SEMI-ANNUAL REPORT AND UNAUDITED CONDENSED FINANCIAL STATEMENTS AS AT 30 JUNE 2017

Transcription

1 SEMI-ANNUAL REPORT AND UNAUDITED CONDENSED FINANCIAL STATEMENTS AS AT 30 JUNE 2017

2 TABLE OF CONTENTS 1. INTRODUCTION APPROVAL OF THE REIT MANAGER S SEMI-ANNUAL REPORT AND UNAUDITED INTERIM FINANCIAL STATEMENTS REPORT OF THE TRUSTEE REIT MANAGER S COMPLIANCE REPORT NATURE OF BUSINESS & DURATION OF THE SCHEME SCHEME S OBJECTIVES AS AT THE DATE OF THE REPORT AND ANY CHANGES SINCE LAST REPORT DIRECTORS OF THE REIT MANAGER ACQUISITIONS CONSTRUCTION ARRANGEMENTS DETAILS OF ANY MATERIAL LITIGATION AND POTENTIAL IMPACT BORROWINGS BUSINESS REVIEW DISTRIBUTION GOING CONCERN AUDITORS ONGOING REQUIREMENT FOR REIT AUTHORIZATION REIT MANAGER S OPERATIONAL REVIEW KEY PERFORMANCE INDICATORS 30 JUNE Debtors Age Analysis Lease Expiry Profile by GLA Portfolio Tenancy Mix Vacancies ASSETS UNDER MANAGEMENT CASH & NEAR CASH ASSETS (KShs) NET ASSET VALUE Movement in Net Asset Value (KShs) Net Asset Value Prior and Post Distribution of 2016 earnings

3 22. FUND RETURNS Property returns (annualised) Investment income return (annualised) (%) Total portfolio return Management Expense Ratio DETAILED ANALYSIS OF UNITHOLDINGS CLOSING PRICE HISTORY CONNECTED PARTY TRANSACTIONS INVESTMENTS IN ANY WHOLLY OWNED AND CONTROLLED COMPANY CARRYING OUT REAL ESTATE RELATED ACTIVITIES FEES PAID BY THE REIT as per REGUALATIONS PROPERTIES DETAILED REPORT SUMMARY OF RECENT VALUATIONS PROPERTY MARKET UPDATE REGULATORY LIMITS PROSPECT STATEMENT & PIPELINE ASSET HOLDINGS VERSUS PRESCRIBED LIMITS MEETINGS OF REIT SECURITIES HOLDERS UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS NOTES TO THE INTERIM FINANCIAL STATEMENTS COMMENTARY ON THE INTERIM FINANCIAL STATEMENTS ANNEXURE A: REPORT OF THE TRUSTEE ANNEXURE B: REIT MANAGER S COMPLIANCE REPORT ANNEXURE C: DETAILS OF THE PARTIES - ORGANOGRAM ANNEXURE D: PROFILES OF THE DIRECTORS OF THE REIT MANAGER ANNEXURE E: REIT MANAGER STAFF AND SUPPORT PERSONNEL ANNEXURE F: DETAILS OF SERVICE PROVIDERS ANNEXURE G: INVESTMENT GUIDELINES ANNEXURE H: KEY RISKS

4 ANNEXURE I: GLOSSARY OF TERMS

5 1. INTRODUCTION The REIT Manager submits its interim report together with the unaudited condensed financial statements for the six-month period ended 30 June 2017, which show the state of affairs of STANLIB Fahari I-REIT ( the REIT ). 2. APPROVAL OF THE REIT MANAGER S SEMI-ANNUAL REPORT AND UNAUDITED INTERIM FINANCIAL STATEMENTS The REIT Manager s semi-annual report and unaudited condensed financial statements of STANLIB Fahari I-REIT for the interim period ended 30 June 2017 have been prepared in accordance with the requirements of International Financial Reporting Standard (IFRS), IAS 34: Interim Reporting, the Nairobi Securities Exchange and the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, These were approved by the Board of the REIT Manager and by the REIT Trustee on 26 July 2017 and are signed on their behalf by: Peter Waiyaki Director, STANLIB Kenya Limited Patrick Mamathuba Director, STANLIB Kenya Limited Amos Mwita Trustee Compliance Officer The Co-operative Bank of Kenya Limited 5

6 3. REPORT OF THE TRUSTEE Please refer to Annexure A. 4. REIT MANAGER S COMPLIANCE REPORT Please refer to Annexure B. 5. NATURE OF BUSINESS & DURATION OF THE SCHEME The STANLIB Fahari I-REIT is a real estate investment trust licenced under the REITs Regulations. The REIT was authorised by the Capital Markets Authority on 30 September 2015 and became the first REIT in East Africa. It later became listed on the Nairobi Securities Exchange on 26 November 2015, raising capital of KShs. 3.6 billion. The REIT's duration is a maximum 80 years subject to the Trust Deed. The REIT Scheme is a closed ended Scheme and trades as FAHR on the Nairobi Securities Exchange ( NSE ). The principal activities of the REIT include but are not limited to: the acquisition, for long-term investment, of income-generating eligible real estate and eligible investments, but not limited to housing, commercial and other real estate; undertaking of such development and construction activities as may be permitted by the Capital Markets Act, Chapter 485A of the Laws of Kenya and the REITs Regulations; and investing in cash, deposits, bonds, securities and money market instruments. 6. SCHEME S OBJECTIVES AS AT THE DATE OF THE REPORT AND ANY CHANGES SINCE LAST REPORT The objectives of the REIT Scheme have not changed since the last report. The primary objective of the REIT Scheme is to provide unitholders with stable annual cash distributions from investment in a diversified portfolio of income generating real estate assets. Further objective is to improve and maximise unit value through the on-going management of the REIT Scheme s assets, future acquisitions and the development of additional income producing real estate assets within regulatory limits. 7. DIRECTORS OF THE REIT MANAGER The directors of STANLIB Kenya Limited during the period under review and up to the date of this report were: 6

7 Director s name Role Appointment/resignation date Wanjiru Mwangi Non-executive chairman Resigned 14 June 2017 Nkoregamba Mwebesa Managing director Appointed 8 December 2016 John Mackie* Non-executive Resigned 17 February 2017 Mike du Toit* Non-executive Appointed 22 February 2006 Peter Waiyaki Non-executive Appointed 1 January 2013 Seelan Gobalsamy* Non-executive Appointed 13 November 2014 Patrick Mamathuba* Non-executive Appointed 23 March 2016 Simphiwe Mdluli* Executive Appointed 30 September 2016 *South African 8. ACQUISITIONS a. Acquisitions during the period During the period under review, the REIT did not acquire any real estate assets. b. Real estate assets contracted for purchase or sale At the date of this report, no real estate assets were contracted for purchase or sale. c. Compliance with Regulation 66 The Scheme completed the acquisitions of the nominated real estate investment within regulatory limit. d. Other non-direct real estate assets Other than the assets listed below, the Scheme does not hold any other non-direct real estate assets. 9. CONSTRUCTION ARRANGEMENTS a. Construction and development activities During the period under review, the Scheme did not enter into any construction and development activities. b. Contractual arrangements to enter into construction and development activities in the next six months The Scheme has not entered into any contractual arrangements to commence construction and development activities in the next six months. 7

