Stanbic IBTC Asset Management, Nigeria’s leading Asset Management firm, announced the audited 2021 financial result for UPDC Real Estate Investment Trust (UPDC REIT), currently the largest Real Estate Investment Trust (REIT) in the country.
The results showed a decline in the REIT’s rental income from NGN1.57 billion earned in the previous year to NGN1.26 billion, due to a reduction in occupancy level as a result of the impact of Covid-19 and remote working.
Furthermore, a fair value loss of NGN5.04 billion was taken on the investment properties due to revaluation of the REIT properties coupled with an impairment charge of NGN141 million owing to of delays in recovery of rental income from tenants adversely impacted by the pandemic. Thus, the REIT recorded a loss before tax of NGN4.48 billion from NGN1.93 billion reported in the prior year.
Despite these numbers, the Fund Manager, Stanbic IBTC Asset Management continues to be optimistic about the significant potential for growth that the UPDC REIT offers investors which would come as a result of the broad sector opportunities and deliberate strategic management being brought to bear by Nigeria’s foremost Asset Management company.
About UPDC Real Estate Investment Trust
UPDC REIT is a close-ended fund sponsored by UPDC Plc (UPDC) in 2013 via an issue of 3,000,000,000 units at NGN10 each and is listed on the Nigerian Exchange Limited (NGX). The REIT is invested in a diversified portfolio of commercial and residential real estate assets, and it enables investors earn stable income while preserving capital over the long term by improving and maximising unit value through the ongoing management of its assets, strategic acquisitions, and development of additional income-producing real estate properties. Units of the Trust can be bought and sold through a licensed stockbroker on the floor of the NGX.
Stanbic IBTC Asset Management’s appointment as the Fund Manager to the UPDC REIT was approved by the Securities and Exchange Commission in May 2021. Since taking up the management of the REIT, Stanbic IBTC Asset Management Limited has focused its effort on improving the operational and governance structure of the REIT as it believes that this will form the bedrock for improved and sustainable long-term performance. Investor relations has also been prioritised with the presentation of the Facts Behind the Figures session on NGX in December 2021, and a commitment to sustain active engagement going forward.
in a recent commentary, Oladele Sotubo, Chief Executive Stanbic IBTC Asset Management said; “the appointment of Stanbic IBTC Asset Management as Fund Manager to the largest REIT in Nigeria is testament of the company’s excellent track record in management of various investment funds including several Mutual Funds and an Infrastructure Fund. In addition, the company can leverage the extensive experience of Standard Bank Group in structuring and executing real estate transactions in various jurisdictions, to improve performance of the UPDC REIT and boost investors’ earnings and sentiment towards REITs as a veritable asset class”.
Making Sense of The Decline
The need to establish the true fair value of the assets in the REIT is also a regulatory requirement for every REIT which allows for a fair reflection of the current market realities. In fulfilling regulatory requirement, the Fund Manager must ensure that the methodology adopted is appropriate and reflective of the nature of the assets as investment properties, putting into consideration the ownership structures, title, age, current state, and use for each asset in the portfolio of the REIT. The valuations must also align the property values to the current market realities.
In a bid to reflect the true fair value of the REIT properties, the Fund Manager appointed a valuer, Ubosi Eleh and Company to conduct a detailed valuation of properties of the REIT using the most appropriate methodology, in line with strategic objectives of the REIT and global best practices.
The revaluation exercise for the UPDC REIT resulted in a drop in the Net Asset Value (“NAV”) to NGN24.9 billion when compared to NGN30.9 billion recorded in the prior year. Despite this drop, however, UPDC REIT is still trading at a significant discount of 65% to its NAV, thus presenting a unique opportunity for investors looking to take advantage of this discounted value.
Furthermore, the REIT was not spared from the impact of Covid-19 as it recorded a drop in demand for commercial office spaces due to global adoption of remote working strategy. As such, the commercial office properties in the REITs portfolio which contributes over 60% of the REITs income in previous years experienced a 26% decline in occupancy along with downward rental reviews to minimise the level of vacancy. However, commercial property continues to remain a viable source of revenue and as measures to reduce the spread and impact of the pandemic show more positive results, more companies are resuming work in physical offices and the demand for commercial office spaces is increasing correspondingly.
Strategic Plan for Growth
As part of the activities to reposition the REIT for long-term growth, the Fund Manager has identified opportunities for upgrade within the existing portfolio of properties, which are expected to attract a more sustainable tenant mix, thus leading to improved cash flow and higher Net Asset Value.
The Fund Manager is also exploring opportunities in other sub-sectors of the real estate market which have proven economically resilient in the recent past. Some of these sub-sectors include retail, purpose-built student accommodation and the industrial sector. The focus on these sectors has increased in recent years due to the impact of the Covid-19 pandemic. Therefore, opportunistic acquisitions that give room for short to medium term capital gains on resale of such properties are being explored.
Concerted efforts are also in place to recover receivables impaired due to delays in rental payment from tenants still struggling with the impact of Covid-19. It is expected that recovery of the outstanding rent will result in improved distributions to unitholders in 2022.
Furthermore, in the light of the recent unbundling of UAC’s shares in the REIT, there has been improved liquidity of the REIT shares which has resulted in a significant improvement in trading activities of the REITs shares on the floor of the stock exchange. Consequently, we expect the improved liquidity to present a good opportunity to investors looking to buy into the future of the REIT at a significant discount presented by the current market price.
What to Expect
As part of plans to improve information flow to the investing public, Stanbic IBTC Asset Management has commenced engagement with the investor community about the activities of the REIT and the company intends to maintain this on a regular basis in order to ensure that investors are carried along on the Fund’s progress, and opportunities for portfolio rebalancing to ensure steady growth.
For information and enquiries, the Fund Manager can be reached via email@example.com or via the company website – stanbicibtc.com.