Understanding the strengths, weaknesses of N20bn TSLREIT

Since February 1 when offer opened for the Top Services Limited (TSL) Real Estate Investment Trust (REIT), close market watchers have been looking at the prospects and/or otherwise of that investment instrument for the struggling retail market in Nigeria.

The TSLREIT which has First Ally Asset Management as fund manager is a close-ended equity REIT  sponsored by TSL, a specialty developer focused on retail malls. The REIT is a collective investment scheme regulated by the Securities and Exchange Commission of Nigeria and will be listed on the Nigerian Stock Exchange on April 17, 2017.

The properties for the REIT are under long leases/concessions with Wemabod, Odu’a Group, LSDPC and the Ondo State Government who receive a portion of annual rent (except LSDPC). Title for all the properties is held 100 percent by the sponsor who will hold 30 percent of the REIT allotment.

Offer on the REIT, which gives investors the opportunity to invest indirectly in a retail REIT, opened at N1,000 per share on 20 million units on February 1, 2017 and will close on March 10, 2017.

Analysts see bright prospects for the REIT and, according to investment forecasts by Ayo Ibaru, a lead analysts at Northcourt Real Estate, earnings yield will move progressively over a five-year period from 9.55 percent in 2017 to 17.65 percent in 2021, making it a compelling destination for savvy but patient investors with long term view of the market.

Part of the REIT’s strong points is its strategy to invest in core retail assets including malls already built, fully operational and generating sustainable income and will not invest in off-plan transactions thereby reducing construction and market risks.

“The REIT’s properties have a good tenant mix that is diversely located with more than 80 percent average occupancy. The corporate anchor tenants have a good track record and staying power, which suggests that cash flow is both predictable and sustainable, Ibaru notes, pointing out that inflationary effects on the REIT are reduced as rental incomes from the properties are linked to the dollar.

The REIT, he adds,  gives holders access to retail yields which have been historically good and are foreseeably so in the Nigerian context. 97.5 percent of the net income earned will be distributed and this has been forecast to start at 9.5 percent and peak at 17.65 percent within five years.

The Trustee (ARM Trustees) and Custodian (Stanbic IBTC Bank) are well known for proficiency in their trades and the Fund Manager (First Ally Asset Management), though fairly recently incorporated, is led by an experienced management team and board.

However, the REIT has its negatives derives from the country’s ailing economy. Ibaru reasons that if the economy continue to see depression, consumer spending is likely to continue to fall, adding that for having strong linkage to retail malls, profitability of the REIT will be adversely affected.

“While the underlying assets are located in South West Nigeria partly for its relative stability, there have been attempts at executing terrorist activity in the region. This remains a potential scare on large scale real estate in the country”, he notes.

Again, he notes that the financial forecasts don’t seem to consider major remodelling/repairs required over a 5-year horizon for the assets which may hinder the ability to attract prime rents in future, and where the repairs are made outside of the budget, the forecast earnings will reduce.