“REGULATIONS, ACQUISITIONS AND CAPITAL RAISING SHAPED THE PERFORMANCE OF THE REITS SECTOR IN H1’2023”

21 August, 2023

Press Release

FOR IMMEDIATE RELEASE

“REGULATIONS, ACQUISITIONS AND CAPITAL RAISING SHAPED THE PERFORMANCE OF THE REITS SECTOR IN H1’2023”

Following the release of the H1’2023 results by all four authorized Real Estate Investment Trusts (REITs) in Kenya, the Cytonn Real Estate Research Team undertook an analysis of the financial performance of the REITs and identified the key factors that shaped the performance of the sector. For the earnings notes of the various REITs, click the links below:

The report is themed “Strategic Financial Sustainability of Kenyan REITs Redefining Real Estate Investment,” where we discuss the background and structure of REITs in Kenya and assess the financial performance of the current REITs in the market during H1’2023 in terms of operational metrics, profitability metrics, leverage ratios, liquidity ratios and valuation metrics. In addition, we highlight the outlook regarding our expectations for the REITs sector going forward.

Three key drivers shaped the REITs sector in Q1’2023, namely, Regulations, Acquisition and Capital Raising.

“REITs are officially established in accordance with the REIT Regulations and granted approval by the Capital Markets Authority (CMA) under Capital Markets Real Estate Investment Trusts Collective Investment Schemes) Regulations, 2013. Units of listed REITs are traded on the Nairobi Securities Exchange (NSE), similar to shares of any other company under Main Market Segment and Unquoted Security Platform (USP), offering investors a liquid stake in Real Estate. Regulations stipulate that Kenyan REITs are mandated to distribute a minimum of 80.0% of distributable earnings to their unitholders. Furthermore, REITs automatically qualify for several tax exemptions, such as the Income Tax Act (ITA), Value Added Tax (VAT), and Capital Gains Tax (CGT), under the authorization of the Kenya Revenue Authority (KRA). Generally, the intricate nature of these regulations within the REITs and the convoluted rules applicable to REITs are proving to be challenging for individuals to navigate and comprehend fully, particularly since the legal landscape is constantly changing. Notably, there is also a lack of sufficient information available to the public about these REIT regulations. Moving forward, we expect both the government and stakeholders in the REITs sector will address these regulatory concerns and foster improved transparency and trust within the REIT sector," Said Zuma Effie, a Real Estate Research Analyst at Cytonn Investments.

‘’We expect the trend of strategic acquisitions and capital raising will persist, with REITs actively seeking opportunities to broaden and diversify their portfolios, cater to evolving market demands and also set standards in promoting environmental sustainability such as execution of green bonds by Acorn holding. We also anticipate capital raising is set to continue shaping the trajectory of the Kenyan REITs industry. The injection of equity and debt, as well as strategic partnerships among private investors and government interaction, will remain vital drivers of expansion and unlocking new avenues such as affordable housing and infrastructure development projects, aligning with market demands and government priorities. As the industry advances, collaborations, regulatory support, and investor education will play pivotal roles in ensuring that capital raising continues to yield positive outcomes and drive the Kenyan REITs industry toward a vibrant and sustainable future.’’ She added.

The tables below highlight the performance of the Kenyan REITs sector, showing the performance using several National Association of Real Estate Investments Trusts (NAREIT) approved metrics and the key take-outs;

*(All values in Kshs mns unless stated otherwise)*
Cytonn Report: Summary Performance Kenya REITs in H1’2023
	Laptrust Imara I-REIT	ILAM Fahari I-REIT			Acorn I-REIT			Acorn D-REIT			H1’2022 Total	H1’2023 Total	y/y
	H1'2023	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change	H1’2022 Total		change
Operating Metrics
Net Operating Income (NOI)	99.6	86.2	86.0	(0.2%)	139.4	128.0	(8.2%)	233.3	334.2	43.2%	458.9	647.9	41.2%
Profitability Metrics
Funds from Operations	99.6	86.2	86.0	(0.2%)	188.8	149.8	(20.7%)	233.3	334.2	43.2%	508.3	669.7	31.7%
Adjusted FFO	99.6	82.8	84.4	2.0%	188.8	149.8	(20.7%)	233.3	334.2	43.2%	505.0	668.1	32.3%
Cash Available for Distribution (CAD)	99.6	86.2	86.0	(0.2%)	144.1	92.8	(35.6%)	-	-	-	230.3	278.5	20.9%
Cash Amounts Distributed	0.0	0.0	0.0		64.0	87.0	35.9%	-	-	-	64.0	87.0	35.9%
Valuation Metrics
Net Asset Values (NAV)	7,024.3	3,538.9	3,392.8	(4.1%)	4,720.4	6,342.1	34.4%	5,575.6	6,547.7	17.4%	13,834.8	23,306.6	68.5%

