11 things I learned from Amanah Harta Tanah PNB’s 2017 AGM

Amanah Harta Tanah PNB (AHP) is a Malaysian REIT that first listed in 1990 and has been paying a steady dividend to shareholders ever since. A total of 196.24 sen per unit or RM198.54 million has been distributed since 1990, with the highest distribution per unit (DPU) of 12.5 sen per unit paid in 1996. AHP has an average dividend yield of 6.4% from 2011 to 2016.

AHP completed the acquisition of Mydin Seremban 2 for RM240 million in 2016. It is a three-year-old freehold property with a net lettable area of 390,803 square feet. The acquisition was funded by borrowings of RM140 million and the balance was raised via a rights issue. The issuance of 120 million new units was completed in January 2017.

Besides Mydin Seremban 2, other properties AHP owns include Plaza VADS, a 24-storey office building with a four-storey podium block in Taman Tun Dr Ismail, Kuala Lumpur; Bangunan AHP, a four-storey commercial building in the same area; and Sri Impian, a four-storey office building in Taman Setiawangsa, also in Kuala Lumpur. The REIT is managed by Pelaburan Hartanah Nasional Bhd (PHNB), a wholly-owned subsidiary of Permodalan Nasional Bhd. AHP’s trustee is AmanahRaya Trustees.

2016 was also a significant year for AHP as five directors resigned from the board including the chairman, YABhg. Tun Ahmad Sarji bin Abdul Hamid, who has been a key figure for PHNB for the last 19 years. His successor, Tan Sri Abdul Wahid, was appointed as the Non-Independent Non-Executive Chairman and four other board members joined between September 2016 and January 2017.

I was looking forward to attending my first AGM with them to gain new insights. At the meeting, CEO Encik Hafidz Atrash Kosai Mohd Zihim welcomed the new chairman and directors before he proceeded with his presentation.

Here are 11 things I learned from Amanah Harta Tanah PNB’s 2017 AGM:

