MRCB-Quill REIT (MQREIT) is an office REIT with a portfolio comprising 11 commercial buildings. Five properties are located in Cyberjaya, four in Kuala Lumpur, and one in both Shah Alam and Penang. In the last financial year, MQREIT completed the acquisition of Menara Shell, a 33-storey office tower, increasing the nett lettable area of its portfolio to 2.2 million square feet. MQREIT is managed by MRCB Quill Management Sdn Bhd and its trustee is Maybank Trustees Bhd.
We had a big surprise when we received our MQREIT annual report this year. Why? The 2016 annual report was thicker and had more than 170 pages compared to the previous year’s annual report which had fewer than 100 pages. The content included in the latest annual report was very informative and made it a lot easier for an investor to understand the overall operations and financial performance of MQREIT. We were glad to see that the management took the initiative to improve the content in the annual report as suggested by a unitholder at the last annual meeting.
This is our second year attending MRCB-Quill REIT’s AGM and here are our key takeaways.
- Net property income (NPI) increased from RM95.39 million to RM107.16 million mainly due to the recognition of full-year contributions from Platinum Sentral. MQREIT paid a distribution per unit (DPU) of 8.38 sen in 2016 which translates of to a yield of 6.98% based on the year-end closing price of RM1.20. The DPU of 8.38 sen is the same as the DPU in 2015 (less the distribution of a one-off gain of 0.09 sen per unit on divestment of property). Likewise, MQREIT’s portfolio value grew 41.3% year-on-year to RM2.3 billion due to the acquisition of Menara Shell.
- MQREIT’s overall occupancy rates remained high at 98% — an increase of 0.5% from the previous year. The increase was due to a number of leasing strategies including proactive tenant engagement for renewals ahead of lease expiry dates, regular communication with key tenants, spreading out tenancy expiries, and improving the quality of the properties to maintain existing tenants and attract new ones.
- MQREIT managed to renew 87% of leases due in 2016 and the weighted average lease expiry (WALE) increased from 5.4 years (2015) to 5.8 years (2016). The management expects the Klang Valley office market to be relatively stable in 2017 albeit with some downward pressure on rents and occupancy in view of the impending new supply of office space coming up.
- MQREIT’s gearing ratio dropped to 37% (as at 31 December 2016) from 42.5% in 2015. Its average debt to maturity is 2.69 years and the average cost of debt was the same as the previous year at 4.4%. The majority of MQREIT’s borrowings (68%) are at fixed interest rates to mitigate against any spike in interest rates.
- A unitholder thanked and praised the board of directors for their willingness to act on her suggestions the previous year to improve the content of the annual report and prepare presentation slides for unitholders at the AGM. This time around, she suggested that the management include MQREIT’s gearing ratio, interest rate profile, the average cost of debt and lease expiry profile in the next annual report instead of just having them featured on the presentation slides. Chairman Tan Sri Saw Choo Boon thanked the unitholder for her suggestions last year and mentioned that the board will always take note and seriously consider all unitholder suggestions if they are relevant and reasonable. He noted to include her items in the next annual report.
- The unitholder highlighted a discrepancy in the occupancy rate of Plaza Mont Kiara in the annual report — Page 7 showed an occupancy rate of 84% while Page 76 showed an occupancy rate of 87%. She asked the management to confirm the actual occupancy rate. After checking with her team, the CEO apologised for the error on Page 76 and stated that the actual figure was 84%.
- The unitholder then asked if MQREIT was facing pressure from existing and prospective tenants to reduce rents or to include perks (free rent for a certain period, free parking, etc.) to go along with their leases. CEO Yong Su-Lin admitted they were facing some downward pressure on rents but they have managed to maintain the existing terms as the majority of their tenants are large players in the market. As such, it is more difficult for them to move to another space compared to a small business.
- Another unitholder mentioned that there was a decline in foreign unitholding over the past five years (2012-2016) from 33.54% to 11.70%. He wanted to know the reason behind the drop and whether these foreign unitholders were institutional funds or retail investors. The chairman answered that Malaysia’s stock market has been affected by the global economy and depreciation of the Malaysian ringgit over the last two years. As a result, many foreign institutional funds have moved out of the Malaysian stock market. Moreover, the market capitalization of MQREIT is below US$1 billion which does not meet the minimum criteria for many foreign institutional funds.
- A unitholder asked about the relationship between CapitaCommercial Trust (CCT) and MQREIT, and the reason why CCT reduced its stake. The CEO explained that CCT’s reduced proportion of holdings in MQREIT is due to the acquisitions of Platinum Sentral in 2015 and Menara Shell in 2016. CCT did not purchase any units during the private placements to raise funds for the acquisitions. CapitaLand ceased to have any board representation on the board of MRCB Quill Management Sdn Bhd (the manager of MQREIT) after CapitaLand RECM Pte Ltd disposed its 40% equity interest in MQM. The CEO also said she is not in the position to represent CCT in answering questions regarding their interest in MQREIT.
- A unitholder asked if there were any plans to increase MQREIT’s gearing ratio in 2017 to acquire more property and whether the management would approach Securities Commission Malaysia for special approval to increase the 50% gearing ratio limit. The CEO explained that they intentionally reduced MQREIT’s gearing ratio from 42% (2015) to 37% (2016) in order to increase their permissible debt headroom for asset enhancement initiatives and/or future acquisition of properties. She also said that the management is unlikely to increase the gearing ratio beyond 50% as the guidelines specifically state that the limit cannot be increased even with unitholders’ approval.
- A unitholder asked if there were any private placements planned in the near future and he highlighted his concern about unit dilution, especially for retail investors. Another unitholder chimed in and suggested that the management consider offering preferential shares to retail investors instead which are popular in Singapore REITs. The chairman reassured the room and stressed that it is the management’s duty to maintain or increase DPU in order to protect the interests of minority unitholders. The CEO then explained that preferential share offerings are not permitted under Securities Commission Malaysia guidelines and that they can only offer private placements and right issues to raise funds.
With additional article contributions by Calvin Soon.
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