Semi-Annual Report and Unaudited Condensed Financial Statements As at 30 June 2018

SEMI-ANNUAL REPORT AND UNAUDITED CONDENSED FINANCIAL STATEMENTS AS AT 30 JUNE 2018

TABLE OF CONTENTS 1. INTRODUCTION ...... 5

2. APPROVAL OF THE REIT MANAGER’S SEMI-ANNUAL REPORT AND UNAUDITED INTERIM FINANCIAL STATEMENTS ...... 5

3. REPORT OF THE TRUSTEE ...... 6

4. REIT MANAGER’S COMPLIANCE REPORT ...... 6

5. NATURE OF BUSINESS & DURATION OF THE SCHEME...... 6

6. SCHEME’S OBJECTIVES AS AT THE DATE OF THE REPORT AND ANY CHANGES SINCE LAST REPORT .. 6

7. DIRECTORS OF THE REIT MANAGER ...... 6

8. ACQUISITIONS ...... 7

9. CONSTRUCTION ARRANGEMENTS ...... 9

10. DETAILS OF ANY MATERIAL LITIGATION AND POTENTIAL IMPACT ...... 9

11. BORROWINGS ...... 9

12. BUSINESS REVIEW ...... 9

13. DISTRIBUTION ...... 10

14. GOING CONCERN ...... 11

15. AUDITORS ...... 11

16. ONGOING REQUIREMENT FOR REIT AUTHORIZATION ...... 11

17. REIT MANAGER’S OPERATIONAL REVIEW ...... 11

18. KEY PERFORMANCE INDICATORS – 30 JUNE 2018 ...... 13

18.1 Debtors Age Analysis...... 13

18.2 Lease Expiry Profile by GLA ...... 13

18.3 Portfolio Tenancy Mix ...... 14

18.4 Vacancies ...... 14

19. ASSETS UNDER MANAGEMENT ...... 15

20. CASH AND NEAR CASH ASSETS (KShs) ...... 15

21. NET ASSET VALUE ...... 16

21.1 Movement in Net Asset Value (KShs) ...... 16

21.2 Net Asset Value Prior and Post Distribution of earnings ...... 16 2

22. FUND RETURNS ...... 17

22.1 Property returns (annualised) ...... 17

22.2 Interest income return (annualised) (%) ...... 17

22.3 Total portfolio return ...... 17

22.4 Management Expense Ratio ...... 18

23. DETAILED ANALYSIS OF UNITHOLDINGS ...... 18

24. CLOSING PRICE HISTORY ...... 21

25. CONNECTED PARTY TRANSACTIONS ...... 21

26. INVESTMENTS IN ANY WHOLLY OWNED AND CONTROLLED COMPANY CARRYING OUT REAL ESTATE RELATED ACTIVITIES ...... 23

27. FEES PAID BY THE REIT AS PER REGULATIONS ...... 23

28. PROPERTIES DETAILED REPORT ...... 24

29. SUMMARY OF RECENT VALUATIONS ...... 27

30. PROPERTY MARKET UPDATE ...... 27

31. REGULATORY LIMITS ...... 31

32. PROSPECT STATEMENT & PIPELINE ...... 31

33. ASSET HOLDINGS VERSUS PRESCRIBED LIMITS...... 32

34. MEETINGS OF REIT SECURITIES HOLDERS ...... 35

35. UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS ...... 36

36. NOTES TO THE INTERIM FINANCIAL STATEMENTS ...... 40

37. COMMENTARY ON THE INTERIM FINANCIAL STATEMENTS ...... 40

ANNEXURE A: REPORT OF THE TRUSTEE ...... 43

ANNEXURE B: REIT MANAGER’S COMPLIANCE REPORT ...... 47

ANNEXURE C: DETAILS OF THE PARTIES - ORGANOGRAM ...... 49

ANNEXURE D: PROFILES OF THE DIRECTORS OF THE REIT MANAGER ...... 50

ANNEXURE E: REIT MANAGER STAFF AND SUPPORT PERSONNEL ...... 53

ANNEXURE F: DETAILS OF SERVICE PROVIDERS ...... 55

ANNEXURE G: INVESTMENT GUIDELINES ...... 57

ANNEXURE H: KEY RISKS ...... 60 3

ANNEXURE I: GLOSSARY...... 65

1. INTRODUCTION The REIT Manager submits its interim report together with the unaudited condensed financial statements for the six-month period ended 30 June 2018, 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 2018 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, 2013. These were approved by the Board of the REIT Manager and by the REIT Trustee on 26 July 2018 and are signed on their behalf by:

______John Sturgeon Patrick Mamathuba Acting Chairman, STANLIB Kenya Limited Director, STANLIB Kenya Limited

______Henry Karanja Trustee Compliance Officer The Co-operative Bank of Kenya Limited

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:

Director’s name Role Appointment/resignation date John Sturgeon* Acting Chairman Appointed 30 May 2018 Nkoregamba Mwebesa Managing Director Mike du Toit* Non-executive Director Jeff Hubbard* Non-executive Director Resigned 26 April 2018 Surinder Kapila Non-executive Director Appointed 30 May 2018 Patrick Mamathuba* Non-executive Director Peter Waiyaki Non-executive Director *South African

8. ACQUISITIONS a. Acquisitions during the period On 29 May 2018, the REIT successfully acquired all of the issued partnership interests in Starling Park Properties LLP for a purchase consideration of KShs. 850 million. Starling Park Properties LLP owns a Grade A newly constructed three storey office building situated on Gitanga Road, Lavington, Nairobi. The property was valued by an independent valuer in March 2018. Further details on this property are provided in section 28 of this report.

The acquisition has enhanced the sectoral and geographical diversification of the portfolio whilst ensuring compliance with regulatory requirements in relation to asset allocations.

The table below summarises the acquisition date fair value of the consideration transferred.

Application of purchase consideration KShs

Purchase consideration 850,037,500

Applied to settling pre-existing debt in the partnership (283,282,223)

566,755,277

Pre-existing debt Starling Park Properties LLP had long term borrowings as well as creditors balances which were settled using the proceeds from the subscription, by the REIT, for new partnership interests in Starling Park Properties. This was to ensure that in line with the REITs Regulations, none of the entity’s assets were encumbered when acquired by the REIT. Creditors balances relating to rental amounts received in advance as well as tenant security deposits were taken over by the REIT.

Acquisition related costs The REIT incurred the following acquisition related costs when acquiring Starling Park Properties LLP:

Acquisition related costs KShs

Legal due diligence and contracting costs 1,768,000

Structural engineering due diligence 1,160,000

Mechanical, electrical and plumbing due diligence 1,160,000

Tax due diligence 694,260

Valuation 626,400

Environmental, social and governance due diligence 464,000

Survey and town planning due diligence 162,400

Other administrative business acquisition costs 2,226,575

Total 8,261,635

The above business acquisition costs have all been expensed in line with the requirements of IFRS 3: Business Combinations and are reported inclusive of VAT.

Identifiable assets acquired and liabilities assumed The REIT incurred the following acquisition related costs when acquiring Starling Park Properties LLP:

Assets and liabilities acquired KShs

Investment property 850,000,000

Property and equipment 30,000

Trade and other receivables 437,427

Cash and cash equivalents 57,047,560

Trade and other payables 57,477,486

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 in this Report, 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 Construction work to install a three screen cinema (with 100 seats each) at Greenspan Mall commenced in July 2018 and is targeted for completion in December 2018. This development will strengthen the mall's entertainment offering and is expected to increase foot traffic, benefit existing and future tenants and increase rental income.

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 delivered a net profit of KShs 65.8 million for the six months ended 30 June 2018 against net profit of KShs 78.3 million in the comparative period. This translates to distributable earnings of 36 cents per unit (June 2017: 43 cents per unit). Key performance highlights are as follows:  Rental income has come slightly under pressure due to a temporary increase in vacancies coupled with some tenants bargaining for reduced rentals upon renewal of leases. The reduction in rental income was partly offset by one month contribution to rental income by the newly acquired property. Implementation of the leasing strategy as well as completion of the cinema project at end of 2018 are expected to increase rental income going forward.  Interest income for the period under review decreased compared to the comparative period due to the utilisation of surplus cash in acquiring the new property; this will lead to increased rental income going forward. In addition, for liquidity reasons, closer to the completion of the acquisition cash had to be invested in call deposits which yield lower interest rates than longer dated cash instruments.

 Property expenses have decreased compared to the comparative period with the property expense ratio under control at 28% compared to 30% in the prior period. Part of the cost savings are due to timing differences.  Fund operating expenses are slightly higher than the prior period due to KShs. 8.3 million one- off business acquisition costs incurred in acquiring the new property.

13. DISTRIBUTION The distribution of KShs. 135,729,225 as disclosed in the 2017 annual report (2016: KShs 90,486,150) was paid at the end of April 2018. 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 2018. The table below shows how the December 2017 and 2016 distribution was derived:

Details Dec 2017 Dec 2016 Distributable earnings (KShs) 149,113,640 98,000,288 Distribution (KShs) 135,729,225 90,486,150 Distribution as a % of distributable earnings 91% 92% Weighted average units in issue (number) 180,972,300 180,972,300 Distributable earnings per unit (KShs) 0.82 0.54 Distribution per unit (KShs) 0.75 0.50

The declaration of the above distribution occurred after the end of the annual financial period resulting in a non-adjusting event at the end of that period and full recognition in the subsequent financial year.

The source of the above distribution was as follows:

Sources of distribution Dec 2017 Dec 2016 Net rental/dividend income from wholly owned 184,894,243 190,587,729 property companies Interest income 99,852,345 111,209,231 284,746,588 301,796,960 LESS: Fund operating expenses (135,632,948) (180,422,344) Interest paid - (23,374,328) Total potential distributable income 149,113,640 98,000,288 Distribution 135,729,225 90,486,150

Distribution as a % of distributable income 91% 92% Distribution per unit (KShs) 0.75 0.50

14. 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.

