Prices for real estate investment trusts (REITs) have been holding up quite well despite weakness in the broader market and this may well remain the case in the near to medium term. With outlook for the global economy and equity markets turning more opaque in recent weeks, the defensive characteristics and higher-than-market average yields offered by REITs are understandably becoming more appealing.
Al-Aqar’s incomes are fairly recession-proof
The Al-Aqar KPJ REIT is among the better-performing of the REITs listed on the local bourse. It is also among the larger REITs, with total assets valued at more than RM1.16 billion. Perhaps more significantly, it is also widely seen as having one of the more recession-proof earnings streams.
For instance, whilst occupancy and rental incomes particularly that for commercial property-heavy REITs may come under pressure from oversupply in the next few years, incomes for Al-Aqar are by and large protected under its long-term leaseback arrangements with KPJ Healthcare. Its typical lease agreements are for a period of 15 years with the option to renew for a further 15 years.
The longer-term outlook for the overall healthcare industry in the country is positive, with steady demand growth expected from both the local population as well as the rising number of medical tourists. Steadily rising demand and costs of healthcare services would in turn support gradual rental income increases under the trust’s long-term lease agreements — which would translate into progressively higher income and distribution to unit holders.
Al-Aqar is on track to meeting its target income distribution of 8.25 sen per unit this year. The trust’s turnover was up 16.9% year-on-year (y-o-y) to RM20.1 million for 1Q11 boosted by contributions from two assets acquired in 2H10, the KPJ Tawakkal Specialist Hospital and a new building at KPJ Johor Specialist Hospital.
The trust declared a 3.3% unit income distribution, which should be paid before the completion of the proposed acquisitions — and issuance of new units — currently pending.
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On top of the list is the acquisition of four properties — for Bandar Baru Klang Specialist Hospital, Kluang Utama Specialist Hospital and two hospital buildings in Indonesia — valued at a combined RM159.9 million. This would be the REIT’s first acquisition of properties outside Malaysia. The purchase would be financed by the combination of RM104 million cash and issuance of 56.6 million new units.
The trust is also in the midst of acquiring an aged care facility and retirement village in Brisbane, Queensland, Australia, valued at RM135 million. To part finance this purchase, up to 64 million new units will be issued.
The acquisitions will expand its earnings base, although the overseas acquisitions will also carry a certain degree of risks, including foreign exchange risks.
Currently, the REIT has 20 properties valued at RM1.1 billion. Upon completion of the proposed acquisitions, the total investment properties of Al-Aqar will rise to roughly RM1.4 billion. Assuming the deals are completed by end-2011, income distribution is estimated to rise to about 8.3 sen per share in 2012, based on the enlarged units in circulation of 704.3 million. That translates into a gross yield of roughly 7.1% at the current unit price of RM1.17.
Unit prices for Al-Aqar have gained about 14% since the beginning of June 2010, giving investors pretty good returns totalling roughly 21% including yields.
Expectations of oversupply in commercial space may weigh on rental outlook
By comparison, AmFIRST REIT has performed less well over the past one year — its unit price rising by just about 3% over the same period. This could be attributed in part to concerns of oversupply of commercial properties in the Klang Valley.
The trust is expected to report a decline in income for the current financial year ending March 2012, weighed down by low occupancy rates at two of its properties, the Kelana Brem Tower and Menara Merais.
For FY11, AmFIRST’s income was lifted by a one-off income of RM5.7 million in compensation for the compulsory acquisition of land in front of Summit Subang USJ. Without this item, we estimate income for distribution will decline to roughly 8.4 sen per unit from 9.75 sen in the previous financial year.
Still, that translates into a fairly attractive gross yield of 7.2% at the current price of RM1.17. We suspect the relatively high yield has prevailed after taking into account the probability of further downside risks in terms of rentals and occupancy, in view of current expectations for a softer market for office buildings.
Positively, the successful acquisition of the two proposed assets is expected to boost earnings for FY13. AmFIRST is in the midst of acquiring two office buildings in Cyberjaya, expanding its portfolio of assets outside the Klang Valley for the first time.
The two properties, known as Prima 9 and Prima 10, are valued at RM72 million and RM61 million, respectively. The purchase will expand the trust’s portfolio of assets under management to eight, valued at a combined RM1.16 billion from the current RM1.02 billion. Both properties are expected to achieve 100% occupancy at the point of completion of the purchase secured by long-term lease agreements with multinational companies.
No new units will be issued as the acquisition will be funded entirely by borrowings, which will raise its gearing to about 45.8% from the current 38.9%. Income for distribution in turn is estimated to rise to roughly nine sen per unit, boosting gross yield to 7.7% at the prevailing unit price.
The trust is also in the midst of acquiring an aged care facility and retirement village in Brisbane, Queensland, Australia, valued at RM135 million. To part finance this purchase, up to 64 million new units will be issued.
The acquisitions will expand its earnings base, although the overseas acquisitions will also carry a certain degree of risks, including foreign exchange risks.
Currently, the REIT has 20 properties valued at RM1.1 billion. Upon completion of the proposed acquisitions, the total investment properties of Al-Aqar will rise to roughly RM1.4 billion. Assuming the deals are completed by end-2011, income distribution is estimated to rise to about 8.3 sen per share in 2012, based on the enlarged units in circulation of 704.3 million. That translates into a gross yield of roughly 7.1% at the current unit price of RM1.17.
Unit prices for Al-Aqar have gained about 14% since the beginning of June 2010, giving investors pretty good returns totalling roughly 21% including yields.
Expectations of oversupply in commercial space may weigh on rental outlook
By comparison, AmFIRST REIT has performed less well over the past one year — its unit price rising by just about 3% over the same period. This could be attributed in part to concerns of oversupply of commercial properties in the Klang Valley.
The trust is expected to report a decline in income for the current financial year ending March 2012, weighed down by low occupancy rates at two of its properties, the Kelana Brem Tower and Menara Merais.
For FY11, AmFIRST’s income was lifted by a one-off income of RM5.7 million in compensation for the compulsory acquisition of land in front of Summit Subang USJ. Without this item, we estimate income for distribution will decline to roughly 8.4 sen per unit from 9.75 sen in the previous financial year.
Still, that translates into a fairly attractive gross yield of 7.2% at the current price of RM1.17. We suspect the relatively high yield has prevailed after taking into account the probability of further downside risks in terms of rentals and occupancy, in view of current expectations for a softer market for office buildings.
Positively, the successful acquisition of the two proposed assets is expected to boost earnings for FY13. AmFIRST is in the midst of acquiring two office buildings in Cyberjaya, expanding its portfolio of assets outside the Klang Valley for the first time.
The two properties, known as Prima 9 and Prima 10, are valued at RM72 million and RM61 million, respectively. The purchase will expand the trust’s portfolio of assets under management to eight, valued at a combined RM1.16 billion from the current RM1.02 billion. Both properties are expected to achieve 100% occupancy at the point of completion of the purchase secured by long-term lease agreements with multinational companies.
No new units will be issued as the acquisition will be funded entirely by borrowings, which will raise its gearing to about 45.8% from the current 38.9%. Income for distribution in turn is estimated to rise to roughly nine sen per unit, boosting gross yield to 7.7% at the prevailing unit price.
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