SFS Real Estate Investment Trust


Ticker:                        SFSREITNature of Business:        REITsLocation :                              Nigeria
Recent Price:                NGN69.30   52-Week High/Low: NGN76.90/69.30Estimated Fair Value:      NGN69.52-NGN75.22
Expected Return:      22.8%Consider Buy:                 Below NGN69.52Business Risk:            Average
Financial Risk:           LowEconomic Moat:            WeakCorporate Governance: Average

Company Overview
Skye Shelter Fund was set up on July 23, 2007 as a close-ended Real Estate Investment Trust (REIT) to afford investors the opportunity of taking advantage of the attractive returns offered by the real estate sector and mitigating against risk by diversifying their investment portfolio. The fund, which is governed by a Trust Deed, was renamed SFS Real Estate Investment Trust by the unitholders in 2019. SFS Capital Nigeria Limited manages the Fund while Apel Capital and Trust Limited (formerly PHB Capital and Trust Limited) are trustees to the Fund. In February 2008, SFSREIT became the first REIT to be quoted on the Nigerian Stock Exchange.

The fund managers have the mandate to invest 75% of the Fund directly in real estate (commercial and residential properties) and 25% in real estate-related investments such as mortgages, real estate related equities and real estate-backed securities. It acquires or develops properties for capital appreciation or rental income. Interests on financial assets also contribute to the gross income of the fund. The fund is exempted from paying Companies Income Tax as long as it distributes at least 90% of profit to its investors or unitholders.

Investment Thesis
We are of the belief that the growth of REIT is largely determined by the ability to identify undervalued properties and upgrade them for sale to buyers. So, ample fund has to be set aside for this purpose in order to take advantage of excellent buying opportunities as they present themselves. These properties also produce rental income. SFSREIT has seven properties at the end of the financial year under review: 4 in Lekki, 1 in Ikeja GRA, and 2 in Abuja. However, we do not back the concentration of its properties in only Abuja and certain parts of Lagos State in Nigeria as there are much more undervalued properties in other parts of the country like Port-Harcourt and other parts of Lagos.

The REIT gives investors the opportunity to profit from the property market that is less volatile than equities and earn stable income; more than 80% of its net income is distributed to the investors. In addition, the fund invests in government securities which are safer for investors and produce regular interest income to the fund.

SFSREIT is trading at a market price of NGN69.30 per share. Our fair value estimate is between NGN69.52 and NGN75.22 for a share. So, a share of the fund trades around our estimated value. Investors enjoy regular distribution and dividend yield averaged 7.3% over the past six years. Apart from properties, the fund managers have invested in only fixed income securities such as bonds and treasury bills. Investment properties and fixed income securities made up 98.7% of total assets at the end of 2019 (2018: 98.1%).

Gross income has grown at a compound annual rate of 3.4% over the past three years while net income has increased by 2.9% on a 3-Year Annual Growth Rate basis. SFSREIT should produce an attractive return of 22.8%. We expect investors to buy below NGN69.52.

Book Value Per Share of SFSREIT  is N116. It has a price-to-earnings ratio of 15.3 and a price-to-book ratio of 0.6; Earnings Power Value is NGN54.10 and the average Book Value Per Share is NGN115.

Our Discounted Cash Flow (DCF) valuation produced a value between NGN69.52 and NGN75.22 per unit of the fund. Our Dividend Discount Model (DDM) produced an estimated value ranging from NGN71.13 to NGN74.69 per unit.

Financial Overview
Gross and net income grew by 4.1% and 6.1% respectively in 2019. 57.3% of gross income comes from interests on fixed-income investments while profit on the disposal of properties produced 1.3% of gross income in the year under review.  Rental income was more or less flat at NGN92.9 million. Net income margin climbed by 1.3% to close at 72.3%. Operating expenses to gross income ratio stood at 27.7% down from 29% of 2018.

The fund which commenced with a capital of NGN2 billion now has unitholders’יּ fund of NGN2.4 billion. However, total assets lost 0.1% between 2018 and 2019. Return on Assets (RoA) of 6% and Return on Equity (RoE) of 6.8% translate to a gain of 6.2% and 5.1% respectively over a period of one year. The Earnings Per Share (EPS) of NGN8.11 gives an earnings yield of 11.7%.  At present, SFSREIT is mainly financed by the unitholders (owners). It is a low geared company and can meet all its maturing immediate obligations.

Business Risk
SFSREIT derives income from rents or sale of properties. The ability to maintain or improve the occupancy rate of its property determines the stability of its rental income. Also, its capacity to grow the business by increasing rents in the future may be hampered by the competition in the industry. Since the bulk of its net income is distributed to unitholders, SFSREIT may find it difficult to take advantage of many buying opportunities without taking on debts because real estate requires huge capital investment.

Besides, there are other medium and upper-medium income areas in the country where property prices are attractive and occupancy rates are high. SFSREIT has to consider these areas rather than areas where prices are almost at their peak. This will help boost profit on the sale of its properties.

Recommendation: Buy

Earnings Chart of SFS REIT

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