15. AUDITORS The condensed consolidated financial statements of the REIT for the interim period ended 30 June 2018 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;

 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 are being complied with.

17. REIT MANAGER’S OPERATIONAL REVIEW Over the past 6 months ended 30 June 2018, the REIT Manager’s primary focus was on concluding the acquisition of an additional property in line with its strategy to grow the property portfolio and to comply with regulatory requirements relating to exposure in investment property. Having fulfilled all the conditions precedent (including CMA and unitholder approval as well as other regulatory approvals),

the transaction was finally completed on 29 May 2018 and the property has since been on-boarded to the existing portfolio.

Drafting of the REIT subsidiary tax regulations with the assistance of the REIT Tax Advisor was completed during the period under review. The draft regulations are aimed at regularising the exemption of REIT controlled entities or subsidiaries from income tax. These have been reviewed by the KRA and the CMA and await the final approval process which will culminate with the subsidiary tax legislation being enacted.

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 near- cash instruments, in line with a dedicated Investment Policy Statement ("IPS"), to ensure optimal returns with minimal exposure to financial-sector risk);

 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 2018

18.1 Debtors Age Analysis

10 8 KShs Millions

5 2 2 2 ------0.4 - - 0 Current 30 Days 60 Days 90 Days 120 + Days

GML BHL SIL

Tenant debtors for the portfolio stood at KShs. 43 million as at 30 June 2018 before taking into account the provision for doubtful debts of KShs. 2.7 million. Of the total amount outstanding, KShs. 4.9 million cash was received after 30 June 2018 and over KShs.12.4 million received through post-dated cheques. The REIT Manager continues (through the property manager) to intensify arrears management processes with the aim of reducing tenant arrears to acceptable levels.

18.2 Lease Expiry Profile by GLA

60%

50% 54%

40%

30% GLA GLA %

20% 20%

10% 10% 5% 2% 6% 2% 0% Vacant Jun-19 Jun-20 Jun-21 Jun-22 Jun-23 Jun-24

The lease expiry profile is looking stronger with over 70% of the leases expiring from five years from the date of this report. This is attributable to the new property’s underlying tenant lease only expiring in 2023 as well as recent lease renewals on the retail property only expiring in six years’ time.

18.3 Portfolio Tenancy Mix

Apparel, 3% Banks, 5% Education, 3% Food & Beverage, Office/light 3% industrial, 14% Vacant, 10%

Office, 18% Miscellaneous, 5%

Supermarket, 32% Healthcare, 5%

Telecoms, 2%

The portfolio has a strong and well diversified tenant base to cushion it at times of sectoral weaknesses. The recent property acquisition has enhanced sectoral diversification by adding to the exposure to the office sector. The imminent cinema installation at Greenspan Mall will strengthen the mall’s entertainment offering once completed.

18.4 Vacancies

Property GLA Vacancy GLA Vacancy % Greenspan Mall 155,477 16,020 10.30 Starling Park Properties 41,312 - - Bay Holdings 33,265 - - Signature International 7,638 7,638 100.00 Total / weighted average 237,692 23,658 9.95

The lease in relation to the Signature International property expired on 31 March 2018 and the tenant did not renew. Extensive space marketing is being conducted to ensure the property is re-let within reasonable time.

19. ASSETS UNDER MANAGEMENT

4,000

3,500 343

3,000 1,102 1,153

2,500 Cash and cash investments Investment property 2,000

KShs KShs Millions 3,313 1,500 2,427 2,435 1,000

500

0 Jun 2016 Jun 2017 Jun 2018

Total assets under management have continued to hold steady since inception. The recent acquisition of investment property has increased investment property by KShs. 850 million as at 30 June 2018 and reduced cash investments.

20. CASH AND NEAR CASH ASSETS (KShs)

Jun 2016 Jun 2017 Jun 2018 Cash and cash equivalents 363,138,822 393,999,343 342,567,776 Investment securities 738,960,449 758,598,400 - Total 1,102,099,271 1,152,597,743 342,567,776

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.

Breakdown of cash and near cash assets 1,400

1,200

1,000 Government securities 800 Fixed deposits 600 KShs KShs Millions Call deposits 400 Cash in bank 200 0 Jun 2016 Jun 2017 Jun 2018

Investment in longer dated instruments decreased significantly towards the end of the first half of 2018 in preparation for the settlement of the property acquisition’s purchase consideration. Investment in fixed deposits and treasury bills can be expected in the future.

21. NET ASSET VALUE

21.1 Movement in Net Asset Value (KShs)

Jun 2016 Jun 2017 Jun 2018 Total asset value 3,677,967,790 3,694,459,035 3,723,493,870 Net asset value 3,515,729,819 3,573,328,950 3,596,234,244 Number of units in issue 180,972,300 180,972,300 180,972,300 Net asset value per unit 19.43 19.75 19.87

21.2 Net Asset Value Prior and Post Distribution of earnings

(KShs) At 31.12.2017 At 31.12.2016 Net asset value prior to distribution 3,666,181,292 3,585,541,033 Net asset value post distribution 3,530,452,067 3,495,054,883 Net asset value per unit prior to distribution 20.26 19.81 Net asset value per unit post distribution 19.51 19.31 Yield based on the value of the unit as at 31 December 7.00% 4.29%

22. FUND RETURNS

22.1 Property returns (annualised)

8.5%

0.0% 8.0%

0.0% 7.5% Capital return Income return 0.0% 8.0%

7.0% 7.5% 7.1%

6.5% Jun 2016 Jun 2017 Jun 2018

Property is valued once at the end of the financial year by an independent valuer. Therefore, no capital return is realised mid-year.

22.2 Interest income return (annualised) (%)

7 months 6 months 6 months Jun 2016 Jun 2017 Jun 2018 Fixed and call deposit interest return 9.1 8.4 8.4 Treasury bills income return 9.3 10.0 - Weighted average interest return 9.1 8.7 8.4

22.3 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% since inception, however from 29 May 2018 (date of acquisition of the new property) this split moved to 91% investment property, 9% cash instruments.

Total return 10.0% 9.0% 8.2% 7.8% 7.8% 8.0% 7.0% 6.0% 5.0% Total return 4.0% 3.0% 2.0% 1.0% 0.0% Jun 2016 Jun 2017 Jun 2018

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.

7 months 6 months 6 months Jun 2016 Jun 2017 Jun 2018 MER (%) 3.3 2.0 2.1

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 KE5000003656, 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.

23.1 Closed-ended 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. The REIT Scheme may undertake secondary offers as and when the need arises.

23.2 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 expiring end of 2018.

On this basis, the free float, as determined, is 66.9%.

23.3 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 2018. The total number of authorised units is 625,000,000. These have not changed since the last audited financial statements.

23.4 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.

23.5 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 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.

23.6 Breakdown of REIT Securities Holdings by Class The distribution of the REIT’s unitholders as at 30 June 2018 was as follows: Unit Unit holders RANGE Units Units % holders % Less than 100 183 - 23 0.4 100-1000 2,001,785 1.1 2,277 40.8 1001-10000 10,737,149 5.9 2,790 50.0 10001-100000 12,037,532 6.7 421 7.5 100001-less than 5% of no. of units in issue 65,234,651 36.0 65 1.2 Holdings above 5% of no. of units in issue 90,961,000 50.3 4 0.1 TOTAL 180,972,300 100.0 5,580 100.0

23.7 REIT Unit Holdings by Country

KENYA UGANDA SOUTH AFRICA OTHER

23.8 Top Investor Holdings Top STANLIB Fahari I-REIT Unitholders as at 30 June 2018 Units % Holding

STANDARD CHARTERED NOMINEES NON RESD A/C KE11752 33,900,000 18.73 STANDARD CHARTERED NOMINEES RESD A/C KE11401 25,000,000 13.81 STANLIB KENYA LIMITED 18,384,300 10.16 KENYA COMMERCIAL BANK NOMINEES LIMITED A/C 926A 13,676,700 7.56 LIBERTY GROUP LTD 7,700,700 4.26 STANDARD CHARTERED NOMINEES RESD A/C KE11443 7,378,500 4.08 ONE GLOBE HOLDINGS LIMITED 5,200,000 2.87 STANDARD CHARTERED NOMINEES NON RESD. A/C 9424 5,147,000 2.84 KENYA COMMERCIAL BANK NOMINEES LIMITED A/C 1018A 3,241,900 1.79 STANDARD CHARTERED NOMINEES A/C 9265 3,211,100 1.77 TOTAL 122,840,200 67.87

24. CLOSING PRICE HISTORY

25.00 6000,000

5000,000 20.00

4000,000 15.00 3000,000 10.00 2000,000

5.00 1000,000

- - Volume

Closing Price

The REIT’s closing price at the various reporting periods is outlined below:

30 Jun 2016 30 Jun 2017 30 Jun 2018 Closing price per unit (KShs) 21.75 12.55 11.30

25. 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 Axis Real Estate 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

(b) Connected party transactions – fees paid

Transaction Jun 2018 Jun 2017 Asset management fee paid to STANLIB Kenya 41,021,463 43,501,267 Custodial fees paid to Co-op Bank 11,525,283 11,472,717 Other admin fees paid to Co-op Bank 890,415 - Valuation fees 626,400 - Legal advisory fees 1,768,000 - Total 55,831,561 54,973,984

Bank account name Jun 2018 Jun 2017 Investment account – fixed deposits - 268,300,000 Investment account – call deposits 276,000,000 29,400,000 Investment account 507,510 6,106,086 Expense account - 1,298,380 Rent collection account – Greenspan Mall 1,424,027 2,021,113 Service charge account – Greenspan Mall 6,442,666 2,220,114 Rent collection account – Bay Holdings 1,246,200 1,500,000 Rent collection account – Signature 19,174 417,938 Total 285,639,577 311,263,631

(d) Units held by connected parties to the REIT

Promoter Holdings as at 30 June 2018 Units Holding %

STANLIB Kenya Limited 18,384,300 10.16

Liberty Group Limited 7,700,700 4.26

Total 26,085,000 14.42

(e) Units held by the directors of connected parties to the REIT

Director’s name Jun 2016 Jun 2017 Jun 2018 Patrick Mamathuba - 257,000 257,000 Mike du Toit 20,000 91,900 91,900 Peter Waiyaki* 25,000 25,000 25,000 Total units 45,000 373,900 373,900 *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.