8 10. DETAILS OF ANY MATERIAL LITIGATION AND POTENTIAL IMPACT As at the date of this report, the REIT Manager is unaware of any material litigation. 11. BORROWINGS The Scheme has not entered into any borrowings or financial arrangement in the period under review. 12. BUSINESS REVIEW The condensed unaudited interim financial statements of the REIT are set out in sections 35 to 37 of this report. The REIT has delivered growth of 221% in earnings for the 6 month period ended 30 June 2017 compared to the restated comparative period ended 30 June This performance is attributable to, among other things: Income contribution from the two office and light industrial properties acquired at the end of June These properties contributed a combined KShs million to net income during the first half of Significant reduction in fund management costs; the comparative period was marked by one-off set-up and listing costs some of which could not be fully capitalised to equity, such as promotional and marketing expenses, legal and tax advisory etc. Finance cost savings of KShs. 23 million compared to the comparative period. Healthy vacancy factor; vacancies continued to be under control at a total portfolio vacancy rate of 5%. 13. DISTRIBUTION The distribution of KShs. 90,486,150 for the thirteen-month period ended 31 December 2016 as disclosed in the 2016 annual report was paid out at the end of April The distribution was declared out of distributable earnings and met the requirements of a minimum distribution in terms of the REITs Regulations, which require that a minimum of 80% of net profit after tax, from sources other than realised gains from disposal of real estate assets, is distributed. No interim distribution has been declared for the period ended 30 June The table below shows how the December 2016 distribution was derived: 8

9 Details Dec 2016 Distributable earnings (KShs) 98,000,288 Distribution (KShs) 90,486,150 Distribution as a % of distributable earnings (%) 92 Weighted average units in issue (number) 180,972,300 Distributable earnings per unit (KShs) 0.54 Distribution per unit (KShs) 0.50 The declaration of the above distribution occurred after the end of the reporting period ended 31 December 2016, resulting in a non-adjusting event in 2016 and a full recognition in the 2017 financial period. The source of the above distribution was as follows: Sources of distribution Dec 2016 Dividend income from wholly owned subsidiaries 190,587,729 Interest income 111,209, ,796,960 LESS: Fund operating expenses (180,422,344) Interest paid (23,374,328) Total potential distributable income 98,000,288 Distribution 90,486,150 Distribution as a % and compliance with Regulation 71 (%) 92 Distribution per unit (KShs) GOING CONCERN The condensed unaudited financial statements of the REIT have been prepared using appropriate accounting policies consistent with those applied at the last report, supported by reasonable and prudent judgments and estimates. The REIT Manager has a reasonable expectation based on an appropriate assessment of a comprehensive range of factors, that the REIT has adequate resources to continue as a going concern for the foreseeable future and at least for the next twelve months from the date of this report. 9

10 15. AUDITORS The condensed consolidated financial statements of the REIT for the interim period ended 30 June 2017 have not been audited by the REIT s independent auditors. 16. ONGOING REQUIREMENT FOR REIT AUTHORIZATION In order to retain its authorization as an I-REIT, the REIT Scheme must comply with the requirements set out in the REITs Regulations, including: Investing only in eligible investments; Within two years of the date of its authorisation as a REIT, investing at least 75% of the total NAV in income producing real estate; In each financial year after the second anniversary of its authorisation, earn at least 70% of its income from rent, licence fees or access or usage rights or other income streams of a similar nature generated by eligible investments in income producing real estate; and Distributing, within four months of the end of each financial year, a minimum of 80% of the net after tax income of the Scheme, unless otherwise authorised by unitholders. Failure to comply with this requirement would have tax implications for the REIT Scheme such that its income may no longer be treated as tax exempt. All the above requirements have substantially been met. The REIT Manager is in the process of acquiring an additional property in order to increase the total value of investment in real estate from the current 67% to 75% by 30 September 2017 as required by the REITs Regulations. 17. REIT MANAGER S OPERATIONAL REVIEW Over the past 6 months, the REIT Manager s primary focus has been seeking high quality properties in order to grow the portfolio and build up scale, as well as investigating funding options. Below is a detailed list of strategic and operational functions the REIT Manager continues to perform in order to ensure effective long term management of the REIT to deliver investor returns and comply with regulatory and legislative requirements: Implementation of the portfolio strategy, which manages risk through portfolio diversification and seeks to deliver appropriately risk-adjusted returns through superior asset allocation and selection; Cash management (all cash collected from rentals is invested in a diversified portfolio of nearcash instruments, in line with a dedicated Investment Policy Statement ("IPS"), to ensure optimal returns with minimal exposure to financial-sector risk); 10

11 KShs Liquidity planning (once the cash is optimally invested, sufficient liquidity is available to make payments when due); Exploration of mechanisms to raise additional capital (such as debt financing, vendor placement, and general issuances of new equity); Efficient use of capital at the SPV level, through management of capital expenditure to improve core asset value; Transaction management - identifying target assets for the portfolio, motivating acquisitions for the fund, and negotiating deal structures pursuant to acquisition; Deal management - ensuring that risk is managed and obligations are met through to deal execution; Managing properties in accordance with their specific property strategies (which guide the composition of tenant mix and execution of leasing strategy) such that net income and capital growth at a property level is optimised, in a manner that is aligned to the fund strategy; and Management of service providers, such that their delivery is aligned to property-level as well as portfolio-level strategy. 18. KEY PERFORMANCE INDICATORS 30 JUNE Debtors Age Analysis Current 30 Days 60 Days 90 Days Days GML BHL SIL Total Tenant debtors for the portfolio totalled KShs million as at 30 June 2017 before taking into account the provision for doubtful debts of KShs million. Included in the 120 days arrears is an amount of KShs. 7 million received from a tenant in July 2017 post the reporting period. The REIT Manager continues (through the property manager) to intensify arrears management processes with the aim of reducing tenant arrears to acceptable levels. 11

12 18.2 Lease Expiry Profile by GLA 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 38% 16% 15% 16% 4% 5% 3% 2% Current Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24 Well spread expiry profile with close to 60% of the portfolio by GLA expiring five years from the reporting date Portfolio Tenancy Mix Office, 4% Vacant, 4% Industial & Storage, 18% Banks, 16% Healthcare, 8% Retail, 37% Education, 4% Apparel, 4% Restaurant, 5% The portfolio has a strong and well diversified tenant base to cushion it at times of sectoral weaknesses Vacancies Property GLA Vacancy % Target % limit Greenspan Mall 155, Bay Holdings 33, Signature International 7, Total / weighted average 196, The total portfolio vacancy rate is within target. 12

