing about REITs, however, is that, like mutual funds, and unlike direct ownership of real estate properties, they (REITS) are managed by professional REIT fund managers that understand the nitty-gritty of both markets (the stock and property markets).

In spite of the fact that they are being managed by professional fund managers in deciding on which REIT to invest in, investors should pay attention to the investment strategy of the REIT, and ensure that such strategies jive with such investor’s overall investment strategy and goal.

Investors should find out if the REIT they are interested in is diversified in both geographical location and property type. On the contrary, investors may be well-served if they buy into REITS that concentrate in a special type of property spread over different geographical locations.

READ: Why I lost money investing in stocks [lessons I learnt]

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Advantages of a focused REIT strategy

a focused REIT strategy provides a better understanding of specialized markets. it reduces the number of markets a REIT needs to worry about and it enables both the investors and managers to understand the REIT better. Furthermore, it grants both the manager and investors the freedom from having to be experts in all markets and it reduces increased management cost due to the need to take care of many property markets.

 

Disadvantages of focused REIT strategy

Though focused strategy has some advantages, it comes with some disadvantages too. It offers poor-risk reduction and does not allow for better property diversification. It does not offer customers or investors multiple locations that may satisfy their needs and it may increase susceptibility to regional market trends and economic swings/changes which may result in the possibility of large fluctuations in income streams.

Hall 7 - Curbing the housing deficit in Nigeria: Hall 7 commissions state of the art residential apartments

How to know whether a REIT is focused or diversified

There is no hard and fast way to know whether a REIT is focused or diversified but one way of knowing is to look at the percentage of investment in property types. The norm is that if a REIT has more than 75% of its assets concentrated in one property type, it can be classified as a REIT with a focused strategy.

REITs in Nigeria

Someone reading this article may have asked, are there REITs in Nigeria? there are, but because they have not been that popular, you are not mistaken into thinking or even believing that there are no REITs in Nigeria. There are three major Real Estate Investment Trusts in Nigeria, UPDC Real Estate Investment Trust, Sky Shelter Fund and Union Homes Real Estate Investment Trust. UPDC is the largest of the REITs by asset, having an asset value of N33.2 billion as at June 28th 2019, followed by Union Homes’ N9.9 billion and then Sky Shelter’s N2.4 billion.

[READ: This report makes a case for dumping stocks in this sector]

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Union Homes appears to be a focused REIT in that out of its 9 properties, only 2 are located in Abuja, with the rest located in Lagos. Those in Abuja have very low occupancy rate ranging from 0 to 20% while those in Lagos have occupancy rates of between 80% to 100%.

Sky Shelter also appears to be a focused REIT, again, out of its 7 properties, 2 are in Abuja with unknown occupancy rates and they are available for sale. On the other hand, those in Lagos are fully occupied.

Is Real Estate Investment Suitable for you and Your Portfolio?

Diversification, they say, is the milk and honey of investing. This is because a well-diversified portfolio gives an investor exposure to upside potentials as well as shield against downside risk. One investment that improves portfolio diversification is real estate investment. The good news actually is that many are involved in real estate investing, in one way or the other, either as owner-occupied or commercial.

Real estate investments have proved profitable in the past and continue to be profitable today if done right. Performance analysts, worldwide, have noted that real estate investments at times outperform equity investments. Unfortunately, irrespective of the profitable return profile of real estate investments, it may not be suitable for everyone, except of course, when it is for owner-occupation. However, a lot of people, in most investment forums online, advise people to go into real estate, as soon as they ask for advice on the best way to invest a given amount of money.

To invest in real estate, one needs to answer some questions, some of which I am posing in this article.  If you answer yes to these questions, then you are suited for real estate investing.

Can you tie up the needed capital for a minimum of several years?

Real estate investing, unlike investments in equities and bonds require sizable amount of money to build or buy the property in addition to money required to cover unexpected repairs or damages, howbeit contingent. By their nature, real estate properties are relatively difficult to sell within a short period, they are not as liquid as stocks and bonds, as a result, you should be prepared to hold the properties for as long as it takes to sell, which may run into several months depending on some factors.

Are you willing to remain in a certain location for the foreseeable future?

Due to the lack of portability of real estates, it tends to tie the investor down to a given geographical location. In addition, the fact that real estate properties require attention, which may be often frequent, you may need to be near enough to the property for the required supervision or repairs.

Do you have the time and expertise to manage the properties effectively?

Rental property often requires a lot of maintenance, new tenants must be found as vacancies arise, rents must be collected, bills relating to the rental property must be paid and, in most cases, records must be kept. All those demands full-time attention which, if given, may imply forgoing one’s full-time job unless the investor decides to hire a management company to manage the rental property. That option too, has its own pros and cons.

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[READ: Despite setbacks, Nigeria’s real estate investors to expect a windfall in 2019]

If you answered no to any or all of the above questions and still desirous of investing in real estate, then direct investment into real property, except for owner occupation, may not be for you and as such, a better option will most likely be to go through Real Estate Investment Trusts.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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    Blurb

    GlaxoSmithKline in big trouble as losses mount

    The results were less than impressive with several key indicators showing a year-on-year decline.

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    GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues.

    GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.

    The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.

    The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.

    READ: GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues

    The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.

    Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.

    The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.

    READ: GlaxoSmithKline Nigeria announces changes in its board

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    The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.

    The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.

    The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.

    READ: Nigerian Breweries posts N7.66bn as Q1 2021 profit, shares gain 2.2%

    Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:

    1. A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
    2. Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.

    In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.

    GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.

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    It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.

    Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.

    Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.

    As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.

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    NB Plc’s share price and dividends keeping shareholders happy

    It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.

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    Jordi Borrut Bel, Nigerian Breweries Plc

    Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.

    The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.

    The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.

    It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.

    Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).

    It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.

    The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).

    The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.

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    What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!

    More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.

    While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.

    The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).

    It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.

    From the company’s numbers and explanations, the results are clearly driven by:

    (1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.

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    (2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).

    (3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.

    Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.

    Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.

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