 The asset known as 67 Gitanga Place is held within the wholly-owned limited liability partnership Starling Park Properties LLP. The above entities are held in trust by The Co-operative Bank of Kenya Limited in its capacity as REIT Trustee. In the case of Starling Park Properties LLP, Greenspan Mall Limited holds a nominal 1% in trust (on behalf of STANLIB Fahari I-REIT) in order to fulfil the requirement to have at least two partners in the partnership.

27. FEES PAID BY THE REIT AS PER REGULATIONS

Jun 2018 Jun 2017 STANLIB Kenya – asset management 41,021,463 43,501,267 Co-op Bank – custodial 11,525,283 11,472,717 Co-op Bank – other administrative fees paid 890,415 - Cushman & Wakefield Excellerate – property management 5,982,039 5,339,397 Axis Real Estate - valuation 626,400 - CED Engineers – structural engineering* 1,160,000 - LDK Engineers – MEPS engineering* 1,160,000 - Jooyato Surveys – survey and town planning* 162,400 - Total 62,528,000 60,313,381

*The above fees (excluding property management fees) are reported inclusive of Value Added Tax.

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 2018, the property has an unexpired leasehold term of 88 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 48% 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.

Greenspan Mall Tenancy Mix

Healthcare, 8% Apparel, 4% Banks, 7% Telecoms, 2% Education, 4%

Food & Beverage, 5%

Vacant, 10% Supermarket, 48%

Others, 13%

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 0.1089 of an acre with a land-lease term of 99 years commencing 1 July 1956, and registered as Title Number I.R 22130. As at 30 June 2018, the property has an unexpired leasehold term of 38 years.

The property was transferred into the portfolio at a net acquisition price of KShs. 108,717,670 on 30 June 2016.

The GLA is approximately 710 m², with ample covered parking bays.

This three storey office building became vacant from 1 April 2018. A suitable replacement tenant is being sought.

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 0.665 of an acre for a term of 99 years from 1 January 1949 and registered as Title Number I.R 93022. The property has an unexpired leasehold term of 30.5 years as at 30 June 2018.

The acquisition of Bay Holdings Limited was concluded 30 June 2016 for an amount of KShs. 216,122,547.

The GLA is 2,566 m2 with a covered area for parking.

The building is currently fully let to three tenants; Imperial bank, Packard Limited and Architecture Supply Limited.

28.4 STARLING PARK PROPERTIES LLP

The underlying property is a three storey office building known as 67 Gitanga Place and is located on Gitanga Road in Lavington, Nairobi.

L.R. No. 3734/1426 (original L.R. No. 3734/917) measuring 0.2830 hectares for a term of 99 years from 1 April 2016 and registered as Title Number I.R 191014. The property has an unexpired leasehold term of 97 years as at 30 June 2018.

The acquisition of Starling Park Properties LLP was concluded on 29 May 2018 for an amount of KShs. 850,037,500.

The property has a GLA of 41,312 SqFt or 3,838 m2. The property is single-tenanted.

29. SUMMARY OF RECENT VALUATIONS The REIT did not revalue the real estate portfolio during the interim reporting period ended 30 June 2018.

Copies of the valuation reports as at 31 December 2017 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

Despite the significant headwinds witnessed in the year 2017 resulting in the weak growth, the real estate sector fundamentals remain relatively strong, with the first half of the year 2018 presenting more optimism following the cooling of political temperatures pointing to a return to normalcy. The construction sector however started on slow progress as witnessed by the decrease in cement production, consumption and value of approved building plans. This slowdown may be an indicator of a construction sector that is still recovering after the prolonged electioneering period, while the current oversupply in the market and low transactions have made developers hesitate to commence new projects.

30.1 Retail

The sector continued to experience stagnation attributed to continued oversupply in certain neighbourhoods, a slowdown in the economy coupled by the underperformance of some retailers such as Nakumatt and Uchumi which closed several branches in year 2017. As a result of these, the absorption levels and stabilization in malls is taking longer approximately 3 to 4 years from construction completion forcing investors to look at longer horizons. Retail yields range between 8% to 10% with vacancies trending up to about 10% for the older malls. Tenant retention continues to be a major challenge with most landlords opting to grant flexible lease terms.

The void left by Nakumatt and Uchumi has been capitalized on by various local and international supermarket chains i.e. In January; Naivas took over retail space at Development House on Moi Avenue previously occupied by Nakumatt, as well as at Capital Centre in April, which was previously occupied by Uchumi. This increased the retailer’s total outlets across the country to 45.

1 Source: Knight Frank Kenya Market Update H1 2018; KPDA Report on Affordable Housing; Broll Kenya, Kenya National Bureau of Statistics (KNBS) Report 2018 27

French retail chain Carrefour opened at Sarit Centre in April, taking over space vacated by Uchumi and its third branch in Thika Road Mall (TRM) formerly occupied by Nakumatt. Carrefour will operate in the space temporarily and shift operations to the new wing of Sarit Centre upon completion by the end of the year. It will also open its sixth store at Galleria Shopping Mall in July 2018 taking over space previously occupied by Nakumatt.

South Africa-based retailer Shoprite is negotiating with various landlords and has recently taken up anchor tenant space left by Nakumatt at Westgate and Garden City Mall. Both branches are expected to open within the second half of 2018.

Botswana-based retailer Choppies is also currently in talks with the owners of Nanyuki Mall to take over the anchor tenant space vacated by Nakumatt in January.

Game announced it will open the second outlet at The Waterfront Karen, replacing Nakumatt which was initially set to be the mall’s anchor tenant. Major international brands entering the market include Foschini, Markham, Mugg & Bean – SA; Jennifer and Celio – from France; and Miniso from Japan.

According to Knight Frank H1 2018 Report, occupancy levels remained high for established malls at 90% and between 60-75% for new retail centres. The high occupancy levels indicate that there is still good demand for retail space in the right locations. Footfall in major shopping malls increased marginally in the first half of 2018, as a result of the unprecedented anchor tenant expansions and replacements.

30.2 Office

According to Knight Frank H1 2018 report, absorption of Grade A and B office space increased by 12% in the first half of 2018 compared to the uptake in the second half of 2017.Prime asking rents reduced marginally in the period to US$1.3/SqFt/month.

Developer confidence remains strong with the market anticipating 234,410 SqM of Space by 2020, representing 30.4% increase in 3 years. Higher vacancies were recorded of about 25% but the second half of 2018 is expected to record an increase in prime asking rents mainly due to economic recovery and the take up of existing space specifically in prime buildings in the right locations.

Fewer completions were recorded in the first half of 2018 in comparison to the second half of 2017, as developers pushed back dates due to delays occasioned by the political climate last year. Completions in the review period in the country’s capital included Sanlam Towers (14,864sqm) and Galleria Office Park (7,432sqm). Major developments in the pipeline 2018 will be over 100,000 SqM including Kings Prism

Tower (25,800SqM), Garden City Business Park Phase one (10,000SqM) - 60% of office space already pre-let to East Africa Breweries Limited (EABL) and AVIC Towers (63,000 SqM).

30.3 Hotel

The sector continues to flourish with the first half of 2018 witnessing a number of international hospitality chains expanding into the Kenyan Market either through new openings or strategic take overs as follows:

New Opening 1st Half 2018:  City Lodge, owned by City Lodge Group, at Two Rivers  Mövenpick Hotel & Residences by Mövenpick Hotels & Resorts in Westlands;  Hilton Worldwide’s Hilton Garden Inn near the Jomo Kenyatta International Airport (JKIA).  Trademark Hotel in the new Village Market extension.

Strategic Global Expansions – Take overs:  Hilton Worldwide took over Nairobi’s Amber Hotel renamed it Double Tree by Hilton  Meridian Hotel in the CBD now operates as Best Western Plus Meridian.  Rwanda based City Blue Hotels took over Best Western Plus Creekside Hotel rebranded to City Blue Creekside Hotel & Suites, Mombasa.  Intercontinental Hotels Group (IHG) took over the management of Sarovar’s Lazizi Premiere Hotel, a JKIA-based hotel which opened in 2017, and rebranded it to Crowne Plaza Nairobi Airport Hotel in May. This increased the number of hotels under the Crowne Plaza brand in Kenya to two.

Major hotel developments in the pipeline:  The Alba Hotel in Lavington and Azure Best Western at Signature Mall, both part of the Best Western’s Collection;  Radisson Arboretum by Carlson Rezidor;  JW Marriott hotel at the Avic International complex

In June, national carrier Kenya Airways (KQ) began direct flights to Cape Town and Mauritius, where it already had pre-existing code sharing agreements with Air Mauritius. KQ is also set to commence daily direct flights between Nairobi and New York in October, which is expected to further boost trade with the United States of America (USA), particularly since it’s one of Kenya’s top source markets for visitors.

30.4 Residential

Report by Knight Frank H1 2018 indicates that prime residential prices improved by 0.4% in the first half of 2018 compared to a 1.8% decline in the second half of 2017. Prime residential rents also improved marginally in the period by 0.33%, having remained unchanged in the second half of 2017. This positive trend expected to continue on the backdrop of improved political climate and thawing of the investor’s wait-and-see attitude.

The Government has unveiled an ambitious project to deliver 500,000 affordable housing units over the next five years to curb the current 2 million housing units’ deficit. This is part of President Uhuru Kenyatta’s ‘Big Four’ agenda. Which proposes that the Government will partner with 35 private firms to construct a million housing units by 2023 at a cost of Kshs. 2.6 trillion (US$ 2 billion). A pilot scheme was launched in Mavoko, Machakos County, in February, while the other projects will be spread across various locations such as Kitengela and Athi River. The mechanism around housing finance, land registration and enforcement and supply chain management are still work in progress.