13 KShs Millions 19. ASSETS UNDER MANAGEMENT Cash and investment securities Investment property Jun 2017 Jun 2016 Dec 2016 The AUM has held steady since inception, with investment property gaining from a revaluation surplus of KShs. 8 million as at 31 December 2016 and cash and investment securities reducing slightly as at 30 June 2017 compared to 31 December 2016 as a result of the distribution of KShs million paid out at end of April CASH & NEAR CASH ASSETS (KShs) 6 months Jun months Jun months Dec 2016 Cash and cash equivalents 393,999, ,138, ,186,650 Investment securities 758,598, ,960, ,035,734 Total 1,152,597,743 1,102,099,271 1,173,222,384 To ensure optimisation of interest income returns, cash from property subsidiaries is swept into the REIT s investment account on a daily basis and is then invested in competitively priced cash investment instruments. In the above table, fixed deposit and all treasury bill instruments that have a maturity greater than 90 days at inception are classified as investment securities, otherwise they are included in cash and cash equivalents. 13

14 KShs Millions Breakdown of cash and near cash assets Government securities Fixed deposits Call deposits Cash in bank Jun 2017 Jun 2016 Dec 2016 Fixed deposit instruments and government securities (i.e. treasury bills) dominate the portfolio, though the latter is currently being wound down in anticipation of a property acquisition. 21. NET ASSET VALUE 21.1 Movement in Net Asset Value (KShs) Jun 2017 Jun 2016 Dec 2016 Total asset value 3,694,459,035 3,677,967,790 3,715,011,411 Net asset value 3,573,328,950 3,515,729,819 3,585,541,033 Number of units in issue 180,972, ,972, ,972,300 Net asset value per unit The slight decrease in total assets and net asset value between 31 December 2016 and 30 June 2017 is attributable to the pay-out of a distribution of KShs. 90,486,150, equating to KShs per unit in April/May Net Asset Value Prior and Post Distribution of 2016 earnings As at 31 December 2016 KShs Net asset value prior to distribution 3,585,541,033 Net asset value post distribution 3,495,054,883 Net asset value per unit prior to distribution Net asset value per unit post distribution Yield based on the value of the unit as at 31 December % 14

15 22. FUND RETURNS 22.1 Property returns (annualised) 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0.0% 0.0% 1.6% 7.7% 7.6% 7.2% Jun 2017 Jun 2016 Dec 2016 Capital return Income return Property is valued once at the end of the financial year by an independent valuer. Therefore, no capital return is realised mid-year Investment income return (annualised) (%) 6 months Jun months Jun months Dec 2016 Fixed and call deposit interest return Treasury bills income return Weighted average interest return Total portfolio return The total portfolio return comprises the weighted property and interest income return over the various reporting periods. The average split between property and cash instruments has been 67% / 33%. 15

16 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Total return 8.9% 8.0% 8.1% Jun 2017 Jun 2016 Dec 2016 Total return 22.4 Management Expense Ratio The management expense ratio ( MER ) is the total fees and expenses incurred at a fund level expressed as a percentage of the average NAV for the period under review. The MER numbers displayed below have not been annualised. 6 months Jun months Jun months Dec 2016 MER (%) The reduction in the MER compared to the comparative period ended 30 June 2016 is due to the prior period including one-off set-up and listing costs which could not be fully capitalised to equity. The REIT Manager is committed to driving costs down at a fund level in order to improve total fund returns. 23. DETAILED ANALYSIS OF UNITHOLDINGS STANLIB Fahari I-REIT is trading as FAHR on the NSE under the Unrestricted Main Investment Market Segment of the NSE and may be listed on such other securities exchanges as the unitholders may resolve from time to time. The units are registered for trading with ISIN code KE , are freely transferable on the NSE, and bear no restriction on transfer, save as it relates to the lock-in periods as highlighted in 23.2 below Fund Open or Closed Fund, Details of any Restrictions on Applications for Redemption STANLIB Fahari I-REIT is a closed-ended fund. Its units can only be traded through the NSE. The market price of the units is market driven and may not necessarily be equal to the NAV of the REIT. There is 16

17 currently no active secondary market for a REIT in Kenya. However, the I-REIT Scheme may undertake secondary offers as and when the need arises Free Float as Required by Regulation 27 and 29 Currently, only the International Finance Corporation ( IFC ) held through Standard Chartered Nominees with 33.9 million units and the Liberty Group Limited have a lock-in for a limited period and are considered restricted in terms of the free float calculation. The lock-in period is 3 years. On this basis, the free float, as determined, is 66.85% Statement of number and type of units outstanding as at the date of the report and last financial statements The REIT has 180,972,300 units in issue as at 30 June The total number of authorised units is 625,000,000. These have not changed since the last audited financial statements Statement of Restriction on Transferability of Units The units are freely transferable on the NSE, and the Trustee has not imposed any restriction on the transfer of units. Units with lock-in periods are disclosed in 23.2 above Details of number and price at which units were issued or redeemed and total value of units issued or redeemed during the period covered by the report Units in issue 17 Number Units issued during period 180,972,300 Units cancelled or redeemed - Units in issue at period end 180,972,300 The REIT has only one class of authorised and issued units. No units were redeemed or issued within the reporting period Breakdown of REIT Securities Holdings by Class The distribution of the REIT s unitholders as at 30 June 2017 was as follows: RANGE Units Units % Unit holders Unit holders % Less than ,091, , ,128, , ,254, less than 5% of no. of units in issue 55,574, Holdings above 5% of no. of units in issue 100,923, TOTAL 180,972, ,

18 23.7 REIT Security Holdings by Country KENYA UGANDA SOUTH AFRICA OTHER 23.8 Top Investor Holdings Top STANLIB Fahari I-REIT Unitholders as at 30 June 2017 Units % Holding STANDARD CHARTERED NOMINEES NON RESD A/C KE ,900, STANDARD CHARTERED NOMINEES RESD A/C KE ,000, STANLIB KENYA LIMITED 18,384, KENYA COMMERCIAL BANK NOMINEES LIMITED A/C 926A 13,750, STANDARD CHARTERED NOMINEES RESD A/C KE ,889, LIBERTY GROUP LTD 7,700, STANDARD CHARTERED NOMINEES NON RESD. A/C ,147, KENYA COMMERCIAL BANK NOMINEES LIMITED A/C 1018A 3,241, STANDARD CHARTERED NOMINEES A/C ,211, CF STANBIC NOMINEES LTD A/C NR ,556, TOTAL 122,780,

19 2015/12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ CLOSING PRICE HISTORY Volume Closing Price The REIT s closing price at the various reporting periods is outlined below: 30 Jun Jun Dec 2016 Closing price per unit (KShs) CONNECTED PARTY TRANSACTIONS The following are connected parties to the REIT, who had dealings with the REIT and the relevant transactions: (a) Identification of connected parties who had dealings with the REIT Connected party Relationship Transaction STANLIB Kenya Limited REIT Manager Asset management fees The Co-operative Bank of Kenya Limited Trustee Custodial fees Tysons Limited Valuer Valuation Mboya Wangong u & Waiyaki Advocates* Legal Advisor Legal advisory services *One of the partners of Mboya Wangong u & Waiyaki Advocates is a director of the REIT Manager 19

