7 things we learned from AmanahRaya REIT’s 2017 AGM

AmanahRaya REIT (ARREIT; Bursa: 5127) was established in Oct 2006 and was listed on Bursa Malaysia in Feb 2007. As at 31st Dec 2016, the portfolio of ARREIT comprised 15 properties with a total asset value of RM1.04 billion.

The REIT manager is a joint venture between AmanahRaya-REIT Managers and Kenedix Asia.  Kenedix Asia, via its local identity KDA Capital Malaysia, acquired 49% of AmanahRaya-REIT Managers in Dec 2016 resulting in the newly-named AmanahRaya-Kenedix REIT Managers. The strategic partnership is a plus for ARREIT as it can now collaborate with the Kenedix Group and tap on its expertise in REIT management.

The Kenedix Group is the largest independent real estate asset management organizations in Japan. As at Dec 2015, the group’s assets under management (AUM) in Japan’s real estate market totalled approximately ¥1.6 trillion. The group’s operations span a diverse array of asset categories including several listed Japanese REITs in mid-size offices, residential property, and retail facilities. The group also own a private REIT in large-size offices and a large number of private funds.

Here are seven things we learned from AmanahRaya REIT’s 2017 AGM:

  1. Net asset value (NAV) per unit increased from RM1.189 in 2015 to RM1.197 in 2016. This was mainly due to the completion three new acquisitions: Toshiba Building in Glenmarie Shah Alam; Deluge Factory in SILC, Nusajaya; and Contraves, an office building in Cyberjaya.
    Date of AcquisitionPropertyLocationPrice ConsiderationExpected Net Yield
    20 May 2016Toshiba BuildingGlenmarie, Shah AlamRM32 million6.50%
    11 August 2016Deluge FactorySILC, Nusajaya, JohorRM24 million6.75%
    30 December 2016Contraves BuildingCyberjaya RM40 million7.20%
    The acquisitions are expected to be yield accretive as their expected net yields are all above ARREIT’s current portfolio yield of 5.28%.
  1. Gross revenue fell 7.0% year-on-year from RM61.6 million in 2015 to RM57.63 million in 2016. The drop was mainly due to the disposal of Wisma Amanahraya Jalan Ampang but was mitigated by new rental revenue recognized from the three new acquisitions in 2016. Likewise, net property income fell from RM57.8 million to RM53.3 million and distributions per unit (DPU) fell from 6.3 cents to 5.9 cents.
  2. ARREIT will work closely with Kenedix Group to “re-strategize” its portfolio. The management plans to focus on three key areas — commercial, industrial, and offices — and double its portfolio size to RM2 billion over the next 3-5 years. Chairman Dato’ Sri Ikmal Hisham Abdul Aziz commented that ARREIT will have higher liquidity to move its share price when its assets under management is larger. If needed, ARREIT can seek a bridging fund from Kenedix if they’re able to identify quality assets to acquire.
  3. A unitholder raised concerns about the vacancies and lease expiries at a number of properties including Silver Bird Factory, which is currently vacant; Gurun Automotive Warehouse, which has its lease expiring in Dec 2017; and Blocks A & B of South City Plaza, of which Block A is currently vacant and Block B is on a short-term lease. Former COO and newly-appointed CEO Noorbaizura Hermeyney replied that ARREIT had just successfully repossessed Silverbird Factory after the settlement of legal proceedings and the management is considering divesting the property if they fail to obtain new tenants. The management hopes to extend the lease with the current tenant at Gurun Automotive Warehouse. The management also plans to recycle its capital by divesting Blocks A & B of South City Plaza and acquiring new assets with better yields.
  4. A unitholder questioned if the management was facing any difficulties in maintaining ARREIT’s rental yield. The CEO did not mention any difficulties and only commented that they seek to maintain at least a 7% rental yield for every property. Knowing that ARREIT’s overall rental yield is only 5.28%, it seems that the management is a long way from its target.
  5. A unitholder highlighted that critical information was missing from the annual report including: Chairman/CEO statement, average occupancy rate, weighted average lease expiry (WALE), cost of debt, and percentage of loans at fixed interest rates. The CEO noted the comment and said they will improve the annual report for next year. She then supplied the numbers to the missing information: ARREIT’s occupancy rate is above 80%; WALE is at three years; cost of debt is at 4.65%; and more than 90% of ARREIT’s loans are at floating interest rates as the management thinks its current cost of debt is cheaper than the fixed interest rates it can secure. However, if they can find a source that will offer better fixed rates, the management is willing to convert some its borrowings to fixed rates to mitigate any rise in interest rates. On the plus side, ARREIT’s gearing ratio is at its lowest over the last five years at 30.29%.
  6. Prior to a vote for the resolution for management to issue new units, a unitholder asked if a private placement would dilute the ownership of existing unitholders. The chairman replied that a private placement would not dilute existing unitholders but failed to elaborate how.

This is our first time attending ARREIT’s annual meeting and, honestly, we walked away with a feeling that the REIT isn’t well managed. ARREIT also owns a number of non-quality assets in non-prime areas which are currently vacant or do not provide attractive rental yields.

However, the management has taken a step forward by partnering with Kenedix Group to leverage on their expertise in managing well-performing REITs. Can the Japanese firm’s strategic direction help ARREIT acquire higher quality assets and improve ARREIT’s performance? We’ll have to wait and see…

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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