12 things we learned from the 2017 AmFIRST REIT AGM

AmFIRST REIT is a Malaysian commercial REIT with a portfolio of nine properties located in Klang Valley, Cyberjaya, Melaka, and Penang. As at 31 March 2017, its total net lettable space is 2.9 million square feet (excluding The Summit USJ Hotel). In 2016, AmFIRST REIT disposed the Ambank Group Leadership Centre (AGLC) to generate a one-off gain of RM12.2 million. AmFIRST REIT’s average annual return since its listing in 2006 is 6.02%.

2016 was a significant year for AmFIRST as it marked its 10th anniversary of listing on Bursa Malaysia. However, 2017 was another challenging year for AmFIRST due to an oversupply of office space and more competitive rental fees within the Klang Valley region. According to a Knight Frank market report, the cumulative supply stands at 51.0 million square feet with an impending supply of 11.7 million square feet in 2017 and 2018. Average rental rates for commercial buildings have declined from RM5.55 per square foot in 2015 to RM5.33 per square foot in 2016.

Here are some valuable lessons we learned from the most recent AmFIRST REIT AGM:

1. Gross revenue increased by 11.8% year-on-year from RM99.8 million in 2016 to RM111.5 million in 2017. This significant increment was mainly from a full-year rental contribution from Mydin Hypermarket as well as positive rental reversion and higher occupancy rates in Menara Ambank. Nevertheless, lower rental rates and occupancy rates from Prima 10 (where RBC moved out), Menara AmFirst (Groupon moved out) and The Summit USJ (refurbishment), and the disposal of AGLC have partially offset the increase.

2. Net property income increased marginally from RM94.6 million in 2016 to RM95.3 million in 2017. This was due to higher rents from Menara AmBANK, Wisma AmFIRST, Jaya 99, and The Summit USJ Retail. Realised net income increased substantially by 6.7% from RM26.1 million in 2016 (excluding the RM12.2 million one-off gain on disposal of AGLC) to RM27.9 million in 2017 due to higher net property income.

3. Out of the nine properties, both Bangunan AmBank Group and Menara AmBank contributed the highest gross revenues of 22% each. This was followed by The Summit USJ at 17%, Mydin Hypermall at 15%, and both Wisma AmFIRST and Jaya 99 at 8% revenue each. Menara AmFIRST and Prima contributed 5% and 3% respectively.

4. One shareholder wanted to know which tenants recorded positive or negative rental reversions. The management answered that the tenant with a positive rental reversion was AmBank Group, which is their sponsor. Most of the tenants in The Summit USJ had negative rental reversions due to a slowdown in business because of the refurbishment.

5. In 2017, the top ten tenants of AmFIRST REIT generated 70.1% of total rental income, with AmBank Group and Mydin Mohamed Holdings contributing 38.9% and 15.4% respectively. AmBank Group is the sponsor of AmFIRST REIT and Mydin has a 30-year lease agreement with AmFIRST REIT. As a result, the risk of tenancy concentration is reduced substantially as both are long-term tenants that will sustain the REIT’s rental income.

6. As at 31 March 2017, the overall portfolio occupancy rate was 82.6%, a marginal increase from 81.4% in 2016. This was due to higher occupancy rates from Menara AmBank (80% to 90%), Wisma AmBANK (77% to 79%), and The Summit USJ Retail (70% to 74%). The management highlighted they worked very hard to secure new tenants recently and further improved the occupancy rate to 87.3% by the end of June 2017. The management also managed to close a key tenant to lease 100% of Prima 9 with an option to purchase the building in the future. However, the tenancy only commences on 1 October 2017.

7. Interest rate expenses increased 32% year-on-year. This significant increase was mainly due to the additional borrowings to raise funds for the RM250 million acquisition of Mydin Hypermall. Total borrowings are at RM775.1 million, of which RM87 million is on fixed-rate term loans and RM200 million is hedged via interest rate swaps. Weighted average interest rate for 2017 is 4.58% compared to 4.71% in 2016.

8. Gearing ratio is still considered high and increased marginally by 0.1% to 46.20% in 2017. The management pointed out that the debt headroom was RM128.5 million before it reaches the 50% limit set by the Securities Commission Malaysia guidelines. However, the management has indicated they plan to restructure the gearing ratio to 35-40%. AmFIRST REIT can be de-geared by disposing low yielding and/or non-core properties. The management plans to use the gains to reduce the loans.

9. The management declared a total distribution per unit (DPU) of 4.06 sen, which represents 100% of the realised distributable net profit for the full financial year of 2017. DPU increased 6.7% from 3.81 sen in 2016 (excluding the one-off gain from the disposal of AGLC). Dividend yield is 5.0% based on the closing AmFIRST REIT share price of 81 sen as at 31 March 2017.

10. The management announced the completed refurbishment of The Summit USJ which upgraded the seven existing cinema halls, external façade, carpark, hotel and newly created common lettable area. A shareholder asked about the total cost of the refurbishment and the management answered that the total cost was RM70 million. As AmFIRST REIT owns 70.1% of The Summit USJ, it paid RM49 million for the refurbishment. The management also shared more positive news as the average footfall increased substantially from 397,000 in 2016 to 552,000 for the first half of 2017. They were also able to retain two key tenants, Giant and GSC, and successfully secured new anchor tenants: HomePro, Hot Market, Encore KTV and Miniature. The management is also negotiating with two new tenants for a food court operator and indoor theme park operator. Net lettable area of the food court and indoor theme park increased to 21,000 square feet and 40,000 square feet repsectively.

11. A shareholder commented that even though The Summit USJ has been fully refurbished, many of the escalators were not functioning when she visited the mall during the weekend. The management explained that the escalators were old and had parts that needed to be replaced. However, they are having difficulties finding the spare parts for the escalators. Nevertheless, they are planning to change the escalators in stages as they cannot be all changed at the same time. The shareholder further commented that the management is taking too long and urged them place this on high priority and solve this issue as soon as possible

12. Another shareholder noticed that the management did not paint the roller shutters of some retail outlets during the refurbishment. The management answered that the reason they did not carry out the painting work was because those retail outlets do not belong to the REIT. Since it does not own those units, they cannot do any paintwork without getting permission from the owners first. A shareholder recommended that the management buy those retail outlets in order for the REIT to manage the mall fully. The management indicated that they have the intention to do so. However, some owners are unwilling to sell or asking for too high a price.

The fifth perspective

The management of AmFIRST REIT has shown its commitment to increase the occupancy rate significantly, as seen by them securing a key tenant for Prima 9 which had been vacant for some time. The management also realises the REIT’s gearing ratio is at an unhealthy level and they are taking steps to reduce the gearing by planning to sell its low-yielding and non-core assets. It looks as if the new management is on the right track and AmFIRST REIT is on course to generate improved earnings for 2017.

With additional article contributions by Calvin Soon.

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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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