20 (b) Connected party transactions fees paid Transaction 6 months 7 months 13 months Jun 2017 Jun 2016* Dec 2016* Asset management fee paid to STANLIB Kenya 43,501,267 42,594,659 85,732,408 Interest paid to STANLIB Kenya - 22,955,567 23,374,328 Custodial fees paid to Co-op Bank 11,472,717 12,594,863 24,298,740 Valuation fees - - 2,975,000 Legal advisory fees - 17,508,000 17,508,000 Total 54,973,984 95,653, ,888,476 *Represents cumulative year to date fees (c) Connected party balances The REIT had the following cash balances held with Co-op Bank: Bank account name 6 months 7 months 13 months Jun 2017 Jun 2016 Dec 2016 Investment account fixed deposits 268,300, ,837, ,000,000 Investment account call deposits 29,400,000 94,000,000 - Investment account 6,106,086 10,041,577 7,251,691 Expense account 1,298,380 3,701,232 1,298,380 Rent collection account Greenspan Mall 2,021,113 4,969,401 2,990,000 Service charge account Greenspan Mall 2,220,114 1,707, ,469 Rent collection account Bay Holdings 1,500,000-3,100,000 Rent collection account Signature 417,938-1,360,800 Total 311,263, ,257, ,664,340 (d) Units held by connected parties to the REIT Promoter Holdings as at 30 June 2017 Units Holding % STANLIB Kenya Limited 18,384, Liberty Group Limited 7,700, Total 26,085,

21 (e) Units held by the directors of connected parties to the REIT Director s name 6 months 7 months 13 months Jun 2017 Jun 2016 Dec 2016 Patrick Mamathuba 257, ,000 Mike du Toit 91,900 20,000 91,900 Peter Waiyaki* 25,000 25,000 25,000 Total units 373,900 45, ,900 *Held through Lex Consultants Limited 26. INVESTMENTS IN ANY WHOLLY OWNED AND CONTROLLED COMPANY CARRYING OUT REAL ESTATE RELATED ACTIVITIES The asset known as Greenspan Mall is held within the wholly-owned subsidiary Greenspan Mall Limited. The asset known as Highway House is held within the wholly-owned subsidiary Signature International Limited. The asset known as Bay Holdings is held within the wholly-owned subsidiary Bay Holdings Limited. 27. FEES PAID BY THE REIT as per REGUALATIONS 6 months Jun months Jun months Dec 2016 STANLIB Kenya asset management 43,501,267 42,594,659 85,732,408 Co-op Bank custodial 11,472,717 12,594,863 24,298,740 Excellerate Kenya property management 5,339,397 3,198,043 8,009,728 Lloyd Masika pre-acquisition valuation - 1,800,000 1,800,000 Tysons post-acquisition valuation - - 2,975,000 CED Engineers structural engineering* - 3,295,027 3,295,027 LDK Engineers MEPS engineering* - 3,151,245 3,151,245 Jooyato Surveys survey and town planning* - 638, ,000 Total 60,313,381 67,271, ,900,148 *The above fees only relate to the seed properties and exclude fees on properties not acquired. 21

22 28. PROPERTIES DETAILED REPORT 28.1 GREENSPAN MALL Greenspan Mall is a modern decentralized mixed use development, situated on 3.8 hectares (9.5 acres), within the middle income area of Donholm approximately 12 km to the east of the Nairobi CBD. The development comprises a retail centre with a GLA of approximately 16,105 m² with 1,000 parking spaces. The acquisition price (on 11 December 2015) was KShs. 2,093,576,710. The Property is registered as L.R. No. Nairobi/Block 82/8759 (F1, F2, F3, F4 & F5). It is held as leasehold interest for a term of 99 years less 7 days, with lease commencement date 1 September 2007 at peppercorn rent, if demanded. As at 30 June 2017, the property has an unexpired leasehold term of 89 years. The mall has a parking ratio in excess of 4 bays per 100 m² of GLA, has a captive middle market within the larger Greenspan estate and offers opportunity to develop an additional 2 acres of vacant land forming part of the acquisition. The property presents an ideal location with potential to improve the returns through development of excess land and reconfiguration of the mall/ tenant mix. Anchored by Tusky s, it offers fast food restaurants and bars, as well as various service related tenants such as banks, wellness centres, salons and small non-branded fashion and apparel component. The anchor tenant occupies 45% of the GLA while the balance is occupied by services, food, clothing and apparel. Greenspan Mall has a well smoothed lease expiry profile making it easy to manage the tenant mix to optimize the rental income stream. 22

23 Greenspan Mall Tenancy Mix Others 6% Vacant 6% Banks 8% Healthcare 12% Education 5% Retail 51% Restaurant 7% Apparel 5% 28.2 SIGNATURE INTERNATIONAL LIMITED The property known as Highway House is a three storey commercial building located in a growing office node on Pokomo Road, off Mombasa Road. Highway House is located on L.R. No. 37/157 (Original Number L.R. No. 37/54/18) measuring of an acre with a land-lease term of 99 years commencing 1 July 1956, and registered as Title Number I.R As at 30 June 2017, the property has an unexpired leasehold term of 39 years. The property was transferred into the portfolio at a net acquisition price of KShs. 108,717,670 as at 30 June The GLA is approximately 710 m², with ample covered parking bays. This three storey office building is fully let to a single tenant, CoolXtreme Limited a company that deals in the supply and fitting of air conditioning systems in and around Nairobi City. 23

24 28.3 BAY HOLDINGS LIMITED The property known as Bay Holdings is located at the junction of Enterprise Road and Bamburi Road within the main Industrial Area of Nairobi. L.R. No. 209/4125 measuring of an acre for a term of 99 years from 1 January 1949 and registered as Title Number I.R The property has an unexpired leasehold term of 31.5 years as at 30 June The acquisition of Bay Holdings Limited was concluded 30 June 2016 for an amount of KShs. 216,122,547. The GLA is 2,566 m 2 with a covered area for parking. The building is currently fully let to three tenants; Imperial bank, Packard Limited and Architecture Supply Limited. 29. SUMMARY OF RECENT VALUATIONS The REIT did not revalue the real estate portfolio during the interim reporting period ended 30 June Copies of the valuation reports as at 31 December 2016 are available for inspection free of charge at the offices of the REIT Manager, and may be inspected between the hours of 09h30-15h00, Monday to Friday (excluding public holidays). 30. PROPERTY MARKET UPDATE 1 The Kenyan real estate market continues to grow in the backdrop of sustained GDP growth rates in excess of 5%, supported by growth in private consumption and increasing foreign appetite for investment in sub-saharan Africa. Kenya augments its position as a preferred hub by multinationals with operations within the East and Central Africa mainly due to its location, connectivity, innovation, access to amenities and recent large scale infrastructural upgrades. With the fourth largest and second oldest stock exchange in the continent, there has also been a growing investor confidence from international investors especially in the real estate sector. Some of the major international investors who up-scaled their real estate operations in Kenya include UK-based 1 Source: Knight Frank Africa Report 2017, Knight Frank Kenya Market Update 2 nd Half 2016 and Jones Lang LaSalle 24

