Tower REIT is a Malaysian office REIT with a portfolio comprising two prime commercial office buildings in the Klang Valley: Menara HLA and HP Towers. The combined total net lettable area (NLA) of the portfolio is 735,020 square feet.
Menara HLA is a 32-storey office building (NLA of 396,820 square feet) situated in the heart of the Golden Triangle in Kuala Lumpur – the main central business district comprising prime office buildings, retail centres, and international class hotels.
HP Towers comprises a nine-storey and 21-storey office building with a combined NLA of 350,056 square feet. The property is located within the commercial area of Bukit Damansara, about eight kilometres west of the Kuala Lumpur city centre.
Tower REIT was listed on Bursa Malaysia in April 2006 by GuocoLand Malaysia, which still has a 21.7% interest in Tower REIT. Singaporeans may be familiar with GuocoLand Malaysia — it is a subsidiary of GuocoLand Limited which is listed on the SGX, and is part of the Hong Leong Group.
This was my second year attending Tower REIT’s AGM. Only a handful of unitholders attended last year’s annual meeting and no presentation was given by the management. The reason for the poor turnout is probably due to Tower REIT’s small asset base (it now only has two properties after it sold Menara ING in 2015) and the fact that no goodie bags are given out at the AGM. So while some investors only turn up for a freebie, I was keen to gain more insight from the management as Tower REIT is the only REIT in Malaysia that has zero debt!
Like the previous year, the management gave no presentation, but I still gathered valuable information from the answers management provided to the questions posed by unitholders. So here are…
6 things I learned from the Tower REIT 2017 AGM:
1. Zero gearing ratio. A unitholder noticed that Tower REIT is the only Malaysian REIT (and maybe in Asia) that has a zero gearing ratio. She commented that she would be very happy with the zero debt if Tower REIT was a regular company but it is a REIT. She questioned the management’s strategy for having zero debt and the reason for doing so.
Chairman Datuk Edmund Kong agreed that it is indeed a very conservative capital structure for a REIT. He explained the management decided to pay off the debt after the sale of Menara ING in 2015, before gearing up again for subsequent acquisitions.
I personally feel that the management should be more proactive in employing debt to grow Tower REIT as long as the gearing ratio is kept in check.
2. Low occupancy rates. One unitholder voiced his concern over the REIT’s low occupancy rates which were below the market average. He pointed out the average occupancy rate for offices in Klang Valley is above 70%, whereas Menara HLA and HP Towers have an occupancy rate of 69% and 66% respectively (as at 31 December 2016). He asked the management for the reason for the low occupancy rates.
The chairman replied that there’s a large amount of vacant space in the market due to new supply, pushing rents down. Tenants have chosen to move out, even to older buildings, due to better rates and generous incentives offered elsewhere.
3. Lease expiry profile and rental reversion. One unitholder highlighted the lease expiry profile rate mentioned on page 20 in the annual report which stated that 35% of leases were due for renewal in 2016. However, the management has only been able to renew 77% of this amount. She asked for the percentage breakdown of renewals for Menara HLA and HP Towers, and if there were any negative rental reversions.
The chairman did not provide the breakdown of renewals but said out that Menara HLA had more tenants moving out compared to HP Towers. He also said that the management has had to reduce their rents by 5-10%.
4. New acquisitions. The chairman revealed that the management has plans to acquire more assets after the sale of Menara ING. They are in midst of looking out for good quality commercial assets, particularly office buildings in prime areas, at a good price. However, they have yet to identify any good value and it is still challenging to find a good quality asset at a good price even in this weak market.
5. AEI programmes. The chairman highlighted that Merana HLA and HP Towers are already more than 20 years old and in need of asset enhancement initiatives. Due to the oversupply and competition, Tower REIT needs to enhance its buildings’ appeal, value, and facilities to compete. He indicated that the management has already embarked on some AEIs but did not elaborate further.
6. Drop in unit price. One unitholder said that Tower REIT’s unit price had dropped from RM1.66 in 2013 to around RM1.20 in 2017. He asked if the management could do something to “push up” the price as he is unable to recover his capital investment to date.
The chairman replied that the management could either acquire more assets or organise more corporate events to drum up demand to improve results. He also said that over the years new REITs have been listed on the exchange which investors have perceived as more “exciting”.
According to the him, the unit price is not a reflection of the inherent value of the buildings in Tower REIT. He pointed out to unitholders that Tower REIT’s net asset value (NAV) is much higher than its current unit price. As such, it can be easily argued that the REIT is undervalued. He also said the unit price may eventually appreciate after the economic headwind is over.
The chairman explained that the management is not in the business of pushing the unit price up. However, the management can push the performance of the REIT, such as its earnings and distributions, so that investors will see the value of the REIT. He also reminded unitholders there’s a strong sponsor (GuocoLand Malaysia) behind Tower REIT.
The fifth perspective
At the current price of RM1.21, Tower REIT is trading at a dividend yield of around 5.7% and at a 36% discount to its NAV of RM1.90 as at 31 December 2016. Remember that Tower REIT has zero debt.
But the downside is the oversupply of office space in Kuala Lumpur which has pressured rents and reduced occupancy rates – especially for the older office blocks like Menara HLA and HP Towers. So do Tower REIT’s office buildings still stand out since they are located in prime locations? I initially thought so but I had second thoughts as their occupancy rates have been dropping over the past two years and it seems unlikely that the office market will improve in the next 2-3 years.
Even though the management has indicated they will implement AEIs to refurbish their two properties, they did not reveal much about the actual enhancements or the cost of doing so. It also seems that the management is extremely conservative in acquiring new properties, which would help Tower REIT’s growth. The situation looks stagnant for now but who knows moving forward.
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