REITs continue to find favour amid uncertainties

With more than half of the real estate investment trusts (REITs) listed on Bursa Malaysia having released their 1Q earnings results, it appears that most continue to do well despite lingering concerns of oversupply and rental pressure, especially in the office segment.

Those that are more active in terms of asset acquisition, such as CapitaMalls Malaysia Trust (CMMT) and Axis REIT, registered a strong earnings boost from the additional income contributions from newly acquired properties.

Positively, others like Quill Capita Trust and AmFIRST REIT — which have a higher portion of their assets in office properties — reported income growth as well, albeit at a more pedestrian pace. As a whole, the REITs are living up to expectations as comparably safe and high-yielding investing alternatives.

Under prevailing cautious sentiment, amid both domestic and external uncertainties, they do look fairly attractive with yields that are far higher than bank deposits. We estimate yields ranging from 5% to as high as 8.4% for the locally listed REITs.

Unsurprisingly, the larger and more liquid trusts are, on average, trading at higher valuations in terms of price-to-net asset value, and give lower yields. The three largest REITs by total asset value — Sunway REIT, Pavilion REIT and CMMT — offer yields of 5% to 5.9%.

By contrast, REITs with smaller asset portfolios and, often, lower profiles, continue to offer higher yields. For instance, mid-sized AmFIRST and Quill Capita are estimated to earn investors yields of roughly 8.4% and 7.4%, respectively.

Buying interest boosts premium on Pavilion REIT
Pavilion REIT, the largest REIT in terms of market capitalisation, is currently trading at RM1.24, about 1.3 times its net asset value of RM0.96 as at end-March.

The trust has done very well since making its debut on the local bourse in early December last year. The IPO was priced at 88 sen for retail investors. Thus, early investors would have earned some 48% in terms of capital gains in just six months.

Pavilion REIT reported revenue of RM85.3 million and income available for distribution of RM50.6 million in 1Q. The trust expects rental income to decline slightly in 2Q and 3Q, due to enhancement being undertaken in parts of the mall. This will see the transformation of roughly 68,000 sq ft of area — approximately 5% of the mall’s total net lettable area (NLA) — into a new high fashion precinct called the Fashion Avenue. The move comes on the heels of the successful creation of similarly themed Tokyo Street, which encompasses smaller-sized tenants at higher yields.

It remains well on target to hit the forecast distribution of 5.73 sen per unit, as disclosed in the prospectus. Indeed, we estimate distribution to total roughly 6.24 sen per unit for the current year. Still, as a result of its unit price gains, Pavilion REIT’s yields are expected to be the lowest among the locally listed REITs, estimated at just about 5%.

As a comparison, some of the larger retail-focused trusts listed across the straits on the Stock Exchange of Singapore are currently yielding between 5.3% and 7.2%. CapitaMall Trust, with assets totalling S$9.7 billion (RM23.77 billion), is trading at 1.1 times net asset value and estimated to yield 5.3% while Fortune REIT is trading at only 0.6 times net asset value and offers yield estimated at 7.2%. The latter owns and manages 16 suburban malls in Hong Kong.

Expansions in the pipeline
To recap, Pavilion REIT’s current portfolio consists of only two properties, the flagship Pavilion Kuala Lumpur Mall and Pavilion Tower, valued at a combined RM3.56 billion. The former is among the few premium fashion shopping malls in the country catering for the mid- to high-end segment of the population. The shopping centre also attracts more than its fair share of tourist numbers, thanks to its location in the heart of the Golden Triangle and commercial business district.

The shopping mall is valued at RM3.43 billion and has total net lettable area of almost 1.34 million sq ft. Pavilion Tower is a 20-storey office block connected to the mall. Contributions from Pavilion Tower are relatively marginal, accounting for just about 2.5% of total revenue in 1Q.

Going forward, the trust intends to stay focused on properties used solely or predominantly for retail purposes. It has the rights of first refusal for two other shopping malls — Fahrenheit88 and a yet-to-be developed neighbourhood mall in Subang Jaya — as well as for the Pavilion Mall extension. With gearing of just about 19% as at end-March, the trust has ample room to leverage for new acquisitions.

Fahrenheit88 is the former KL Plaza, located across the street from Pavilion Mall, and has about 280,000 sq ft of net lettable area (NLA). The refurbished mall opened in 2010 and is a good candidate to be Pavilion REIT’s first acquisition post-listing.