25 Old Mutual Insurance which has invested KShs. 6.4 billion and pan-african real estate fund and UKbased emerging markets specialist Actis which has recently raised US$500 million for its third African property fund, Delta Africa property fund from South Africa and AVIC International Holding Corporation of China. The market continues to face dire undersupply of housing stock for the lower income earners so much such that the government has recently introduced tax incentives which entitle developers of at least 400 units of low cost housing to pay reduced tax of 15% down from the initial 30%. Following the enactment of REITs Regulations in June 2013, there seems to be potential for residential development REITs in the low to medium income sector. This sector has recorded higher investment returns and demand than the higher ticket housing sector Retail Retail sector in Kenya has grown exponentially over the last decade with marked decentralization within major towns. Demand for retail space has been fairly stable driven by increasing spending power of Kenyan consumers, urbanization and devolution, changing consumer preferences and rising demand for international brands. Nairobi has the biggest development pipeline with the new projects, exhibiting clear trend towards mixed use rather than pure retail. Increasingly, office, residential and leisure facilities are being incorporated. Notable slow down on take up was experienced in 2016 and first half of 2017 mainly due to challenges within the financial sector and operational challenges facing some of the local major retailers. The absorption levels in malls is expected to remain low as a result of rising new supply which has stretched capacity of local retailers to take up the space. In the recent months, the city saw the delivery of over 100,000 sqm comprising of the first phase of Actis Garden City Mall (33,500 sqm) in 2015, followed by the opening of The Hub (30,000 sqm) in the affluent suburb of Karen in 2016 and the 67,000 sqm Two Rivers Mall, the largest in East Africa, opened in February Crystal Rivers Mall located in Athi River is set to open in Q anchored by Naivas. Southfield Mall in Embakasi is in final stages of completion while Mall of Kenya is being master planned within Tatu City. The sector remains dominated by local retailers albeit growing interest from international chains; largely due to the strength of local competition. Opportunities exist for new entrants and smaller retail units in major towns that house devolved county headquarters. Several factors such as difficulty in finding local partners with expertise, currency volatility and security concerns are cited as the major hindrances for international retailers who have put their market entry decisions on hold. 25

26 Retail yields range between 8% to 10% with vacancies trending up to about 10% for the older malls. As a result of this new significant supply, it has taken longer to let retail space and prime rents have stagnated. The marked increase in retail space supply and competition in 2016/2017 has pushed pioneer retail centres such as Sarit Center and Village Market to expand and reinvent in order to retain their market share and keep up with competition. The proposed expansion is set to target younger and savvier clientele and also to keep shoppers within the malls after 6 pm Office On the office front, there is risk of short - medium term pressure on rental as a result of the excessive supply. A significant number of offices in Upperhill and Westlands have recorded low occupancies. Approximately 300,000 sqm of commercial office space was delivered to the Nairobi market in 2016, compared with an average of 150,000 sqm in recent years. This has led to stagnation on rental and sale values. Major office occupiers have been government s agencies, financial institutions, professional firms, nongovernmental organizations, educational institutions and health care providers. With the devolution, the central government uptake of office space has greatly reduced. Further closure of satellite campuses in 2016 following directive from Ministry of Education, down-scaling of various NGO s and financial institutions due to deteriorating relationship with central government and headwinds in the financial sector respectively has left landlords jostling for the few occupiers. Landlords have therefore resorted to offering additional incentives such as rent-free periods and tenant installation allowances in order to maintain high and good quality occupancies. The situation has been exacerbated further by external events that have caused some multinationals, particularly in the oil industry, to downsize their operations in Kenya and a growing supply pipeline which has seen some of the biggest office developments launched in the reporting period. According to JLL research published in April 2016, future growth opportunities exist in bespoke office solutions. These solutions offer occupiers the ability to meet their requirements in a number of ways, ranging from consolidation of their office needs, to fully serviced office suites that provide companies with the advantage of operating a satellite office or entering the market without the burden of office capital fit-out costs or the onerous lease commitments. An example is Tiara Business Park in Lavington which has recently been occupied by Chinese networking and telecommunications company, Huawei. Mashiara Park along Waiyaki Way also provides these solutions. 26

27 Despite the flexibilities currently accorded to tenants, the take-up of new prime offices (grade A) in Nairobi is expected to remain somewhat steady, as the city augments its position as the preferred location for global corporates looking to establish regional hubs serving East Africa s 150 million plus population. Office yields are between 7-9%. Newly completed developments for FY2016 are mainly concentrated in the Upperhill district. These are mainly corporate headquarters such as Britam Tower, UAP Tower and 4th Ngong Avenue Towers Hotel Nairobi has a semi-mature hotel market which ranks as the third largest hotel market in sub-saharan Africa. Nairobi is estimated to have more than 170 hotels with a total of 10,000 rooms. The trend of global hotel chains entering the market has continued with their rooms accounting for an increasing proportion of the total rooms. Global hotel brands such as Crowne Plaza, Radisson Blu, Kempinski Villa Rosa and Best Western Premier have entered the Kenyan market. The sector continues to flourish and attract new local and foreign investors. With the saturation of the 4 star (3,993 keys) and 5-star (1,340 keys) market, developers are looking to the budget and serviced apartment segments in Nairobi and into the provinces for new hotel opportunities. There is a risk of short-term oversupply in the market, with an increase in room supply and a heavy reliance on slowing regional economic growth to drive demand. In 2015 Nairobi hotels achieved occupancy rates of 53.8%, reducing by 1.1% on 2014 levels and an average daily rate of USD 143. Notable developments completed or due for completion in 2016 and 2017 include: Hilton Garden Inn JKIA rooms Tune Hotel Nairobi rooms Golden Tulip Grand Sapphire rooms Pullman Nairobi Westlands rooms Swiss International Hotel Lenana 133 rooms Lazizi Premier 140 rooms Park Inn Radisson 140 rooms Looking forward, a major factor that is likely to affect the sector is the lifting of the travel bans which would have a significant positive impact on demand for hotels in Nairobi as well as boosting investor sentiment in the city. However, the upcoming general election and potential security concerns may lead to a slowdown. 27

28 30.4 Residential The residential sector remained stable throughout 2016, due to steady macroeconomic conditions and minimal impact from external shocks. According to Knight Frank Prime Residential Report 2017, luxury home sales prices increased marginally, but prime rental prices declined as a result of a slight oversupply, which was partly attributable to the exodus of a large number of expatriates following the downsizing of Kenya s oil extraction industry. The Kenyan government estimates that there is a shortage of approximately 200,000 units per annum and is addressing the situation through measures such as slum upgrading, public private partnerships and the provision of tax incentives for major developers. The middle income residential sector which has been very active in the past has recently recorded reduced activity due to lay-offs, down scaling or closure of business, relocation of diplomatic staff as well as reduced lending which has been an unforeseen negative impact of interest rate capping Industrial This sector has remained largely owner occupied with most of the stock in the traditional industrial zones being outdated and of poor quality, and suffering from heavy traffic congestion. There is growing demand for modern well-configured logistics space of high specification. This rising demand has prompted the emergence of several master planned industrial parks, particularly on the outskirts of Nairobi where developers are taking advantage of new infrastructure developments along the bypasses and link roads, but construction is yet to commence on a large scale. Other occupiers such as Imperial Health sciences have opted to build their own 13,500 sqm temperature controlled park according to their specifications of quality. One such initiative is Tatu Industrial Park comprising of 450 acres of serviced land suitable for light industrial, warehouse and logistics uses. Unilever has signed an agreement to acquire 70 acres of land at the park which forms part of the Tatu City urban development project. Other proposed industrial parks include Northlands Industrial Park and Infinity Industrial Park both on Eastern Bypass and Tilisi Industrial Park off Waiyaki Way. 28

