UPDC REITs Public Offer Frequently Asked Questions

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Wednesday, February 20, 2013
1. Why does UPDC want to do a REIT?
UPDC has decided to do a REIT primarily to provide an alternative investment class to discerning investors with appetite for real estate based optimal returns and also to extract liquidity from some of its existing portfolio of property assets without outright disposal of assets.

2. What will the proceeds be used for?
UPDC intends to use its proceeds from the transfer of assets in other real estate projects that add value to its current shareholders. While the REIT will invest in real estate related and liquid assets that will maximise returns to units holders

3. How will the REIT continue to make money?
The REIT aims to achieve long-term capital growth of its assets by investing at least 75% of its assets directly in quality real estate (land and/or properties) in strategic locations across Nigeria, which the Fund Manager has identified as offering excellent growth/appreciation potential.

A maximum of 25% of the REITs assets may be invested in real estate related assets with no more than 10% in liquid assets including investments in fixed income securities.

4. What happens if the tenants fail to renew their contracts?
All lease contracts are fairly long term. This in effect „locks‟ the clients in for reasonable periods of time. Existing clients are „grade A‟ corporate and institutional clients with undisputable ability to meet rental obligations as at when due and likely to renew such contracts prior to expiration.

5. How does this impact on the shareholders of UPDC knowing that a substantial amount of their assets is being transferred to a REIT
UPDC shareholders will own 40% of the REIT, a major stake that will continue to guarantee steady stream of cash flow resulting from 90% of yearly distributable REIT income. The extra cash proceeds from the offer will be further employed into other capital projects that will further generate value to the shareholders.

6. Can you explain what the DOT means?
DOT stands for Deed of Declaration of Trust. The UPDC REIT is the first of its kind in Nigeria to utilise a DOT structure. It is a novel cost effective means of transferring the properties to be vested in the REIT.

7. As investors, how are our interests protected?
The DOT protects investor‟s interests by vesting all beneficial interests, rights and power in the properties to the Joint Trustees. The DOT is irrevocable, bankruptcy remote and legal titles to the properties are kept with the Custodian on behalf of the Joint Trustees.

The Trustees are First Trustees Limited and UBA Trustees Limited, two of the largest and most experienced in the country with a strong track record in similar transactions.

8. How will the income be distributed?
A minimum of 90% of the net income earned will be distributed to Unit holders at the end of every financial year.

9. What will UPDC’s role be in the REIT
UPDC is acting as the sponsor and property manager to the REIT. The choice of UPDC as the property manager is borne out of a stellar record in property development and management from which the REIT can benefit enormously from. This also provides some comfort/reassurance to the existing client tenants of the properties as UPDC already has a good relationship with them.

10. Will UPDC also invest? If so what will be their stake?
Yes. UPDC will own a 40% stake in the REIT.

11. How will the REIT be governed? Who determines the board members?
The REIT will be governed by the Fund Manager and the Investment Committee. The Investment Committee shall set appropriate policies, review and assess processes and controls which would guide investment proposals by the Fund Manager and take decisions on cash allocation for investment purposes and also.

The Investment Committee will oversee the investment process and is made up of Nine (9) well-seasoned members with world class real estate expertise and wealth of experience spanning decades.

12. Who are the members of the investment committee?
The investment committee is made up of representatives from UPDC (2), FAML (2), the Joint Trustees (1 each) and three independent member with a strong track record in real estate.

13. Will UPDC unduly influence the committee’s decisions as they already own 40% of the REIT?
The following measures have been put in place to ensure Shareholders interests are well protected:

• The Investment Committee is fairly constituted with 9 seats; UPDCs representation is not in the majority. It holds only 2 of the 9 seats;

• The Investment Committee will be chaired by an Independent Member;

• UPDC will have restricted voting rights on decisions involving the initial assets or any other future transaction between UPDC and the REIT; and

• UPDC will be prohibited from partaking or voting on decisions that directly relate to UPDC‟s role as Property Manager as well as any contracts or arrangements which involve UPDC in any capacity.

14. What about tax?
It is expected that the REIT income to the investor will be deemed exempt from tax as enjoyed by the Bond markets. However this remains a grey area as the FG is yet to pass any resolution deeming REIT income as exempt from tax.

The REIT net income will be liable to company income tax however in the absence of any Government directives. We remain optimistic that the issue of double taxation will be resolved in the shortest possible timeframe.

15. How valuable are the vested properties in the REIT
The vested properties valued at N21Billion are a diversified portfolio of residential and commercial properties in choice locations in Lagos, Abuja and Aba including the prestigious Victoria Mall Plaza 1 & 2, Abebe Court, the UAC Office Complex in Abuja and the warehouse in Aba.