Work on the Pavilion Mall extension, which will entail some 300,000 sq ft of retail lettable area, is slated to start in 3Q12 and expected to take two to three years. Meanwhile, the mall in Subang Jaya will reportedly have NLA of roughly 400,000 sq ft and is expected to be completed by 2015.

We will continue our highlights of a few of the smaller REITs this Friday.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article appeared in The Edge Financial Daily, May 16, 2012.

Sunway REIT: Yields with fairly low risks

Sunway REIT is one of the more obvious choices when it comes to real estate investment trusts (REITs) for investors on the local bourse, considering its size and liquidity. It is currently the largest REIT in terms of assets under management — which totalled more than RM4.5 billion at end-March 2012 — and a close second to Pavilion REIT in terms of market capitalisation.

Investors in the trust since its IPO, in July 2010, would have fared well. Its unit price has risen from the retail IPO price of 88 sen to the current RM1.25 while distributed income totalled some 12.2 sen during this period. That translates into gains of nearly 56% in less than two years — pretty smart returns when taking into account its relatively defensive profile.

Such defensive characteristics may well continue to attract investors given the prevailing cautious sentiment amid domestic and external uncertainties. We estimate Sunway REIT’s income distribution to total roughly 7.42 sen per unit for the financial year ending June 2012. That would earn unitholders a fairly attractive gross yield of 5.9% at the current price.

Retail and hospitality-centric portfolio of assets
Sunway REIT’s portfolio of assets is a mix of retail, hospitality and commercial but is unique in that most are located within close proximity and hence provide synergistic benefits to the whole.

For instance, a good chunk of its assets — roughly three quarters the value of its total investment properties — are located in Bandar Sunway, an 800-acre (320ha) integrated township in the Klang Valley, where development is still ongoing. Complete with a theme park, university and campus as well as private medical centre, the Sunway Pyramid Shopping Mall, Sunway Pyramid Hotel & Spa and Pyramid Tower Hotel benefit from both local and tourist traffic generated by the township. Similarly, Menara Sunway is current fully occupied and enjoyed positive rental reversion for leases renewed so far this year.
Refurbishment to enhance value of Sunway Putra Place
The trust’s first acquisition, since listing, of the Sunway Putra Place is premised on a similar concept. The clutch of properties, which include a shopping mall, hotel and office tower, was purchased in a public auction last year for some RM514 million — and is currently valued at a combined RM576 million.

Sunway REIT plans to undertake major refurbishment for the mall — works are slated to begin in 2013 and are estimated to take 15-18 months to complete — costing some RM200 million.

Once completed, the mall will have an additional net lettable area of some 115,000 sq ft, or more than 20% increase from the existing total, and will be repositioned to target the mid to mid-upper level income shoppers. With improved layout and tenant mix, the mall is expected to generate better rentals. That would, in turn, attract more traffic, thus benefiting also business at the hotel and office tower. The trust also expects higher valuations for the properties once the asset enhancements are completed.

Estimated 6%-6.2% yields for FY13-FY14
The refurbishment would, however, mean a loss of rental income from the mall during the estimated 18-month duration. Sunway Putra Mall contributed roughly RM25 million in turnover in the first nine months of FY12.

As such, we estimate income available for distribution to be somewhat flattish in FY13 from the current financial year — positive rental reversions from the other properties are expected to more or less offset the rental income loss — before ticking slightly higher in FY14. Earnings, however, should register much stronger growth in FY15 when the mall reopens.

This is, of course, barring any new acquisitions. During its IPO, Sunway REIT revealed the intention to grow and possibly double its assets within the next five to seven years. Some RM2.6 billion of properties were identified for potential acquisition, primarily from Sunway City, one of the largest property developers in the country.

Some completed pipeline assets include Sunway University, Monash University and Sunway Campus, Sunway Giza Shopping Mall and Sunway Medical Centre while others like The Pinnacle and Sunway Pyramid 3 are currently under construction. The trust’s gearing now stands at about 36%.

As mentioned above, income distribution is estimated to total roughly 7.42 sen per unit for FY12, up from 6.58 sen in FY11, boosted by first-time contributions from Sunway Putra Place.

Going forward, income distribution is forecast to be flattish at 7.44 sen in FY13 before improving to about 7.79 sen per unit in FY14. Based on our estimates, unitholders will earn yields of roughly 6% and 6.2% for the two years respectively.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article appeared in The Edge Financial Daily, May 11, 2012.