29 31. REGULATORY LIMITS REGULATION REGULATORY LIMIT ACTUAL AS AT 30 JUNE 2017 COMPLIED ( ) / NOT COMPLIED (X)/ N/A Minimum number of 7 5,653 REIT securities holders Minimum Free Float 25% 66.9% Minimum Promoter 25% of NAV 14.42%; 3 year lock-in N/A investment and retention* Eligible Investments** 75% real estate 67% real estate N/A Minimum income 75% of rental income 73% N/A generation*** Maximum gearing 35% of total asset 0% value Minimum distributions 80% 92% *Regulation 74 (minimum retained investments by the promoter and lock-in period) does not apply to STANLIB Kenya Limited in its capacity as Promoter as it neither sold nor transferred real estate to the REIT Scheme within one year of its establishment. **Regulation 65(6) requires that within two years of the date of its authorization as a REIT that at least 75 percent of the total net asset value of the REIT is in income producing real estate. This will be applicable from 30 September ***Regulation 69 minimum income requirement is applicable each financial year after the second anniversary of the REIT s authorisation. As the REIT Scheme was authorised on 30 September 2015, Regulation 69 will be applicable in the year ending 31 December PROSPECT STATEMENT & PIPELINE The REIT management team is currently engaged in discussions with different vendors regarding various acquisition opportunities with an aim of completing a transaction by 30 September In addition, the management team is considering various funding options to fund these additional opportunities. All acquisitions will be in line with the portfolio strategy, and provide the key enhancements of sectoral diversification, capital appreciation and income accretion. 29

30 33. ASSET HOLDINGS VERSUS PRESCRIBED LIMITS The table below highlights the asset holdings versus the subscribed limits in the investment mandate. I-REIT Eligible Investments (Assets) Regulation 65 Regulation and maximum limit % Regulation and minimum limit % Limit in scheme document % % as at the reporting date Highest % level during reporting period Date of most recent valuation/s and ref. to report detailing valuation If the REIT is an Islamic REIT percentage of Shariah compliant total. If not 100% then for each category set out below specify % that is Shariah compliant N/A N/A N/A N/A N/A N/A All direct eligible real estate: a) Freehold None None None None None None b) Leasehold None None None None None None All indirect eligible real estate: a) Freehold held through investee companies or investee trusts N/A N/A N/A N/A N/A N/A b) Leasehold held through investee companies or investee trusts None None None Refer to financials Refer to financials

31 I-REIT Eligible Investments (Assets) Regulation 65 Regulation and maximum limit % Regulation and minimum limit % Limit in scheme document % % as at the reporting date Highest % level during reporting period Date of most recent valuation/s and ref. to report detailing valuation Income producing real estate Regulation 65 (6) Minimum of 75% of TAV within 2 years of authorisation N/A - REIT is not yet 2yrs N/A - REIT is not yet 2yrs N/A - REIT is not yet 2yrs N/A - REIT is not yet 2yrs N/A - REIT is not yet 2yrs N/A - REIT is not yet 2yrs Land and cost of construction Regulation 70 Maximum 15% TAV Cash, Deposits, bonds and money market instruments Regulation 65 (11) Maximum 5% to single issuer, institution, or members of group Wholly owned and controlled company which conducts real estate activities Regulation 65 (14) Maximum 10% TAV with REIT securities holder consent Income producing assets including listed shares in Kenyan property companies and units in Kenyan IREITs. Regulation 68 (2) Maximum 10% of value of investment and TAV at time of acquisition None None None None None None 5% 0% 5% 0% 0% 30 June 2017 N/A N/A N/A N/A N/A N/A 10% 0% 10% 0% 0% None 31

32 I-REIT Eligible Investments (Assets) Regulation 65 Regulation and maximum limit % Regulation and minimum limit % Limit in scheme document % % as at the reporting date Highest % level during reporting period Date of most recent valuation/s and ref. to report detailing valuation For an IREIT that has converted from a DREIT Mortgages or other secured loans etc.; authorised under Regulation 12 provided to purchasers of real estate developed or constructed Regulation 12 N/A N/A N/A N/A N/A N/A Other assets (eligible) include description None None None None None None Other assets (not eligible) include description None None None None None None 32

33 34. MEETINGS OF REIT SECURITIES HOLDERS The maiden Annual General Meeting ( AGM ) for REIT securities holders was held on 13 April The meeting was quorate with 33.99% of the unitholders (by number of units held in the REIT) present in person or by proxy. The purpose of the meeting was to: receive the Annual Report and the Audited Annual Financial Statements for the thirteenmonth period ended 31 December 2016; note the first and final distribution for the thirteen month period ended 31 December 2016, of KShs. 90,486,150 (50 cents per unit in issue) as recommended by the REIT Manager and approved by the REIT Trustee; note that KPMG had expressed their interest to continue as auditors and the REIT Manager and REIT Trustee were happy for them to continue; and seek a special resolution to amend the Trust Deed, which is the REIT s constitution, to allow the sending out of notices and reports electronically and specifically by displaying them on the REIT website. This is to reduce costs by taking advantage of the growth of information technology. It also allows the REIT Manager and REIT Trustee to use other technologies that may emerge in due course to keep costs low. The special resolution was passed by the general meeting. Other than the above AGM, no other meetings of the REIT unitholders took place during the period under review. 33

34 35. UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS Consolidated statement of profit or loss and other comprehensive income Note Unaudited 6 months 30 June 2017 Unaudited restated 7 months 30 June 2016 Audited 13 months 31 December 2016 KShs KShs KShs Revenue Rental and related income Straight-lining of lease income ( ) Other income Interest income Bargain purchase gain on acquiring property subsidiaries Sundry income Operating expenses ( ) ( ) ( ) Property expenses ( ) ( ) ( ) Fund operating expenses ( ) ( ) ( ) Increase/(decrease) in fair value of investment property ( ) ( ) Fair value adjustment to investment property Straight-lining of lease income ( ) ( ) Operating profit Finance costs - ( ) ( ) Net profit for the period Other comprehensive income Total comprehensive income attributable to unitholders for the period Basic earnings per unit (KShs) Headline earnings per unit (KShs) Supplementary information Distributable earnings per unit (KShs)

35 Consolidated statement of financial position Unaudited 6 months 30 June 2017 Unaudited restated 7 months 30 June 2016 Audited 13 months 31 December 2016 ASSETS KShs KShs KShs Non-current assets Investment property Fair value of investment property for accounting purposes Straight-line lease adjustment Property and equipment Current assets Investment securities Trade and other receivables Cash and cash equivalents Total assets EQUITY & LIABILITIES Capital and reserves Trust capital Revaluation reserve Retained earnings Current liabilities Trade and other payables Tax payable Total equity & liabilities Net asset value per unit