  • Gross rental income grew 75.6% year-on-year from RM13.3 million to RM23.36 million. Net property income (NPI) grew from RM7.87 million in 2015 to RM17.23 million in 2016. This is mainly due to the three-month contribution (Oct-Dec 2016) from the new acquisition, Mydin Seremban 2, and a growth in rental income from Plaza VADS after its refurbishment. Total assets more than doubled year-on-year from RM211.5 million to RM446.1 million, again, mainly due to the acquisition of Mydin Seremban 2.
  • Mydins Holdings Berhad is the single tenant occupying 100% of Mydin Seremban 2. Mydin Holdings signed a 30-year lease with a 10% rental step-up for the first four years and, subsequently, a 10% rental step-up every three years. The current monthly rent is RM1.4 million. The CEO added that Mydin Seremban 2 will give AHP a higher yield and expects rental income to grow in 2017 as the REIT recognises the full-year rental income of RM16.8 million from Mydin Seremban 2.
  • The upgrading and refurbishment works on the tower block and the construction of a new four-storey podium block at Plaza VADS was fully completed as at January 2016. The upgrading has significantly increased the property’s net lettable area from 190,445 square feet to 248,855 square feet. The average rent has increased from RM3.65 per square foot to RM4.25 per square foot.
  • Occupancy rate in Bangunan AHP remained flat at 55.6% in 2016. If that wasn’t bad enough, the average rent also dropped from RM3.25 per square foot to RM2.77 per square foot. Even then, some tenants have moved out the rental rates do not meet the tenants’ requirements (too expensive). The CEO admitted they’re facing huge downward pressure on rents due to an oversupply of office spaces and challenges from competitors in the Taman Tun Dr. Ismail vicinity who are offering lower rents and freebies such as free rent and parking of up to six months just to lock in tenants.
  • The CEO also quoted that one desperate landlord was willing to rent its office space located at Jalan Sultan Ismail at a rate of only RM2.50 per square foot! He added that AHP is always trying to find a way to better position its properties through better marketing and modelling what their peers are doing to attract the same group of tenants in a suppressed market. The CEO mentioned that Mydin Seremban 2 will act as a “buffer” for AHP against the soft office rental market in 2017.
  • Distribution per unit (DPU) fell year-on-year from 7.0 sen to 4.5 sen. This is mainly due to a rights issue which increased the units in circulation from 100 million units to 220 million units following the completion of the rights issue on 12 January 2017. (The final distribution for FY2016 was paid after the completion of the rights issue.)
  • A number of unitholders congratulated the appointment of the new chairman, Tan Sri Abdul Wahid, to the board based on his vast experience in the finance industry. They felt it was time to inject new blood to the board of directors after 26 years. With the renewal, they are looking forward to the new board to bring back the “good old times” and seemed confident that AHP’s performance will improve significantly in 2017.
  • One unitholder raised his concern over the independent auditors’ report on “Valuation of investment in real estate” on page 34 of the annual report. He highlighted a line from the auditors’ report: “Because the valuation of the real estates is derived from various valuation models and assumptions, there is significant measurement uncertainty involved in this valuation.” He asked if the auditors agreed with the valuation of AHP’s properties provided by independent valuers. The auditor present at the meeting said that Securities Commission Malaysia implemented a new requirement where auditors had to include their opinion on the valuation of investment in their reports. He confirmed that the auditors agreed with the valuation of AHP’s properties or they wouldn’t have signed off the report.
  • Another unitholder asked the management the number of new properties they planned to inject into the portfolio over the next five years. The CEO answered that there is no specific number but they are planning to expand the portfolio to bolster AHP’s financial performance despite the soft market sentiment in 2017. He said they have yet to identify a new acquisition but hope to find one before the end of 2017. The CEO also revealed that the management has no preference on the type of asset (either office or retail) but it must come with a good yield to boost the group’s overall yield.
  • One unitholder brought up that AHP’s gearing ratio had increased substantially from 26.40% in 2015 to 41.92% in 2016 due to the heavy borrowings used to acquire Mydin Seremban 2. Even though the ratio is still below the 50% limit, she raised her concern that AHP has the highest gearing ratio among all Malaysian REITs in 2016 and asked how the management planned to raise funds to acquire more property in 2017 since the debt headroom is so low. In my opinion, the CEO did not answer the question clearly. He insisted that another Malaysian REIT had a higher gearing ratio of 48% and echoed that AHP has yet to reach the 50% gearing ratio limit. However, he did not mention any concrete plans on how to reduce the high gearing ratio in order to acquire more properties.
  • One unitholder suggested that the management consider building both wet and dry kitchens for the offices at Bangunan AHP if they planned to refurbish the property. She highlighted some office REITs have used this feature as one of their competitive advantages to demand higher rents and attract larger tenants. The CEO replied that even though the management is currently planning an asset enhancement initiatives programme for Bangunan AHP, they will only refurbish the property if a prospective tenant agrees to rent the property at a good yield. He then gave the example of Mydin as an example of a long-term tenant signing a 30-year lease with built-in step-up rents. However, I didn’t agree with the CEO on this point. Mydin is a single tenant that leased a retail mall while Bangunan AHP is an office building. While a large retailer like Mydin might be comfortable signing a long-term lease for an entire mall, it is uncommon for a single tenant to rent an entire office building where leases are usually much shorter and run for two to three years.

In my opinion, it is too early for unitholders to assess the new management as five of them have only been on the board for less than a year. I personally sensed that many unitholders at the AGM had high hopes and trusted the new management to deliver an improved performance over the next few years. Will they be able to turn AHP around and revive its glory days from the past? Time will tell.

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Mitra Chen is a value investor since 2008. Prior to that, she had over 20 years experience in human resources in the recruitment industry. She strongly believes that everyone can achieve financial independence when they use the right financial methods and tools for their investments.

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