30.5 Industrial

Demand for decentralised high quality industrial space remained strong with more investors taking interest in this niche market. According to Knight Frank Kenya, in February 2018, Africa Logistics Properties (ALP) signed a long term lease with Copia, an e-commerce retailer for 4,500sqm of warehousing space at ALP North. ALP had pre-let 63% of its 50,000 SqM logistics and distribution complex with phase one slotted for completion in H2 2018. ALP is also constructing a second project; 100,000-SqM dubbed ALP West along Nairobi – Nakuru Highway due for completion in 2019.

In September 2017, South African logistics and warehouse property specialist Improvon Group through a joint venture with Actis concluded an agreement to develop a 104-acre Northlands Commercial Park to tap into the growing demand for long-term logistical and warehousing needs within Sub-Saharan Africa. The triple A logistics park will provide lettable space of 2,000sqm-50,000sqm and additional land sale options to tenants.

31. REGULATORY LIMITS

REGULATION REGULATORY LIMIT ACTUAL AS AT 30 COMPLIED (√) / NOT JUNE 2018 COMPLIED (X)/ N/A Minimum number of 7 5,580 √ 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 92% real estate** √ Minimum income 70% of rental income 76% √ generation Maximum gearing 35% of total asset 0% √ value Minimum distributions 80% 91% √

*Regulation 74, being the minimum retained investments by the promoter and lock-in period, does not apply.

**measured as a % of NAV.

32. PROSPECT STATEMENT & PIPELINE The REIT Manager continues to endeavour to build a strong pipeline of suitable properties in order to grow the portfolio. Its focus is also on improving the yield of the existing portfolio in order to enhance future earnings.

33. ASSET HOLDINGS VERSUS PRESCRIBED LIMITS The table below highlights the asset holdings versus the subscribed limits in the investment mandate.

All indirect eligible real estate: a) Freehold held through investee N/A N/A N/A N/A N/A N/A companies or investee trusts b) Leasehold held through investee None At least 25 At least 25 Refer to Refer to 31.12.2017 and companies or investee trusts years at years at Section 28 Section 28 30.06.2018 inception inception

I-REIT Eligible Investments (Assets) Regulation and Regulation and Limit in % as at the Highest % level Date of most Regulation 65 maximum limit minimum limit scheme reporting date during recent % % document reporting valuation/s % period and ref. to report detailing valuation Income producing real estate Regulation N/A 75% None 92% 92% 31.12.2017 and 65 (6) Minimum of 75% of NAV within 2 30.06.2018 years of authorisation Land and cost of construction Regulation None None None None None None 70 Maximum 15% TAV Cash, Deposits, bonds and money market 5% 0% 5% 0% 0% 30.06.2018 instruments Regulation 65 (11) Maximum 5% to single issuer, institution, or members of group Wholly owned and controlled company N/A N/A N/A N/A N/A N/A which conducts real estate activities Regulation 65 (14) Maximum 10% TAV with REIT securities holder consent

Income producing assets including listed 10% 0% 10% 0% 0% None 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

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

34. MEETINGS OF REIT SECURITIES HOLDERS The second Annual General Meeting (“AGM”) for REIT securities holders was held on 20 April 2018. The meeting was quorate with 33.86% 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 year ended 31 December 2017;  note the first and final distribution for the year ended 31 December 2017, of KShs. 135,729,225 (75 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  To approve the acquisition by the REIT of 100% interest in STARLING PARK PROPERTIES LLP, which owns Land Reference Number 3734/1426 (Original Number 3734/917), Nairobi, on which is developed an office block measuring 41,312 square feet, subject to all statutory approvals.

The above resolutions were passed by the general meeting.

Other than the above AGM, no other meetings of the REIT unitholders took place during the period under review.

35. UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS Consolidated statement of profit or loss and other comprehensive income

Unaudited 6 Unaudited 6 Audited 12 months months months 30 June 30 June 31 December 2018 2017 2017 KShs KShs KShs

Revenue 132,421,963 135,294,546 270,689,177 Rental and related income 135,133,830 137,969,452 279,433,136 Straight-lining of lease income (2,711,867) (2,674,906) (8,743,959)

Other income 42,210,875 52,850,748 101,606,067 Interest income 41,862,494 51,097,027 99,852,345 Sundry income 348,381 1,753,721 1,753,722

Operating expenses (111,562,529) (112,546,133) (231,925,563) Property expenses (38,068,697) (42,066,715) (96,292,615) Fund operating expenses (73,493,832) (70,479,418) (135,632,948)

Increase in fair value of investment property 2,711,867 2,674,906 30,756,728 Fair value adjustment to investment - - 22,012,769

property Straight-lining of lease income 2,711,867 2,674,906 8,743,959

Net profit for the period 65,782,176 78,274,067 171,126,409

Other comprehensive income - - - Total comprehensive income attributable to unitholders for the period 65,782,176 78,274,067 171,126,409

Basic earnings per unit (KShs) 0.36 0.43 0.95

Headline earnings per unit (KShs) 0.35 0.42 0.78

Supplementary information: Distributable earnings per unit (KShs) 0.36 0.43 0.82

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (continued)

Consolidated statement of financial position

Unaudited 6 Unaudited 6 Audited 12 months months months 30 June 30 June 31 December 2018 2017 2017 KShs KShs KShs ASSETS

Non-current assets Investment property 3,313,256,395 2,435,000,000 2,460,000,000 Fair value of investment property for 3,210,236,207 2,348,670,856 2,379,739,909 accounting purposes

Straight-line lease accrual 103,020,188 86,329,144 80,260,091

Property and equipment 3,910,058 4,434,352 4,138,729

3,317,166,453 2,439,434,352 2,464,138,729 Current assets Investment securities - 758,598,400 529,000,000 Trade and other receivables 63,759,641 102,426,940 80,298,716 Cash and cash equivalents 342,567,776 393,999,343 688,190,218

406,327,417 1,255,024,683 1,297,488,934

Total assets 3,723,493,870 3,694,459,035 3,761,627,663

EQUITY AND LIABILITIES

Capital and reserves Trust capital 3,479,540,745 3,479,540,745 3,479,540,745 Revaluation reserve 30,012,769 8,000,000 30,012,769 Retained earnings 86,680,730 85,788,205 156,627,778

3,596,234,244 3,573,328,950 3,666,181,292 Current liabilities Trade and other payables 127,259,626 116,095,184 95,446,371 Tax payable - 5,034,901 -

127,259,626 121,130,085 95,446,371

Total equity and liabilities 3,723,493,870 3,694,459,035 3,761,627,663

Net asset value per unit 19.87 19.75 20.26

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (continued)

Consolidated statement of changes in equity

Trust Revaluation Retained capital reserve earnings Total KShs KShs KShs KShs

Audited balance at 31 December 2016 3,479,540,745 8,000,000 98,000,288 3,585,541,033

Net profit for the period - - 78,274,067 78,274,067

Transactions with owners of equity Distribution to unitholders - - (90,486,150) (90,486,150)

Unaudited balance 30 June 2017 3,479,540,745 8,000,000 85,788,205 3,573,328,950

Net profit for the period - - 92,852,342 92,852,342

Transfer to non-distributable reserve - 22,012,769 (22,012,769) -

Audited balance 31 December 2017 3,479,540,745 30,012,769 156,627,778 3,666,181,292

Net profit for the period - - 65,782,176 65,782,176

Transactions with owners of equity Distribution to unitholders - - (135,729,225) (135,729,225)

Unaudited balance at 30 June 2018 3,479,540,745 30,012,769 86,680,730 3,596,234,244

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS (continued)

Consolidated statement of cash flows

Unaudited 6 Unaudited 6 Audited 12 months months months 30 June 30 June 31 December 2018 2017 2017 KShs KShs Cash flows from operating activities Cash flows from operating activities 57,353,118 69,861,509 142,476,116 Tax paid by subsidiaries - - (5,034,901) Distribution paid (135,729,225) (90,486,150) (90,486,150)

Net cash (outflow)/ inflow from operating activities (78,376,107) (20,624,641) 46,955,065

Cash flows from investing activities Acquisition of Starling Park Properties LLP (850,037,500) - - Decrease/(increase) in investment securities 529,000,000 (25,562,666) 204,035,734 Additions to investment property (3,256,395) - (2,987,231)

Net cash (outflow)/inflow from operating activities (324,293,895) (25,562,666) 201,048,503

Net movement in cash and cash equivalents (402,670,002) (46,187,307) 248,003,568 Cash and cash equivalents at beginning of period 688,190,218 440,186,650 440,186,650 Cash and cash equivalents at acquisition of 57,047,560 - - subsidiaries

Cash and cash equivalents at end of period 342,567,776 393,999,343 688,190,218

36. NOTES TO THE INTERIM FINANCIAL STATEMENTS Unaudited 6 Unaudited 6 Audited 12 months 30 months 30 June months 31 June 2018 2017 December 2017 Basic and headline earnings Basic earnings – comprehensive income 65,782,176 78,274,067 171,126,409 attributable to unitholders for the period Adjusted for: Fair value adjustment to investment property (2,711,867) (2,674,906) (30,756,728) (including straight-line lease accrual movement) Headline earnings 63,070,310 75,599,161 140,369,681 Adjusted for: Straight-line lease accrual movement 2,711,867 2,674,906 8,743,959 Distributable earnings 65,782,176 78,274,067 149,113,640

Distributable earnings per unit (KShs) 0.36 0.43 0.82

Basic earnings per unit (KShs) 0.36 0.43 0.95

Headline earnings per unit (KShs) 0.35 0.42 0.78

Weighted average units in issue (units) 180,972,300 180,972,300 180,972,300

Units in issue at the end of the period (units) 180,972,300 180,972,300 180,972,300

37. 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 four properties (a shopping centre, an office building and two semi office/light industrial buildings) valued at KShs 3.3 billion, all held through special purpose vehicles.