36 Consolidated statement of changes in equity Trust capital Revaluation Retained Total reserve earnings KShs KShs KShs KShs Balance at 26 November Net profit for the period as restated Transactions with owners of the REIT Issue of units Transaction costs for issue of units ( ) - - ( ) - Total transactions with owners of the REIT Unaudited restated balance at 30 June Net profit for the period Transaction costs for issue of units ( ) - - ( ) Transfer to non-distributable reserve ( ) - Audited balance at 31 December Dividends paid - - ( ) ( ) Net profit for the period Unaudited balance at 30 June

37 Consolidated statement of cash flows Unaudited 6 months 30 June 2017 Unaudited restated 7 months 30 June 2016 Audited 13 months 31 December 2016 KShs KShs KShs Cash flows from operating activities Cash generated from operations Interest paid - ( ) ( ) Distribution paid ( ) - - Net cash (outflow)/inflow from operating activities ( ) Cash flows from investing activities Acquisition of subsidiaries - ( ) ( ) Increase in investment securities ( ) ( ) ( ) Net cash used in investing activities ( ) ( ) ( ) Cash flows from financing activities Proceeds from issue of new units Transaction costs for issue of new units - ( ) ( ) Net cash inflow from financing activities Net movement in cash and cash equivalents ( ) Cash and cash equivalents at beginning of period Cash and cash equivalents at acquisition of subsidiaries Cash and cash equivalents at end of period

38 Segmented statement of profit or loss and other comprehensive income - for the 6 months ended 30 June 2017 Retail Office and light Fund Total industrial KShs KShs KShs KShs Revenue Rental and related income Straight-lining of lease income ( ) ( ) - ( ) Other income Interest income Bargain purchase gain on acquiring property subsidiaries Sundry income Operating expenses ( ) ( ) ( ) ( ) Property expenses ( ) ( ) - ( ) Fund operating expenses - - ( ) ( ) Increase in fair value of investment property Fair value adjustment to investment property Straight-lining of lease income Operating profit/(loss) ( ) Finance costs Net profit/(loss) for the period ( )

39 Segmented statement of profit or loss and other comprehensive income - for the 7 months ended 30 June 2016 Retail Office and light Fund Total industrial KShs KShs KShs KShs Revenue Rental and related income Straight-lining of lease income Other income Interest income Bargain purchase gain on acquiring property subsidiaries Sundry income Operating expenses ( ) - ( ) ( ) Property expenses ( ) - - ( ) Fund operating expenses - - ( ) ( ) Decrease in fair value of investment property ( ) ( ) - ( ) Fair value adjustment to investment property Straight-lining of lease income ( ) ( ) - ( ) Operating profit/(loss) ( ) Finance costs - - ( ) ( ) Net profit/(loss) for the period ( )

40 Segmented statement of financial position - for the 6 months ended 30 June 2017 ASSETS Retail Office and light Fund Total industrial KShs KShs KShs KShs Non-current assets Investment property Property and equipment Current assets Investment securities Trade and other receivables Cash and cash equivalents Total assets EQUITY & LIABILITIES Capital and reserves Trust capital Revaluation surplus ( ) Retained earnings ( ) ( ) Current liabilities Trade and other payables Tax payable Total equity & liabilities ( )

41 Segmented statement of financial position - for the 7 months ended 30 June 2016 ASSETS Retail Office and light Fund Total industrial KShs KShs KShs KShs Non-current assets Investment property Property and equipment Current assets Investment securities Trade and other receivables Cash and cash equivalents Total assets EQUITY & LIABILITIES Capital and reserves Trust capital Revaluation surplus Retained earnings ( ) Current liabilities Trade and other payables Tax payable Total equity & liabilities

42 36. NOTES TO THE INTERIM FINANCIAL STATEMENTS 1. Basic and headline earnings Basic earnings comprehensive income attributable to unitholders for the period Adjusted for: Fair value adjustment to investment property (including straight-line lease accrual movement) Bargain purchase gain on acquiring property Unaudited 6 months 30 June 2017 Unaudited 7 months 30 June 2016 Audited 13 months 31 December ,274,067 24,401, ,000,288 (2,674,906) 88,625,294 81,004,050 - (25,156,147) (25,156,147) subsidiaries Headline earnings 75,599,161 87,870, ,848,191 Adjusted for: Straight-line lease accrual movement 2,674,906 (88,625,294) (89,004,050) Distributable non-cash items - 25,156,147 25,156,147 Distributable earnings 78,274,067 24,401,393 98,000,288 Distributable earnings per unit (KShs) Basic earnings per unit (KShs) Headline earnings per unit (KShs) Weighted average units in issue (units) 180,972, ,972, ,972,300 Units in issue at the end of the period (units) 180,972, ,972, ,972, COMMENTARY ON THE INTERIM FINANCIAL STATEMENTS 37.1 Introduction STANLIB Fahari I-REIT ("the REIT") is a real estate investment trust, listed on the Nairobi Securities Exchange. It currently owns three properties (a shopping centre and two semi office/light industrial buildings) valued at KShs. 2.4 billion, through special purpose vehicles. Being the first REIT to be established in Kenya, STANLIB Fahari I-REIT has strong ambitions to grow its portfolio by assembling high quality assets that will enhance earnings, reduce the portfolio cost ratio and ensure sectoral diversification. As REIT Manager, STANLIB Kenya Limited is committed to providing unitholders with consistent, long term real returns. 42

43 37.2 Basis for preparation The unaudited condensed consolidated financial statements of STANLIB Fahari I-REIT for the six months ended 30 June 2017 have been prepared in accordance with the requirements of International Financial Reporting Standard (IFRS), IAS 34: Interim Reporting, the Nairobi Securities Exchange and the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, IFRS and the Financial Pronouncements as issued by the Financial Reporting Standards Council require interim reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements required by IAS 34: Interim Financial Reporting. The interim consolidated financial statements have not been audited by STANLIB Fahari I-REIT's independent auditors. They have been prepared by the REIT Manager to give a true and fair view of the financial position, financial performance and cash flows of the REIT. The REIT Manager is not aware of any matters or circumstances arising subsequent to 30 June 2017 that require any additional disclosure or adjustment of the financial statements Financial results The REIT has delivered growth of 221% in earnings for the 6 month period ended 30 June 2017 compared to the restated comparative period ended 30 June This performance is attributable to, among other things: Income contribution from the two office and light industrial properties acquired at the end of June These properties contributed a combined KShs million to net income during the first half of Significant reduction in fund management costs; the comparative period was marked by oneoff set-up and listing costs some of which could not be capitalised to equity, such as promotional and marketing expenses, legal and tax advisory etc. Finance cost savings of KShs. 23 million compared to the comparative period. Healthy vacancy factor; vacancies continued to be under control at a total portfolio vacancy rate of 5% Restatement of the comparative period ended 30 June 2016 The REIT's accounting policies as set out in the audited annual financial statements for the 13 months ended 31 December 2016 have been consistently applied. The financial statements for the 7 43

