8 things we learned from the 2018 MRCB-Quill REIT AGM

The Malaysian office market in 2017 remained subdued mainly due to the oversupply of office rental space and soft economic growth. In the third quarter of 2017, Klang Valley had a total supply of 104.7 million square feet of office space. As such, many landlords were forced to offer lower rents and rent-free periods to attract potential tenants.

Despite the challenging year, MRCB-Quill REIT (MQ REIT) — which owns 11 office properties with a market value of RM2.2 billion — posted a solid set of results for 2017. We attended its most recent annual meeting to find out more. Here are eight things we learned from the 2018 MRCB-Quill REIT AGM:

1. Gross revenue increased 32.8% year-on-year to RM181.5 million. The CEO added that MQ REIT’s revenue has a compound annual growth rate (CAGR) of 17% from 2007 to 2017. Likewise, net property income (NPI) grew 31.9% to RM141.3 million. This was mainly due to a full-year contribution from Menara Shell and higher rental income from certain properties.

2. Distribution per unit (DPU) grew 0.12% to 8.39 sen, which translates to a yield of 6.71% (based on the closing price of RM1.25 as at 31 December 2017). From 2007 to 2017, CAGR for DPU is 2.4%. One shareholder wondered if the management had a distribution policy of not more paying more than 9 sen in DPU as he noticed that MQ REIT’s DPU ranged between 8.30 sen and 8.47 sen since 2011. The CEO clarified that there was no such policy and explained that the REIT need to reserve some cash for CAPEX and asset enhancements.

3. Portfolio occupancy rate in 2017 remained stable at 96.3%, a slight reduction of 1.7 percentage points from 2016.  The CEO highlighted that MQ REIT’s occupancy rate is significantly higher than the average occupancy rate of 83.5% for the Klang Valley office market. Out of 11 properties, five properties recorded a full occupancy rate, four properties recorded an occupancy rate above 90%. This was followed by Plaza Mont Kiara and Quill Building 5- IBM which recorded occupancy rates of 87% and 78% respectively. A shareholder wanted to know how the management planned to improve the occupancy rate for both these properties. The management explained that the majority of the REIT’s income from Plaza Mont Kiara is actually derived from carpark fees (which is fully utilised), while 10,000 out 74,000 square feet of retail space is currently vacant. As for Quill Building 5-IBM, the anchor tenant gave up 1½ floors and the management is actively looking for new tenants.

4. MQ REIT renewed 80% of leases expiring in 2017 and its weighted average lease expiry (WALE) reduced slightly from 5.8 years in 2016 to 5.3 years in 2017. A shareholder was curious to know if there was any positive rental reversion from the expiring leases and whether any of them were from the oil and gas industry. The management answered that there were no oil and gas tenants from the leases renewed in 2017. The leases that were unrenewed comprised two tenants occupying 40,000 square feet and the management has already secured tenants to lease part of the space. They added that it’s a challenge to increase rents right now as it is a tenant market, but they have managed retain tenants by stretching tenancy periods and lowering rents.

5. Gearing ratio and average cost of debt maintained at 37% and 4.4% respectively in 2017. Average debt to maturity increased to 2.79 years from 2.69 years, but interest coverage ratio fell to 2.4 times. The CEO added that they have completed the refinancing of RM180 million debt due in March 2017 and the next refinancing due will be in September 2018.

Source: MRCB-Quill REIT 2017 Annual Report

6. A shareholder wanted to know the reason for the RM15 million impairment on Platinum Sentral. The management explained that the completed transaction price of the property in 2015 was based on rental rates in 2014. However, they never expected the 2016/17 oil crisis which softened the market. Despite the impairment, Platinum Sentral still nets a good yield of 7.5%.

7. Another shareholder highlighted the RM28 million divestment of Quill Building 8 – DHL (XPJ) — scheduled to be completed by second quarter of 2018 — and asked if the management planned to reinvest the proceeds in a new property in a foreign market like Australia. The CEO said that part of the proceeds will be used for repaying existing debt, distributions, and working capital needs. At the moment, the management is not considering any overseas acquisition, and forex risk would become a factor if they did so.

8. The management expects the Klang Valley and Cyberjaya office markets to remain challenging in 2018. The CEO said that new office supply coming onstream will add to the downward pressure on rents and occupancy rates. There is a mismatch between the demand and supply of office space in Klang Valley as 17.13 million square feet of office space is expected to enter the market from 2017 to 2020, while the take-up rate is only 3 million square feet annually.

With additional article contributions by Mitra Chen.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Calvin Soon is a value investor and a partner of Invesmart Network PLT. Away from investing, he owns a consultancy business. Calvin believes that anybody can achieve financial independence if they use the right investment process and understand what they invest in.

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