37.2 Basis for preparation The unaudited condensed consolidated financial statements of STANLIB Fahari I-REIT for the six months ended 30 June 2018 have been prepared in accordance with the requirements of International Financial Reporting Standard (IFRS), IAS 34: Interim Reporting, the Nairobi Securities Exchange and the requirements of the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013. 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 2018 that require any additional disclosure or adjustment of the financial statements.

37.3 Accounting policies The REIT has adopted IFRS 9: Financial Instruments and IFRS 15: Revenue from Contracts with Customers, effective 1 January 2018. The adoption of IFRS 9 has had an impact in the classification of the REIT's financial instruments. The adoption of both standards has not had a material impact on the amounts and disclosures of the financial statements of the REIT.

37.4 Financial results STANLIB Fahari I-REIT delivered a net profit of KShs 65.8 million for the six months ended 30 June 2018 against net profit of KShs 78.3 million in the comparative period. This translates to distributable earnings of 36 cents per unit (June 2017: 43 cents). Key performance highlights are as follows:  Rental income has come slightly under pressure due to a temporary increase in vacancies coupled with some tenants bargaining for reduced rentals upon renewal of leases. The reduction in rental income was partly offset by one month contribution to rental income by the newly acquired property. Implementation of the leasing strategy as well as completion of the cinema project at end of 2018 are expected to increase rental income going forward.  Interest income for the period under review decreased compared to the comparative period due to the utilisation of surplus cash in acquiring the new property; this will lead to increased rental income going forward. In addition, for liquidity reasons, closer to the completion of the acquisition cash had to be invested in call deposits which yield lower interest rates than longer dated cash instruments.  Fund operating expenses are slightly higher than the prior period due to KShs. 8.3 million one-off business acquisition costs incurred in acquiring the new property.

37.5 Borrowings STANLIB Fahari I-REIT is currently ungeared.

37.6 Interim distribution The REIT Manager has not recommended the distribution of an interim dividend. A full distribution will be declared at the end of 2018 in line with the requirements of the REITs Regulations to distribute a minimum of 80% of distributable earnings within four months after the end of the financial year.

37.7 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 www.stanlibfahariireit.com from 27 July 2018.

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. 22130 – Property known as Highway House under the SPV Signature International Limited;  L.R. No. 209/4125 registered as Title No.I.R. 93022 – Property under the SPV Bay Holdings Limited; and  L.R No. 3734/1426 (Original Number 3734/917) – Property under Starling Properties LLP.

We confirm that the other assets of the fund are as detailed in the accounts.

Details of other matters: Requirement under the Fifth Schedule Trustee’s report a) Any appointment of a secondary disposition There was no appointment to this effect. 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 The CMA granted the REIT a period of 6 months has been, or should have been, notified to up to 26th March 2018 to comply with Regulation the Authority pursuant to the Regulations 65(6) which requires that investment property should form 75% of the total net asset value of the Fund.

c) Any failures by the trustee to comply with There were no failures to this effect. 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 The REIT had entered into an agreement on 26th other person to comply with the provisions March 2018 to effectively purchase the of the scheme documents, the Act or the ownership interest in Starling Park Properties LLP, Regulations and action taken to remedy the whose underlying property asset is Land failure Reference Number 3734/1426 (Original Number 3734/917), Nairobi, on which is developed an office block measuring 41,312 square feet of lettable space. The REIT successfully acquired all of the issued partnership interest in Starling Park Properties LLP for a purchase consideration of KShs 850,037,500.00 on 29 May 2018. As at 30th June 2018, the REIT’s investment property forms 92% of the total net asset value of the Fund. e) Any action taken by the trustee during the The assets were safe and there was no threat period to protect assets of the trust or the requiring the Trustee to take action. interests of REIT securities holders f) Meetings of REIT securities holders convened The Trustee convened the 2nd REIT AGM of the by the trustee, resolutions put and the securities holders on 20th April 2018 at All Saints outcome of voting. Cathedral, Nairobi.  The Annual Report and the Audited Annual Financial Statements for the financial year ended 31st December 2017 was tabled and adopted by securities holders.  The first and final distribution for the period ended 31st December 2017, of KShs. 135,729,225 (75 cents per unit in issue) as recommended by the REIT Manager and approved by the Trustee was tabled and adopted.  The unitholders approved the purchase of the ownership interest of Starling Park Properties LLP, whose only asset is Land Reference Number 3734/1426 (Original

Number 3734/917), Nairobi, on which is developed an office block measuring 41,312 square feet of lettable space. The REIT had entered into an agreement on 26th March 2018 to effectively purchase this property to add to its portfolio of properties.  The unitholders approved the continuation of KPMG as the REIT auditors having expressed their interest to continue as auditors. The REIT Manager and REIT Trustee had no objection of them continuing as the REIT auditors. The unitholders also authorized the REIT Manager and the Trustee to fix their remuneration.

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 2nd AGM of the securities holders on 20th April 2018 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 2018

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 six month period ended 30 June 2018:

1. The state of the REIT Manager’s compliance program progressed well during the period under review. As part of its compliance program and in order to meet the evolving business environment within which the REIT operates; various processes to reinforce its compliance frameworks, systems, policies and procedures continued to be undertaken during the period under review. Furthermore, leverage from the wider Group’s frameworks remains a big advantage to the REIT Manager’s from a risk and compliance perspective.

2. In addition to the above and in line with the above mentioned Regulation, the REIT Manager confirms as follows:

a. Any matter arising during the period which has been, or should have been, notified to the Authority pursuant to the above mentioned Regulation;

i. The REIT wrote to the Capital Markets Authority notifying it and seeking approval to conclude a transaction it had entered into to effectively purchase the ownership interest (100% ownership) in Starling Park Properties LLP, the investment vehicle which would allow the REIT to indirectly acquire the real estate therein. The said acquisition would also bring the REIT to full compliance with Regulation 65(6) of the REITs Regulations which requires that investment property should form 75% of the total net asset value of the Fund. The said approval was granted by the Authority.

b. Any failures by the REIT Manager, Trustee or any other party to comply with the provisions of the of the scheme documents, the Act or the Regulations and action taken to remedy the failure;

i. The REIT Manager in a letter dated 22nd September 2017 to the CMA had requested for an extension to meet the requirement of Regulation 65(6) of the REITs Regulations and was granted an extension period of 6 moths up to 26th March 2018. On 26th March 2018, the REIT entered into an agreement to effectively purchase the ownership interest in Starling Park Properties LLP, whose underlying property asset is Land Reference Number 3734/1426 (Original Number 3734/917), Nairobi, on which is developed an office block

measuring 41,312 square feet of lettable space. The REIT successfully acquired all of the issued partnership interests in Starling Park Properties LLP on 29 May 2018. 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:

______Evelyne Kinara Risk and Compliance Manager: STANLIB Kenya Limited 26 July 2018

ANNEXURE C: DETAILS OF THE PARTIES - ORGANOGRAM

Reporting line Appointments Trustee CMA NSE KRA SERVICE PROVIDERS Co-op Bank Outsourced Reporting • Property Managers activities line • Valuers • Structural Engineers Reporting Appointment • Legal Advisors line • Tax Advisor Institutional & Retail • Auditor REIT Manager Investors STANLIB Kenya At least 80% 100% of net income Ownership Providers of operational Manages REIT Investments services to the REIT for fees for management fee STANLIB Fahari I-REIT Listed on NSE

>75% of TAV <25% of TAV

Real Estate Cash & Cash

Investments Equivalents

Greenspan Mall Bay Holdings Signature Starling Park

Limited Limited International Limited Properties LLP

100%

100% 100% 100%

100% 100% 100% 100%

Greenspan Mall Office/light industrial Office/light industrial Office Building

ANNEXURE D: PROFILES OF THE DIRECTORS OF THE REIT MANAGER

i. John Sturgeon

Acting Chairman – Mr Sturgeon is currently a Consultant to Liberty Holdings Limited in South Africa, responsible for the Liberty Property Portfolio, Chairman of the Pension and Provident Funds as well as over sight of certain of Liberty’s non South African subsidiaries. Prior to this he was the Group Executive - Corporate Finance and Capital Management for the Liberty Group (2004 – 2017). Prior to this, he was a Consultant to the Standard Bank Equity Fund division on Management Buyouts and Private Equity Investments (2000 – 2004). He began his career as an articled clerk with Peat Marwick Mitchell and grew his financial experience through various positions from Financial and Cost Accountant to Financial Controller for companies within the Dorbyl Group, then becoming Group Financial Manager for Calan Limited. From May 1982, Mr Sturgeon became the Group Financial Director/Company Secretary for Natyre Limited / Calan Group. Since then, he has held various Financial Director positions including for Argus Holdings Limited (1993 – 1994) and the Premier Group Limited (1994 – 1999). Mr Sturgeon holds a Post- Graduate Certificate in the Theory of Accounting (CTA) from the University of Witwatersrand. He also holds a CMA and HDip Tax also from the University of Witwatersrand. He is a registered Chartered Accountant with the South African Institute of Chartered Accountants. ii. Nkoregamba Mwebesa

Managing Director, STANLIB Kenya – Mr Mwebesa has more than 26 years of experience in the East Africa Financial Services Sector. His expertise spans Investment Management, Capital Markets and Securities, and Investment Banking. Mr Mwebesa is the immediate past Chief Executive of Standard Bank Group Securities (SBGS), a licensed Investment Bank in Kenya, Uganda and Rwanda. During his time at SBGS Mr Mwebesa led the strategic re-positioning of the business resulting in increased market share and a leap from 7th place to 2nd place in NSE Equity trading rankings, No. 1 on the Uganda Securities Exchange and No. 2 on the Rwandan Stock Exchange. Prior to joining SBGS, Mr Mwebesa had a very successful tenure as the Chief Executive Officer of the Nairobi Securities Exchange Limited (NSE), the largest securities exchange in the East African Region. He is currently a non-executive director of Central Depository and Settlement Corporation.

