8 things I learned from the 2019 Tower REIT AGM

Listed on Bursa Malaysia on 12 April 2006, Tower REIT currently has a real estate portfolio consisting of two commercial office buildings: Menara HLA and Plaza Zurich. The properties are valued at RM342.2 million and RM220.1 million respectively as at 30 June 2019.

After Bank Negara Malaysia cut the overnight policy rate (OPR) by 25 basis points on 7 May 2019, banks and research houses were expecting another rate cut of the same magnitude by year end, inciting investor interests in dividend stocks, including REITs.

As a result, 10 out of 18 Malaysian REITs listed on Bursa Malaysia have returns in the positive territory year to date as of 30 September 2019. However, Tower REIT is one REIT that hasn’t performed as well with a year-to-date return of negative 6.5%. I attended the AGM to find out the reason for the underperformance and management’s plans to improve the business.

Here are eight things I learned from the 2019 Tower REIT AGM:

1. Tower REIT recorded gross revenue of RM44.1 million for FY2019 (18-month period), versus RM32.6 million in FY2017. Tower REIT changed its financial year-end from 31 December 2018 to 30 June 2019. As such, its financial statements for the financial period 2019 (FY2019) constitutes an 18-month period compared to the preceding FY2017, which was a 12-month period.

2. Menara HLA experienced a decrease in occupancy rate to 34% in FY2019 compared to 51% in FY2017. CEO Eusoffe Chua revealed that the main reason for the decrease in occupancy at Menara HLA was due to businesses winding up. Nevertheless, the manager was able to negotiate favourable settlements for the premature termination of tenancy contracts, which mitigated some of the shortfall from the loss of rental. Along with dampened market conditions, the flight of businesses to the urban fringes such as Bangsar South, Damansara Heights, Petaling Jaya, and Subang Jaya contributed to the decline in occupancy. This was partially mitigated by an increase in occupancy to 64%% at Plaza Zurich in FY2019 versus 58% in FY2017.

3. Plaza Zurich was formerly named HP Towers. The CEO explained that Hewlett Packard (HP) had stopped paying naming rights for the building and decided to only pay for signage rights. Signage rights are the rights of an office tenant to display a sign of its name atop the building. Management was able to bring in Zurich Insurance as an anchor tenant and convince the company to pay naming, signage, and advertising rights, considerably boosting revenue during the financial period.

4. Tower REIT recorded realized income after taxation of RM23.6 million after property operating expenses of RM17.4 million in FY2019. A unitholder noted that the REIT recorded in its financial statements an unrealized loss of RM9.8 million in FY2019 compared to an unrealized gain of RM1.8 million in FY2017. The CFO explained that this was due to the increase in real property gains tax rates from 5% to 10% for foreigners and companies, which came into effect on 1 January 2019, as part of the new measures tabled in Budget 2019.

5. The same unitholder asked if Hong Leong Group was planning to move some of its offices to Tower REITs space to utilize the vacancy. The CEO acknowledged a potential move, saying that it makes more economic sense for Hong Leong to move its offices into Tower REITs existing vacancies instead of paying rent to third parties, since Tower REIT is controlled by Hong Leong Group. Hong Leong Group’s investment banking arm, Hong Leong Investment Bank, is the REIT’s third largest tenant occupying 3% of the REIT’s net lettable area.

6. The unitholder asked management about its outlook for 2020. The CEO said that in addition to the slowing global economic growth — which has resulted in businesses reducing capital investments and delaying their expansion plans — there’s a current oversupply of office spaces. He foresees that the next financial year will continue to see the impact from this issue. However, management has an asset enhancement strategy in place to mitigate the challenging situation. Management plans to refurbish Plaza Zurich to incorporate more amenities — such as food and beverage outlets and meeting spaces — and improve accessibility and connectivity. A survey conducted with existing tenants showed that these were the improvements they most wanted to see. The refurbishment is expected to cost about RM11 million and plans for better connectivity to the MRT have been submitted to the city council.

7. Tower REIT is also exploring the establishment of co-working and co-living spaces as a pilot initiative in Menara HLA over the next couple of years. The CEO explained that in the new economy, millennials, who are increasingly becoming a larger part of the workforce, prefer flexible spaces and leases instead of incurring a large capital expenditure. He is looking to create an ecosystem of services such as training programmes, mentorship and networking opportunities, market access, and legal services that will support the businesses in Menara HLA. He further explained that technology companies will be prioritized as tenants as it is the fastest growing industry. The space will be rebranded as HLX and 64% of Menara HLA’s net lettable area will be redeveloped to cater to this concept.

8. A unitholder, noting that Tower REIT had zero gearing and cash on hand, asked if there were any medium to long-term plans to increase the number of assets from its current portfolio of only two office buildings. The CEO replied that management is looking to diversify into residential and industrial properties. One of the resolutions of the meeting was a proposed renewal of unitholders’ mandate to allot and issue up to 56.1 million new units (20% of the outstanding total number of units), should management require funds to acquire property assets. The unitholder suggested that the management utilize borrowings first due to the REIT’s zero gearing.

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

Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

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