UPDC Real Estate Investment Trust


Ticker:                         UPDCREITNature of Business:    REITsLocation :                              Nigeria
Recent Price:                  NGN5.50   52-Week High/Low: NGN5.50/3.00Estimated Fair Value:      NGN7.40-NGN8.90
Expected Return:        37.9%Consider Buy:               Below NGN8.90Business Risk:            Average
Financial Risk:      LowEconomic Moat:            WeakCorporate Governance: Average

Company Overview
UPDC Real Estate Investment Trust (UPDCREIT), founded in June 2013, is a close-ended Real Estate Investment Trust (REIT) listed on the Nigerian Stock Exchange (NSE). The fund invests in commercial and residential properties with the aim of producing stable streams of income for unitholders and growing their capital. UPDCREIT’s property portfolio includes Abebe Court (Ikoyi Lagos), Victoria Mall Plaza (Victoria Island Lagos) and UAC Office Complex (Abuja). In addition, the fund invests in bonds, treasury bills, and other liquid assets.

UPDCREIT is managed by FSDH Asset Management Limited. United Capital Trustees Limited and FBNQuest Trustees Limited are the trustees to the fund. The trustees see to it that the fund is managed in the interest of unitholders and in accordance with applicable regulations. UACN Property Development Company Plc was appointed as the property manager.

Investment Thesis
REIT provides a vehicle for individuals to own property without huge capital commitment. The unitholders, in addition to capital appreciation, enjoy generous distribution from the net income made each year. Though it made a loss in 2019, UPDCREIT had been making profits since its inception. Besides, the fund generates free cash flow for the unitholders.

Though the vacancy rate is low, we are of the opinion that a long-term lease on its properties could assure a rental income for the foreseeable future. It is debt-free, but we expect UPDCREIT ‘s debt level to rise if it intends to boost its portfolio of properties as buying opportunities arise. Investment properties have grown at a compound rate of 4.7% over the past three years. The fund has disposed of its property in Aba, a city in Abia State of Nigeria, in the year 2020; an income of NGN163.4 million was realised on the property disposed of.

The result for the 2019 financial year fell short of expectations; in fact, it was a deviation from the performance of prior years. The poor result in the current year was triggered by a fall in the fair value of its properties leading to a loss of NGN2.4 billion on investment properties. Profit Before Tax (PBT) and Profit After Tax (PAT) margins were negative. Both PBT and PAT margins were -442% each. Return on Equity (RoE) was -1.5% while Return on Assets (RoA) was -1.4%. Before 2019, UPDCREIT’s performance had been satisfactory. Profit margin and payout ratio had been high. PBT margin had been around 85.4% and it paid out over 70% of PAT to investors or unitholders.

We are of the opinion that UPDCREIT should be worth between NGN7.40 and NGN8.90 per share. Investors who purchase the shares of the company should expect a return of 37.9%.

Financial Overview
Despite a 27.3% growth in rental income, gross income diminished. Rental income reached NGN1.7 billion from NGN1.3 billion. But gross income slumped from NGN3.1 billion to NGN101.7 million. A loss of NGN2.4 billion on investment properties prevented UPDCREIT from growing its gross income in 2019 compared with the previous period where a NGN1.8 billion gain on investment property was the major driver of gross income growth. Interest income lost 17.3% compared to 2018 when it dropped 26%. Interest on treasury bills went down from NGN691.4 million to NGN555.9 million, shedding 19.6% in a year while interest on bank deposits was NGN12.4 million down from NGN24.5 million of the previous period. However, corporate bonds produced an interest income of NGN124 million which was 2.5% higher than the NGN121 million recorded a year earlier.

A 33.1% year-on-year increase in operating expenses, coupled with a 96.7% decrease in gross income, led to a Loss Before Tax of NGN449.3 million. PBT in the earlier period was NGN2.6 billion (2017:NGN2.2 billion). Property maintenance expenses were NGN194.2 million, up from NGN104.7 million. Property maintenance expenses accounted for 35.8% of total operating expenses compared to 25.7% of the year before.

A diminution in the value of investment properties and treasury bills caused a 6.5% fall in total assets. A dividend of NGN1.5 billion was paid to unitholders in spite of the loss posted.  Unitholders’ fund was reduced to NGN30.6 billion or NGN11.45 per unit afterwards.

There was no addition to its property portfolio in the year under review but NGN140.9 million worth of property and equipment were purchased.  UPDCREIT consistently generates free cash flow for the investors. A free cash flow of NGN1.29 per unit was produced in the year under consideration (2018:NGN0.10). The reason for the rise in free cash flow per unit was the drop in capital spending per unit. Earnings Per Unit was negative due to the loss recorded in the year. Revenue Per Unit also nosedived.

Business Risk
Weak consumer demand as a result of harsh economic conditions can reduce the occupancy rate of properties. So rental income which is a major source of income may be adversely affected.

Recommendation: Buy

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