Mr Mwebesa holds a B.A. Economics and Philosophy degree from the University of Nairobi and an Executive MBA from the Maastricht School of Management.

iii. Mike du Toit

Non-executive Director – Mr du Toit joined Liberty in 2010. He is the Managing Director of NSE-listed Liberty Kenya Holdings Plc and Liberty Group’s Regional Group Executive for East and Central Africa responsible primarily for strategic growth initiatives, governance and stakeholder engagement. Prior to this he was Managing Director of Stanbic Bank in Kenya (previously CfC Stanbic) having led the merger of the Stanbic and CfC Groups. As a career banker, he has extensive experience in the financial services sector across sub-Sahara Africa having worked and lived in, amongst others Botswana, Mozambique, South Africa and Uganda. He is a member of all the Boards of all Liberty entities in the region. Mr du Toit holds an LIB of the Institute of Bankers (SA). iv. Surinder Kapila

Non-executive Director – Ms Kapila is an Advocate of the High Court of Kenya and a business law expert with deep knowledge of trade and regional integration having among others, helped establish the Common Market for East and Southern Africa (COMESA) Court of Justice and provided technical support to USAID regional trade team to encourage free movement of goods and trade between member states. She also has over 30 years experience in governance for banks, bilateral and multilateral donor agencies, research institutes as well as businesses at large. In her career, Ms Kapila has held several roles including but not limited to Assistant Legal Officer for KCB Bank Limited, Legal Advisor and Company Secretary for CBA Bank Limited, Legal Consultant for World Bank – Agriculture Division, Legal Consultant for USAID Regional Legal Office and Legal Consultant for International Centre for Research in Agroforestry (ICRAF). Currently, she is a Development Consultant. She is a current board member of International Federation of Women Lawyers (FIDA) (also former president), FIDA Kenya (also co-founder), Capital Club East Africa, and the Beth Mugo Cancer Foundation. She is a past board member of Ecobank Kenya Limited, the East African Building Society Bank, and Hillcrest International Schools. Ms Kapila holds a B.A. (Hon) Economics and Political Science degree, a Diploma in Journalism as well as an LL.B. Public and Private International Law degree all from the University of Mumbai, India. She also holds an Executive MBA, International Business Development, and Leadership from Inoorero University, Kenya/CBS-SIMI Executive, Denmark. She is also a Chartered Meditator and Conciliator duly commissioned by the Kenya Institute of Chartered Mediators and Conciliators and the Mediation Training Institute East Africa.

v. Patrick Mamathuba

Non-executive Director – Mr Mamathuba is Head of Alternative Investments and Portfolio Manager at STANLIB Limited. Mr Mamathuba has 22 years experience in the investment industry. He joined STANLIB Limited in 1999 and has held various positions including Bond Trader, Portfolio Manager and Chief Investment Officer. In his current role he has been involved in establishing and growing new ventures within STANLIB Limited including the passive funds offering, establishment of

infrastructure capability and seeking private equity partner for the group.

Mr Mamathuba has held the position of Chairman of the Direct Property and High Yield debt propositions investment committees. In addition he has chaired the STANLIB Credit Partners board and is a Director of the Infrastructure Private Equity Fund 1 General Partner. He is a member of the STANLIB Executive Committee. In his previous roles he was involved in analysing JSE listed companies and managing client portfolios exceeding ZAR40 billion. He has also overseen client allocations to third party private equity funds. Prior to joining STANLIB, he worked at Transnet treasury and the South African Reserve Bank. Mr Mamathuba holds a B.Com (UCT) degree, B.Com Honours (UNISA) and is a CFA charter holder. vi. Peter Waiyaki

Non-executive Director – Mr Waiyaki is an advocate of the High Court of Kenya and a Partner at Mboya Wangong’u & Waiyaki Advocates responsible for Strategy and Development. He is an accomplished practitioner ranked as a top commercial lawyer over several years. He specializes in corporate and commercial law with particular emphasis on capital markets law and practice, corporate restructurings, mergers and acquisitions and corporate finance. He previously worked as the founding Chief Executive of the Central Depository & Settlement Corporation in Kenya and oversaw the establishment of the automation of the clearing, delivery and settlement of trades on the Nairobi Securities Exchange. He is a director of several private companies including Enwealth Financial Services Limited and Cities & Homes Limited.

Mr Waiyaki holds a Bachelor of Laws Degree from University of Nairobi and a Diploma from the Kenya School of Law. He is a qualified and practising Arbitrator and a Certified Public Secretary. He is a member of the Law Society of Kenya Chartered Institute of Arbitrators (Kenya Branch) and the Institute of Certified Public Secretaries of Kenya.

ANNEXURE E: REIT MANAGER STAFF AND SUPPORT PERSONNEL i. Nozipho Makhoba Acting Chief Executive Officer: STANLIB Fahari I-REIT – Nozipho has 17 years working experience spanning across financial management, external audit, property investment and corporate finance. In her role as Acting Chief Executive Officer, she is responsible for driving strategic growth, stakeholder engagement, financial and risk management, financial reporting and strategic resource planning. Before joining STANLIB Kenya Limited, Nozipho worked for the Liberty Group (South Africa) from 2012 in various areas of the business including Liberty Properties and Group Corporate Finance where she was instrumental in the Group’s mergers and acquisition transactions related to property. Prior to joining the Liberty Group, Nozipho spent six years in the audit profession and five years with the largest asset manager in Africa - the Public Investment Corporation as a Finance and Operations Manager in the Property Investment Division. While at the Public Investment Corporation, she also held non-executive director roles for various property investment companies including Pareto Limited South Africa. She holds a B.Com (Accounting) degree and a Post-graduate Diploma in Accounting, both from the University of Kwa-Zulu Natal. She is a registered Chartered Accountant with the South African Institute of Chartered Accountants. ii. Ruth Okal Property Asset Manager: STANLIB Fahari I-REIT – Ruth has 14 years industry experience and is responsible for optimizing STANLIB Kenya Limited’s real estate portfolio through market research, data analysis, revenue forecasting and industry reporting to inform business decisions. She holds an MA in Property Management and Valuation and a BA in Land Economics both from University of Nairobi, and has been instrumental in the originating, negotiating and closing many property transactions. Ruth is both a registered Valuer and Registered Estate Agent. She has completed CFA Level 1. Ruth joined STANLIB Kenya Limited in 2013 from Knight Frank Kenya Limited, where she gained experience within Commercial Agency, Property Management, Valuation, Market Research,

Feasibility Studies and Development Advisory. iii. Hilda Njoroge Property Analyst: STANLIB Fahari I-REIT – Hilda has 6 years working experience and is responsible for real estate market research, asset management and investment analysis by evaluating relevant statistics and providing recommendations regarding the investment attractiveness of properties and property related investments under STANLIB Kenya Limited’s Property portfolio. Hilda joined STANLIB

Kenya Limited in 2014 from Acorn Group Limited, a leading Real Estate developer in the East Africa region, where she gained experience in real estate development, feasibility studies, deal origination and execution, financial modelling, investment analysis and project finance and funding. She holds a B.Com Finance & Business Administration honours degree from Strathmore University-Nairobi and a M.Sc. in Real Estate Investments and Finance with distinction from Heriot-Watt University Scotland, United Kingdom. She is a registered member of the Institute of Certified Investment and Financial Analysts (ICIFA), a final candidate of the Royal Institute of Chartered Surveyors (RICS) and a continuing candidate of the Chartered Institute for Securities & Investment (CISI). iv. Irene Maloba Financial Accountant: STANLIB Fahari I-REIT – Irene has over 5 years of experience in the financial sector. She is adept at budget forecasting, financial planning, financial reporting and analysis, treasury operations as well as banking. She is responsible for evaluating the company’s performance, risk management and financial reporting. Prior to joining STANLIB Kenya Limited, Irene worked as a Management Accountant at Centum Investment Company Plc, the largest investment firm in East Africa where she was responsible for financial reporting and analysis for the Holding Company as well as Two Rivers Development and its subsidiaries. Before joining Centum, Irene spent over three years at Equity Group Holdings Limited where she developed her career in Finance. She was in charge of the finance department of Equity Investment Bank at the time of exit. Irene holds a Master of Science in Finance from the University of Nairobi and a Bachelor’s degree in Business Management (Finance and Banking) from Moi University. She is a Certified Public Accountant of Kenya and a member of ICPAK. v. Evelyne Kinara Risk and Compliance Manager: STANLIB Fahari I-REIT – Evelyne has 8 years working experience in legal and compliance field in the financial and capital markets industry across East Africa. Before joining STANLIB Kenya Limited, Evelyne worked for SBG Securities Limited (a member of the Standard Bank Group) from 2009 in the Legal and Compliance Department where she was in charge in overseeing the daily compliance functions pertaining to the capital markets industry in three jurisdictions where the Company is licensed-Kenya, Uganda and Rwanda. Evelyne holds a Bachelor of Laws Degree (LLB) from Moi University.