These properties have an aggregate net lettable area of approximately 23,754.1 square metres. Currently, the properties have a projected average occupancy rate of 99.5%, consistent with the historical tenancy rate of the properties. The vested properties have been valued byJoe Akhigbe and Associates and Jide Taiwo & Co, two independent and renowned estate valuers/surveyors in Nigeria

16. What happens in the event of an oversubscription?
In the event of an oversubscription for the units offered to the public, the Fund manager may, subject to the approval of SEC, allot additional units not exceeding 15% of the Offer size to investors. This will in turn reduce the portion of Units to be subscribed by the Sponsor.

17. Why should I invest when I can get better yields elsewhere?
Treasury Bill and FGN Bond yields may currently offer slightly better yields than the UPDC REIT. However, it is pertinent to note the downward trend of the aforementioned yields. As a result of the recent listing of the FGN Bonds in JP Morgan and Barclays bank emerging market bond index, more foreign cash is finding its way into these instruments.

An increase in foreign investments is inadvertently causing yields in these asset classes to drop. We foresee single digit yields by Q2 thus making the UPDC REIT a better investment in the short to medium term.

18. The dividend yield of the REIT is still low when compared to alternative asset classes such as bank securities/T bills.
The investment in the UPDC REIT should not be compared with bank securities and Treasury Bills as the REIT is an Equity REIT and the returns on investment in the UPDC REIT will be derived from rental income yield and capital appreciation. The dividend yield on the REIT can be compared with the dividend yield on equities listed on The Nigerian Stock Exchange (NSE). The average dividend yield on the equities listed on the NSE for the last 3 years is 6.09%, while the projected dividend yield for the REIT in the first year of operation is 7.80%.

The capital appreciation on the REIT would be from the sale of properties held by it. However, despite the sale of properties, the value of properties on the financial statement would be depreciated and as a result, we expect that the REIT would trade at a premium to the NAV, incorporating the capital appreciation.

19. “Other income’s” contribution to total income is higher than rental incomes in some years, which may be largely due to property sales as stated in the Assumptions. Does this mean that the REIT will be selling off most of its initial properties in its first few years of operations? How easy and how long does it take to purchase/build high quality rental yielding property in Nigeria, if the initial properties are sold?

The “Other income” will be from the following:
• Interest Income on liquid assets i.e. short term fixed income securities and real estate related securities; and

• Proceeds from the sale of properties held by the REIT. The REIT expects to sell Abebe Court (which is 20% of all the properties held by the REIT) within the first Two (2 ) years of the REIT. In addition to the sale of Abebe Court, The REIT also plans to sell some of the additional properties that would be purchased into the REIT within the first 5 years of the REITs operation. However, the newest and higher valued properties in the REIT (i.e. VMP 1 (38% of all the properties held by the REIT) and VMP 2 (34% of all the properties held by the REIT)), are expected to remain in the REIT.

In addition to the above, the investment policy of the Fund currently precludes it from developing/acquiring real estate assets, which will not begin to earn rental income within a year of purchase.

The fund manager has already identified likely replacement for the assets to be sold within the current development plan of the sponsor, (i.e. UPDC, which is the leading property development company in Nigeria). The investment process will be overseen by an investment committee made up of a team of portfolio managers and financial consultants with broad experience in real estate investments and finance in Nigeria.

20. If at least 75% of the REIT’s assets will be invested in real estate, how does the REIT intend to meet this obligation, if real estate properties are sold? Have other properties already been identified?
The fund manager has already identified likely replacement for the assets to be sold within the current development plan of the sponsor. However, the investment options will not be restricted to UPDC property portfolio. In determining the likely replacement assets, the Fund manager will ensure the properties have the under listed attributes:

Preferred Location. Location often has the single greatest impact on an asset‟s long-term income-generating potential and value. Assets located in the preferred submarkets in metropolitan areas and situated at preferred locations within such submarkets have the potential to achieve attractive total returns.

Premium Buildings. The REIT will seek to acquire assets that generally have design and physical attributes that are more attractive to a user than those of inferior properties. Such assets generally attract and retain a greater number of desirable tenants in the marketplace.

Quality Tenancy. The REIT will seek to acquire assets that typically attract good quality tenants. These tenants usually require larger spaces and longer term leases in order to accommodate their current and future space needs without undergoing disruptive and costly relocations. Such tenants may make significant tenant improvements to their spaces, and thus may be more likely to renew their leases prior to expiration.

21. Why does revenue rise significantly in 2017 compared to other years?
The revenue would rise significantly in 2017, as it is assumed that the REIT would sell the additional properties, it purchased in the first two years of its operations, in 2017.

22. What yields do other properties held by UPDC enjoy?
Currently, the other properties held by UPDC have a rental yield of between 5% and 8%.

23. Who are the tenants currently in each property? How long are the tenancy agreements valid for each tenant? When will they be renegotiated in line with market rates? What rental yield does each property earn?

See table below


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