Source: Cytonn Research

Key takeaways from the table include:

Net Operating Incomes (NOI) of Kenyan REITs recorded a 41.2% growth to Kshs 647.9 mn in H1’2023, from Kshs 458.9 mn in H1’2022. The performance during the period was mainly supported by a 43.2% growth in the reported net operating income of Acorn D-REIT, to come in at Kshs 334.2 mn from Kshs 233.3 mn realized in H1’2022, respectively. In addition, LAPTrust Imara I-REIT reported a significant NOI at Kshs 99.6 mn, which further contributed to the positive performance,
Funds from Operations (FFO) of Kenyan REITs increased by 31.7% in H1’2023 to Kshs 669.7 mn from Kshs 508.3 mn in H1’2022, whereas Adjusted FFOs for Kenyan REITs also increased by 32.3% to Kshs 668.1 mn in H1’2023 from Kshs 505.0 mn in H1’2022. This was on the back of significant increases in the reported NOIs during the period. The performance was, however weighed down by an 8.2% decrease in the NOI of Acorn I-REIT to Kshs 128.0 mn from Kshs 139.4 mn in H1’2022, which consequently led to a 20.7% decrease in the I-REIT’s FFOs and Adjusted FFOs to Kshs 149.8 mn from Kshs 188.8 mn in H1’2022 respectively,
Cash amounts available for paying dividends to REIT investors, which we measured using the Cash Available for Distribution (CAD) metric, increased by 20.9% in H1’2023 to Kshs 278.5 mn from Kshs 230.3 mn in H1’2022. The performance was propelled by Laptrust Imara I-REIT’s distributable earnings, which stood at Kshs 99.6 mn, despite a notable decline in Acorn I-REIT’s distributable earnings. Acorn I-REIT’s distributable earnings declined by 35.6% to Kshs 92.8 mn from Kshs 144.1 mn in H1’2022,
Notably, only Acorn I-REIT’s REIT manager recommended an interim dividend of Kshs 0.30, with the total cash distributed in H1’2023 amounting to Kshs 87.0 mn. Conversely, ILAM Fahari I-REIT, LAPTrust Imara I-REIT, and Acorn D-REIT REITs managers did not recommend interim dividends for the period H1’2023, and,
Net Asset Values for Kenyan REITs increased by 68.5% to reach an all-time high of Kshs 23,306.6 mn in H1’2023, from Kshs 13,834.8 mn in H1’2022. This was attributable to 34.4% and 17.4% growths in the net asset values of Acorn I-REIT and Acorn D-REIT’s to Kshs 6,342 and Kshs 6,547.7 mn in H1’2023 from Kshs 4,720.4 and Kshs 5,575.6 mn in H1’2022 respectively.

The table below makes a comparison of the leverage and liquidity ratios of all four Kenyan REITs during H1’2023 and H1’2022;

Cytonn Report: Leverage & Liquidity ratios of Kenyan REITs
	LAPTrust Imara I-REIT	ILAM Fahari I-REIT			Acorn I-REIT			Acorn D-REIT			H1’2022 Weighted Average*	H1’2023 Weighted Average**
	H1'2023	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change	H1’2022 Weighted Average*
Leverage Ratios
Debt to Equity	0.0x	0.0x	0.0x	0.0%	0.0x	0.0x	0.0x	0.6x	0.6x	1.0x	0.3x	0.2x
Debt to Total Market Cap	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	59.3%	64.0%	4.7%	29.2%	19.3%
Debt to Gross Book Value	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%	34.1%	35.1%	1.0%	16.8%	10.6%
Debt to EBITDA Multiple	0.0x	0.0x	0.0x	0.0%	0.0x	0.0x	0.0%	14.2x	11.8x	(16.6%)	7.0x	3.6x

Debt Service Coverage	0.0	0.0	0.0	0.0%	0.0	0.0	0.0%	6.8%	8.1%	1.3%	3.3%	2.5%
Implied Cap Rate	1.4%	9.6%	12.3%	2.6%	3.1%	2.0%	(1.2%)	2.5%	3.2%	0.8%	3.4%	2.7%
*Market cap weighted as at 30/06/2022
**Market cap weighted as at 30/06/2023

Source: Cytonn Research

Key takeaways from the table include;