ANNEXURE F: DETAILS OF SERVICE PROVIDERS

REGISTERED OFFICE OF THE FUND COMMERCIAL BANKER

1st Floor, Liberty House The Co-operative Bank of Kenya Limited Nyerere Road Co-operative House P.O. Box 30550 – 00100 Haile Selassie Avenue Nairobi, Kenya P.O. Box 48231 – 00100 Tel: +254 20 326 8569 Nairobi, Kenya Email: [email protected] Tel: +254 703 027 000 Email: [email protected]; [email protected]

TRUSTEE AUDITORS

The Co-operative Bank of Kenya Limited KPMG Kenya Co-operative House 8th Floor, ABC Towers Haile Selassie Avenue ABC Place, Waiyaki Way P.O. Box 48231 – 00100 P. O. Box 40612 – 00100 Nairobi, Kenya Nairobi, Kenya Tel: +254 703 027 000 Tel: +254 20 280 6000 Email: [email protected]; Email: [email protected] [email protected]

REIT MANAGER TAX ADVISORS

STANLIB Kenya Limited Viva Africa Consulting LLP 1st Floor, Liberty House 3rd Floor, Kiganjo House Nyerere Road Rose Avenue, Off Denis Pritt Road P.O. Box 30550 – 00100 P.O. Box 75079 – 00200 Nairobi, Kenya Nairobi, Kenya Tel: +254 20 326 8569 Tel: +254 20 246 5567 Email: [email protected] Email: [email protected]

COMPLIANCE OFFICER - TRUSTEE COMPLIANCE OFFICER – REIT MANAGER

Henry Karanja Evelyne Kinara Co-operative House 1st Floor, Liberty House Haile Selassie Avenue Nyerere Road P.O. Box 48231 – 00100 P.O. Box 30550 – 00100 Nairobi, Kenya Nairobi, Kenya Tel: +254 20 327 6965 Tel: +254 20 326 8569 Email: [email protected] Email: [email protected]

COMPANY SECRETARY REGISTRAR Debra Ajwang’-Ogada CDSC Registrars Limited Co-operative House 10th Floor, Nation Centre Haile Selassie Avenue Kimathi Street P.O. Box 48231 – 00100 P.O. Box 3464 – 00100 Nairobi, Kenya Nairobi, Kenya Tel: +254 20 327 6474 Tel: +254 20 291 2000 Email: [email protected] Email: [email protected]

LEGAL ADVISORS INDEPENDENT VALUERS Mboya Wangong’u & Waiyaki Axis Real Estate Limited Advocates The Rahimtulla Tower Lex Chambers, Maji Mazuri Road No. 8 Upperhill Road Off James Gichuru Road P.O. Box 10730 – 00100 P.O. Box 74041 – 00200 Nairobi, Kenya Lavington, Nairobi Tel: +254 20 272 4848 Tel: +254 20 216 0312 Email: [email protected] Email: [email protected]

PROPERTY MANAGER STRUCTURAL ENGINEER Cushman & Wakefield Excellerate Civil Engineering Design (K) Ltd rd 3 Floor, Grenadier Tower 1st Floor Sri Sathya Sai Centre 1 Woodvale Close, Westlands Musa Gitau Road P.O. Box 1620 – 00606 P.O. Box 54531 – 00200, City Square Nairobi, Kenya Nairobi, Kenya Tel: +254 20 444 2061 Tel: +254 20 806 8141 Email: [email protected] Email: [email protected]

MEPS ENGINEER LDK Africa Limited 9th Floor, Purshottam Place Westlands Road P.O. Box 60293 – 00200 Nairobi, Kenya Tel:+254 374 3838 Email: [email protected]

No expert referenced above is or has been, engaged or interested or connected with the Trustee or the REIT Manager save as disclosed in this report.

ANNEXURE G: INVESTMENT GUIDELINES

1. Investment Targets

The REIT Scheme will act in best endeavour to achieve the following investment performance metrics after being fully invested subject to changing market conditions at any time:

 The targeted Internal Rate of Return at property level and before REIT expenses is 14 per cent per annum.

 Distributions to unitholders will be after deduction of REIT expenses and thus the IRR earned by investors may be lower than the target IRR at a property level.

2. Investment Limits and Guidelines

The Eligible Assets comprise eligible real estate or eligible cash investments. At least 75% of the REIT Scheme’s Total Net Asset Value (“NAV”) may be invested in eligible real estate, while a maximum of 25% of the REIT Scheme’s NAV may be invested in eligible cash investments. Eligible real estate includes, but is not limited to, strategic real estate in Kenya, via the following investment instruments:

 Land Title (direct ownership of the property asset), including leases with minimum 25 years remaining;

 100% ownership of any Company that owns the property asset; with the property asset being transferred directly into the REIT Scheme if deemed necessary by the REIT Manager and REIT Trustee in order to access fiscal benefit; and

 100% beneficial interest in an Investee Trust.

Further,

 The REIT Scheme will not co-own eligible real estate with any other person;

 The REIT Scheme may hold units in listed property companies or real estate investment trusts with similar objectives listed on a securities exchange in Kenya, in which event the REIT Scheme need not own 100% of such company or real estate investment trust, subject to the REIT Scheme not investing more than 10 per cent of its assets by TAV in such listed securities.

The sector allocation for the 75% to 100% of eligible real estate is as follows:

Sector Lower Limit Upper Limit Retail 30% of TAV 75% of TAV Office 30% of TAV 75% of TAV Industrial 0% of TAV 15% of TAV Hospitality 0% of TAV 15% of TAV

Eligible cash investments include cash, deposits, bonds, securities and money market instruments.

A material change to the Eligible Assets of the REIT Scheme may only be made if authorised by the Act and the REITs Regulations and approved by the REIT Scheme unitholders.

The investments of STANLIB Fahari I-REIT will be in accordance with the asset class allocation, in the property sectors and subject to the sector allocations as set out earlier in this section.

3. Operating Policies

The operations and affairs of the Trust shall be conducted in accordance with the following operating policies:

 To the extent the Trustee determines to be practicable and consistent with its fiduciary duty to act in the best interests of the Trust and the unitholders, any written instrument which in the sole judgment of the Trustee creates a material obligation of the Trust must contain a provision or be subject to an acknowledgement to the effect that the obligation being created is not personally binding upon, and that resort will not be had to, nor will recourse or satisfaction be sought from the private property of the Trustee, unitholders or beneficiaries under a plan of which a unitholder acts as a Trustee or officer, employees or agents of the Trust, but that only property of the Trust or a specific portion thereof will be bound;

 The Trust shall only guarantee the obligations of its wholly-owned subsidiaries (other than any wholly-owned subsidiaries that are general partners in partnerships that are not wholly-owned by the Trust), provided that the Trust may guarantee the obligations of wholly-owned subsidiaries of the Trust that are general partners in partnerships that are not wholly-owned by the Trust if the Trust has received an unqualified legal opinion that the guarantee by the Trust of the obligations of wholly-owned subsidiaries of the Trust that are general partners in partnerships that are not wholly-owned by the Trust will not cause the Trust to cease to qualify as an approved I-REIT Scheme;

 Subsidiaries of the Trust shall not enter into any transaction involving the purchase of lands or land with improvements thereon and the leasing thereof back to the vendor for less than the fair market value of the property;

 Title to real estate shall be held by and registered in the name of the Trustee, its subsidiary or nominee, an investee company or the Trustee of an Investee Trust and, if required, in the name of a secondary disposition Trustee;

 The Trustee and each Investee Trust or investee company or other subsidiaries of the Trust will have conducted such diligence as is commercially reasonable in the circumstance on real estate the Trust intends to acquire;

 The Trust will obtain and maintain at all times insurance coverage in respect of potential liabilities of the Trust and the accidental loss of value of the assets of subsidiaries of the Trust from risks, in amounts, with such insurers, and on such terms as the Trustee considers appropriate, taking into account all relevant factors including the practices of owners of comparable properties, provided that it shall remain the obligation of the REIT Manager to obtain quotations and make recommendations to the Trustee;

 Amendments to Investment Guidelines and Operating Policies shall be subject to the terms set out in the Trust Deed;

 Regulatory Matters: If at any time a government or regulatory authority having jurisdiction over the REIT Scheme or any REIT assets shall enact any law, regulation or requirement which is in conflict with any investment guideline of the Trust then in force, such restriction in conflict shall, if the Trustee on the advice of legal counsel to the Trust so resolves, be deemed to have been amended to the extent necessary to resolve any such conflict and, notwithstanding anything to the contrary herein contained, any such resolution of the Trustee shall not require the prior approval of the unitholders; and

 Operating Plan: The REIT Manager shall, at least on an annual basis, prepare an investment and operating plan for the ensuing period for approval by the Trustee.

ANNEXURE H: KEY RISKS

Industry Specific Risks

While analyses of the Kenyan property market show positive growth trends in terms of rental incomes and property values over the past few years, there can be no guarantee that the current trends will continue unabated into the future. Any changes in property industry dynamics may impact growth trends. However, experience in other markets suggests that I-REITs that invest in portfolios of high-quality investment properties provide sustained returns and operating performance even in a less favourable market environment of slower growth in rental incomes and property values for the industry as a whole. Weaknesses in land title and rental lease registration can adversely impact the operations of REIT Schemes.

All I-REIT Schemes are dependent on the certainty of the title to the properties and enforceability of rental lease agreements. Uncertainty of title presents the risk of (i) delays in completion of the purchase of properties until titles and leases are regularized, and (ii) delays in enforcement of lease contractual arrangements both of which could have adverse impacts on the business, financial condition and results of operations of I-REITs.

As a mitigating factor, the STANLIB Fahari I-REIT’s policy is to conduct a thorough due diligence on properties to be purchased and to require the current owners to regularize titles and leases before the purchases are completed.

The underlying asset portfolio of REIT Schemes comprise primarily of real estate. REITs Regulations require that an I-REIT must invest at least 75 percent of its total NAV in income producing real estate, within two-years of being licenced by the regulator. The nature of real estate investments means that it is difficult to find buyers for or sellers of property assets quickly, particularly for the larger, iconic, REIT-quality properties. As a result, it may be difficult for REITs to re-balance their investment portfolio or sell their assets on short notice should there be adverse economic conditions or exceptional circumstances.

Risks common to traded REIT securities REIT units traded on the NSE and the prices are subject to securities market volatility, reflecting demand and supply conditions, just like other listed securities. The price obtainable on sale of a REIT unit on a public exchange can go up or down and may differ from the reported NAV per REIT unit.

The price of the REIT Scheme units will generally reflect prospective investors’ confidence in Kenya’s economy, the property market and its returns, the REIT Scheme management and interest rates.

Risks associated with the STANLIB Fahari I-REIT structure Market Risk The underlying asset value of STANLIB Fahari I-REIT’s properties may be impacted by fluctuations in supply and demand for the type of rental properties that the REIT has invested in. STANLIB Fahari I- REIT’s reported financial results may be affected by losses recognised on the revaluation of investment properties being charged to the profit or loss statement. The REIT prepares its financial statements in accordance with IFRS. As currently permitted by IFRS, investment properties held to earn rentals and for capital appreciation are stated at annual valuation performed by independent professional valuers on an open market value for existing use basis. Any revaluation surpluses or deficits arising from the revaluation of investment properties are reflected in the profit or loss statement.