44 month comparative period ended 30 June 2016 have been restated as outlined in the above financial statements. The restatement does not in any way affect the audited financial statements as at 31 December 2016, but instead provides alignment with the audited financial statements. The restatement was necessitated by additional information coming to light subsequent to the publishing of the prior period's interim financial statements but before the finalisation of the audited financial statements as at 31 December The significant restatements include: The consolidation of the two property companies acquired on 30 June 2016 in the restated accounts; previously, these were not consolidated at interim but were accounted for at cost. This had the impact of increasing the bargain purchase gain on acquiring property subsidiaries as recognised in profit or loss as well as increasing current assets and current liabilities that were previously not consolidated; The recognition of straight-line lease income in the restated comparative period; Derecognition of the post-acquisition current and deferred taxation liability of a subsidiary company in the restated interim accounts; Expensing of set-up and listing costs that could not be capitalised to equity; Expensing of fund level non-recoverable taxes (i.e. VAT); Capturing of property expenses for the first seed property only finalised post the interim reporting period; and Reclassification of items considered an integral part of investment property (i.e. lifts, escalators, lighting and generators) from property and equipment to investment property Prospects The REIT Manager is in negotiation with several vendors to acquire additional property in the near future. The acquisitions are expected to boost the quality of the property portfolio, diversify sectoral exposure, enhance future earnings and improve economies of scale Borrowings STANLIB Fahari I-REIT is currently ungeared. The planned acquisition of additional property may lead to gearing until such time that additional equity is raised Interim distribution The REIT Manager has not recommended the distribution of an interim dividend. A full distribution will be declared at the end of 2017 in line with the requirements of the REITs Regulations to 44

45 distribute a minimum of 80% of distributable earnings within four months after the end of the financial year Website information The REIT Manager's semi-annual report and unaudited condensed financial statements will be available on the STANLIB Fahari I-REIT website at from 31 July Regulatory changes affecting REITs in Kenya Recently, the REIT investment vehicle in Kenya has benefited significantly through the introduction of enabling and attractive tax arrangements. These include the exemption from VAT asset transfers and other transactions related to the transfer of assets into the REIT. Also, REIT related asset transfers are now exempt from stamp duty. These tax benefits present a significant milestone and will unlock growth opportunities for REITs in Kenya Change of directors of the REIT Manager The following directors of the REIT Manager resigned during the period under review: Director s name Role Appointment/resignation date Wanjiru Mwangi Non-executive chairman Resigned 14 June 2017 John Mackie* Non-executive Resigned 17 February

46 ANNEXURE A: REPORT OF THE TRUSTEE The Trustee s report is prepared in accordance with Regulation 101 and the Fifth Schedule of the REITs Regulations. 1. Confirmation of all matters relating to the title particulars of real estate properties and other assets of the fund We confirm the below titles particulars for the real estate properties: Nairobi Block 82/8759 (No.s F1,F2,F3,F4 & F5) Property known as Greenspan Mall under the SPV Greenspan Mall Limited; L.R. No 37/157 registered as Title No.I.R Property known as Highway House under the SPV Signature International Limited; and L.R. No. 209/4125 registered as Title No.I.R Property under the SPV Bay Holdings Limited. We confirm that the other assets of the fund are as detailed in the accounts. Details of other matters: Requirement under the Fifth Schedule a) Any appointment of a secondary disposition trustee together with details of purpose of the appointment and of any documents executed by the secondary disposition trustee b) Any matter arising during the period which has been, or should have been, notified to the Authority pursuant to the Regulations c) Any failures by the trustee to comply with the provisions of the scheme documents, the Act or the Regulations and action taken to remedy the failure d) Any failures by the REIT manager or any other person to comply with the provisions of the scheme documents, the Act or the Regulations and action taken to remedy the failure e) Any action taken by the trustee during the period to protect assets of the trust or the interests of REIT securities holders f) Meetings of REIT securities holders convened by the trustee, resolutions put and the outcome of voting. Trustee s report There was no appointment to this effect. The Trust Deed was amended to align with the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 on AGM date and notice of AGM meeting and filed with the Capital Markets Authority via letter dated 9 th March The Trustee notified the Authority of the appointment of KPMG as the auditors of the REIT via a letter dated 16 th March There were no failures to this effect. There were no failures. The assets were safe and there was no threat requiring the Trustee to take action. The Trustee convened the 1 st AGM of the securities holders on 13 th April 2017 at All Saints Cathedral, Nairobi. The Annual Report and the Audited Annual 46

47 Financial Statements for the thirteen-month period ended 31 December 2016 was tabled and adopted by securities holders. The first and final distribution for the thirteen month period ended 31 December 2016, of KShs. 90,486,150 (50 cents per unit in issue) as recommended by the REIT Manager and approved by the Trustee was tabled and adopted. A special resolution to amend the Trust Deed, which is the REIT s constitution, to allow the sending out of notices and reports electronically and specifically by displaying them on the REIT website so as to reduce costs by taking advantage of the growth of information technology and allow the use of other technologies that may emerge in due course to keep our costs low was tabled and adopted. 2. A summary of the meetings of REIT securities holders called or held during the period, a summary of the purpose of the meeting, resolutions put to the REIT securities holders and of attendees and votes cast. The Trustee convened the 1st AGM of the securities holders on 13th April 2017 at All Saints Cathedral, Nairobi. 3. Trustee s opinion on whether the REIT Manager has managed the scheme in accordance with the provisions of the scheme documents, the Act and REITs Regulations. In the Trustee s opinion the REIT Manager has managed the scheme in accordance with the provisions of the scheme documents, the Act and the REITs Regulations. 4. Comments by the Trustee on the REIT Manager s report, performance of the REIT Manager or of any other person or other material matter. No material matters have come to the attention of the Trustee requiring comment. Signed by The Compliance officer The REIT Trustee The Co-operative Bank of Kenya Limited Date: 26 July

48 ANNEXURE B: REIT MANAGER S COMPLIANCE REPORT In accordance with Regulation 101 and the Fifth Schedule to the REITs Regulations, the Compliance Officer notes the following for the seven-month period ended 30 June 2017: 1. The state of the REIT Manager s compliance program progressed well during the period under review. As part of its compliance program, various processes to reinforce its compliance frameworks, systems, policies and procedures continued to be undertaken during the period under review, partly in order to be in keeping with the nature of the evolving business environment within which the REIT operates. Furthermore, leverage from Group s matured frameworks remains a big part of the REIT Manager s advantage from a compliance program standpoint. 2. Furthermore, in its records, Compliance has the following information: a. Any matter arising during the period which has been, or should have been, notified to the Authority pursuant to the Regulations; i. None. b. Any failures by the REIT Manager, Trustee or any other party to comply with the provisions of the scheme documents, the Act or the Regulations; and i. None. c. Any action taken by the REIT Manager or which the Trustee was requested to take during the period to protect assets of the trust or the interests of REIT securities holders. i. None. Signed by: Njabulo Duma Compliance officer: STANLIB Kenya Limited Date: 26 July