The majority of the REITs remained ungeared during H1’2023, with their leverage ratios remaining at zero except Acorn D-REIT. Acorn D-REIT debt ratios increased in H1’2023 on account of a 19.5% growth in its long-term borrowings to Kshs 3.9 bn from Kshs 3.3 bn in H1’2022,
Notably, Acorn D-REIT’s Debt to EBITDA Multiple reduced to 11.8x in H1’2023, from 14.2x recorded in H1’2022. This was on the back of faster growth in the REIT’s EBITDA compared to its long-term borrowings. Acorn D-REIT EBITDA in H1’2023 increased by 42.3% to Kshs 334.2 mn from Kshs 233.3 mn in H1’2022, compared to a 19.5% growth in the REIT’s long-term debt, and,
ILAM Fahari I-REIT traded at the highest implied capitalization rate of 12.3%, indicating that it offers a higher return on investment compared to all other REITs. Contrarily, LAPTrust Imara I-REIT had the lowest implied capitalization rate of 1.4%. However, despite the performance, we expect that the LAPTrust Imara I-REIT performance will improve gradually, considering that the REIT is still in its initial year of operation.

The table below presents a summary of key valuation metrics of Kenyan REITs in H1’2023;

	LAPTrust Imara I-REIT	ILAM Fahari I-REIT			Acorn I-REIT			Acorn D-REIT
	H1'2023	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change	H1'2022	H1'2023	y/y Change
Price/FFO per share multiple	69.5	13.1	12.7	3.0%	24.7	41.6	68.8%	23.9	18.5	(22.7%)
Dividend Yield	-	0.0%	0.0%	0.0%	1.4%	1.4%	0.1%	-	-	-
Dividend Coverage/Payout Ratio	0.0	0.0%	0.0%	0.0%	44.4%	93.7%	49.3%	-	-	-
NAV per share	20.3	19.6	18.7	(4.1%)	21.2	22.0	3.7%	23.9	25.3	6.0%

Source: Cytonn Research

LAPTrust Imara I-REIT units are trading at a premium relative to its peers, with a price to FFO per share multiple of 69.5. Comparatively, ILAM Fahari I-REIT units are trading at a discount with a price to FFO per share multiple of Kshs 12.7,
Acorn I-REIT dividend yield currently stands at 1.4%. ILAM Fahari I-REIT, LAPTrust Imara I-REIT and Acorn D-REIT did not pay any dividends during the period. Distinctly, Imara LAPTrust Imara I-REIT has not issued any dividend distributions since it began its operation earlier this year, and Acorn D-REIT is yet to issue dividends since it began its operations in 2021. The initial strategic priority for Acorn D-REIT was centred around property development and exit upon successful stabilization. Due to this, it was envisioned that the initiation of dividend distributions for the D-REIT commence after the completion of its third year of operations,
Imara LAPTrust Imara I-REIT, ILAM Fahari and Acorn D-REIT REIT did not pay out dividends during H1’2023. This was on account of REIT managers not recommending interim dividend distributions for LAPTrust Imara I-REIT and ILAM Fahari, respectively, and Acorn D-REIT’s three-year grace period in relation to paying out dividends. Conversely, Acorn I-REIT dividend payout came in at 93.7%, in line with REITs regulation in Kenya which require that REITs distribute at least 80.0% of their net profits after tax as dividends, and,
Acorn D-REIT recorded the highest NAV per share at Kshs 25.3, and ILAM Fahari had the lowest NAV per share at Kshs 18.7. Notably, all REITs share prices are in line with their NAV per share, with the exception of ILAM Fahari I-REITs shares that are trading at a discount to their NAV per share

Based on our research and analysis, we make the following recommendations to enhance the REITs sector through a more informed and strategic approach which include; i) Enhancing stakeholder education on the REIT structure, particularly within governmental bodies such as the Kenya Revenue Authority (KRA), ii) Expanding Legal framework and introducing flexibility in the legal entities permissible for REIT establishment, iii) Introduce Hybrid REIT Vehicles which would provide investors integrated returns, by combining the higher return from development while reducing risk exposure through the relatively stable income component of the I-REIT. In addition, an IPO with such a hybrid REIT vehicle would eliminate the duplicated costs of running two separate REITs, thereby improving subscriptions by investors, iv) Gradual Public Listing Requirement, which would allow REITs an initial period of private operation before enforcing mandatory public listing, v) Reduction of the minimum capital requirement which currently stands at Kshs 100.0 mn, as this financial threshold currently confines trusteeship options to banking institutions exclusively, vii) Introducing the concept of tokenization for REITs which would present an innovative solution with the potential of amplifying market participation through ownership of REIT units in smaller denominations, from as low as Kshs 100.0, and, vii) Reconsideration of the steep Kshs 5.0 mn minimum for investing in D-REITs to eliminate entry barriers that inadvertently limit individual market entry.

Notes to the Editor:

Cytonn Investments is an independent investment management firm with offices in Nairobi - Kenya, and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.

Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional-grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs 82.0 billion in real estate projects.

For more information, kindly contact:

Clifford M. Mulama

Brand and Communications

+254 713 840 107

Email: cmulama@cytonn.com