The REIT Manager mitigates the impact of these risks on STANLIB Fahari I-REIT’s underlying asset values and operating performance by applying a careful investment evaluation process to help ensure that the seed properties selected and new Eligible Assets that the STANLIB Fahari I-REIT may invest in the future are in line with the REIT’s stated investment philosophy and objectives and meet the minimum investment return criteria.

Income Risk Rental income earned from, and the value of, STANLIB Fahari I-REIT’s investment properties may be adversely affected by a number of factors and distributions may not be made if the REIT reports an operating loss. Reduction in reported rental income and operating profits may arise, for example, if tenancy agreements of the underlying properties are renewed at a lower rental rate than the previous agreement or if the occupancy rate falls. This in turn, reduces property income and STANLIB Fahari I-REIT’s ability to recover certain operating costs such as service charges. Other factors could include changes in the REIT’s ability to collect rent from tenants on a timely basis or at all; changes in laws and governmental regulations in relation to real estate, including those governing usage, zoning, taxes and government charges. Such revisions may lead to an increase in the management expenses or unforeseen capital expenditure to ensure compliance. Rights related to the relevant properties may also be restricted by legislative actions, such as revisions to the building standards

laws or the city planning laws, or the enactment of new laws related to construction and redevelopment.

The REIT Manager intends to mitigate the impact of such factors by implementing portfolio specific strategies and operational initiatives. These include activities such as: income flow management; lease audit and data integrity review; vacancy management and leasing strategy; review of lease structures; and cost optimization management. In particular, the leasing strategy includes procuring of payment upfront and contractual lock-ins of rental rates and other clauses in tenancy agreements.

Securities Liquidity Risk The STANLIB Fahari I-REIT is the first I-REIT to have its units listed on the NSE. As with other listed securities listing and quotation does not guarantee that a highly-liquid trading market for the units will remain strong.

Regulatory Risk Changes to the regulatory framework applicable to a REIT could impact the REIT’s financial performance and after-tax returns to unitholders. The STANLIB Fahari I-REIT is subject to the REITs Regulations and the regime governing I-REITs in Kenya remains relatively new.

Future changes may occur in laws and regulations that impact the REIT Scheme. Alternatively, there may be changes to enforcement or regulatory interpretation of laws leading to changes in the legal requirements affecting the REIT Scheme.

The REIT Manager intends to mitigate this regulatory risk by participating actively in industry forums to discuss and debate potential regulatory changes and their potential impact.

Tax Risks STANLIB Fahari I-REIT is exempt from income tax as per Section 20 of the Kenyan Income Tax Act. As allowed by Regulation 65(1) (b) of the REITs Regulations, the REIT has invested in eligible real estate assets through investment in the shares of investee companies incorporated in Kenya that directly own the eligible real estate and which are wholly owned and controlled by the REIT Trustee. The Kenya Revenue Authority (“KRA”) has advised that subsidiary legislation or rules must be developed and published within the Kenyan Income Tax Act to ensure that the exemption of the incomes of the

REIT’s eligible investee companies is expressly and adequately addressed in the Income Tax Act. Failure to develop and publish the subsidiary legislation could lead to the incomes of the REIT’s investee companies not being exempt from income tax, and thus reduce the distributions to unitholders.

At the date of this report, the subsidiary tax legislation had been developed and reviewed by the KRA and the CMA with the view to ensuring these pass through the parliamentary approval process (or any other due approval process) together with other broader tax amendments during 2018.

The REIT is required to distribute at least 80 percent of its distributable income to its unitholders annually. Failure to distribute at least 80 percent of its distributable income to unitholders, changes to the interpretation of current tax laws and any new laws and regulations that may be introduced in the future could adversely impact the tax liability of the REIT Scheme. Such changes may reduce income, distributions and unitholder returns.

The Kenyan Parliament re-introduced Capital Gains Tax at a rate of 5% effective 1 January 2015. The KRA has confirmed that organizations that are exempted from income tax, such as registered REIT Schemes, will not be subjected to Capital Gains Tax. Consequently, the reintroduction of Capital Gains Tax is not expected to negatively impact the return and distribution of any capital gains achieved on the underlying properties acquired by the REIT Scheme, should it divest its interest in these properties and realize a capital gain.

The REIT Manager and Trustee intend to mitigate these tax risks by, firstly, monitoring and taking proactive action to help ensure that the REIT remains compliant with tax registration requirements, secondly, ensuring that at least 80 percent of the distributable income of the REIT is distributed to unitholders and, thirdly, by participating actively in industry forums to discuss and debate proposed changes to the tax legislation.

Risks Associated with the Scheme’s Proposed Investment Portfolio Risks Arising from Acquisition of Special Purpose Vehicles The STANLIB Fahari I-REIT has acquired investment properties through the purchase of shares in limited liability companies (special purpose vehicles) that own underlying investment properties rather than purchasing the underlying properties directly. As is common with acquisitions of this type, the REIT’s policy is to complete due diligence on any such company it wishes to purchase.

Further, the REIT’s policy is to enter into contractual arrangements that include obligations for the vendor to identify and settle liabilities of the target company prior to the sale and to provide certain, limited, ability for the REIT and the target company to make claims against the vendors in the event that they suffer losses relating to pre-acquisition liabilities and claims that may only come to light and crystallize after the acquisition.

However, there remains a residual risk that the REIT may not be able to claim full reimbursement for the losses that it might suffer in respect of such pre-acquisition liabilities and claims that are identified and crystallize after the acquisition because of contractual limitations and because the REIT may be unable to collect claim reimbursements on a timely basis or at all.

The REIT Manager intends to mitigate this risk by ensuring that it monitors liabilities and claims against the companies that the Scheme purchases carefully and puts in place appropriate processes to identify potential claims, to submit claims and to follow up and collect such claims.

ANNEXURE I: GLOSSARY

Term or abbreviation Meaning

“the Act” means The Capital Markets Act, Chapter 485A of the Laws of Kenya, (Amended by Act No. 48 of 2013);

“AGM” Means Annual General Meeting;

“CBD” means central business district;

“CDSC” means Central Depository and Settlement Corporation Limited;

“CED” means Civil Engineering Design (K) Ltd;

“CMA” or “Capital means the Capital Markets Authority in Kenya established by statute (and Markets Authority” or includes any successor thereto (whether immediate or derivative)); “Authority”

“Co-op Bank” means The Co-operative Bank of Kenya Limited;

“Distribution Date” means date by which distributions to Unitholders are required to be made, being 30 April annually;

“Eligible Assets” means the eligible real estate and/or eligible cash investments that the STANLIB Fahari Property Income Fund is permitted to invest in;

“GLA” means gross lettable area, being the total area of a building that can be let to a tenant. GLA comprises primary GLA plus supplementary areas which include for example, storerooms, balconies, terraces, patios and signage/advertising areas dedicated for the use by the tenant and exclude basements and parking. Unless otherwise noted, any reference within the report to m² is based on GLA;

“IFRS” means the International Financial Reporting Standards;

“Independent means the independent property valuers of the I-REIT, being Tysons Property Valuers” or Limited up to 31 December 2017 and Axis Real Estate Limited from 1

“Valuer” January 2018 to 30 June 2018;

“I-REIT” means Income REIT;

“KRA” Means Kenya Revenue Authority;

“LDK” means LDK Africa Limited;

“Legal Advisor” means the legal advisor to the REIT, being Mboya Wangong’u and Waiyaki Advocates;

“m²” or “sqm” means square metres;

“MER” means the management expense ratio as defined in the REITs Regulations

“NAV” means net asset value, being the value of all the STANLIB Fahari I-REIT’s assets after subtracting the value of all of its liabilities as determined in accordance with the consolidated financial statements of STANLIB Fahari I- REIT;

“NSE” means Nairobi Securities Exchange Limited, approved as a securities exchange under the Act;

“p.a.” means per annum;

“Registrar” means the registrar of REIT securities in relation to STANLIB Fahari I-REIT, being CDSC Registrars Limited;

“REIT” means Real Estate Investment Trust, an unincorporated common law trust that has been authorised as such by the CMA;

“REIT Manager” means STANLIB Kenya;

“REITs Regulations” means the Capital Markets (Real Estate Investment Trusts) (Collective Investment Schemes) Regulations, 2013 as may be amended or modified from time to time;

“REIT Trustee” or means the Co-operative Bank or Co-op Bank of Kenya Limited; “Trustee”

“SPV” means special purpose vehicle;

“STANLIB East Africa” means STANLIB entities in Kenya Uganda, Tanzania and South Sudan, and inclusive of STANLIB Kenya;

“STANLIB Kenya” means STANLIB Kenya Limited, Certificate of Incorporation number C.9522;

“Subsidiary” or means a subsidiary or the subsidiaries of the STANLIB Fahari I-REIT property “Subsidiaries” fund, being an entity or entities owned more than 50% by the REIT Trustee on behalf of the REIT;

“TAV” means total asset value, being the value of all the STANLIB Fahari I-REIT assets prior to any adjustments or deduction of liabilities;

“Technical Engineer” means one or both of the technical engineers being, Civil Engineering Design (K) Ltd and/or LDK Africa Limited;

“Trust Deed” means the trust deed between STANLIB Kenya and Co-op Bank establishing the STANLIB Fahari I-REIT property fund as an Income Real Estate Investment Trust Scheme, 30 September 2015;

“Unitholder(s)” or means any person including the Promoter, who has purchased or otherwise “REIT Unitholder(s)” or acquired (including through the exchange, or in consideration of any “Securities holder” transfer, of Property) and holds any Units and is registered in the Register as evidence that he holds the Units;

“USD” means United States Dollar;

“VAT” means value-added tax as defined in the Value-Added Tax Act, 2013, as amended;

“ZAR” means South African Rand.