By THE EDGE
Still fresh from the listing of its Real Estate Investment Trust (REIT) in April, Amanah Raya REIT (ARREIT) recently proposed a round of asset injection. This will be the first of two to pump up the REIT in its aim to have an asset size of RM1 billion by year-end.
Beyond that, ARREIT also has designs on foreign real estate, which it intends to acquire once it hits that milestone, according to managing director Datuk Mohd Azahari Mohd Kamil. Like unit trust funds, Malaysian REITs are allowed to invest up to 30% of their assets abroad.
ARREIT holders can look forward to at least two more asset injections in the next 18 months. By year-end, it will propose one that may involve assets held in the common fund portfolio. The common fund manages some RM6.6 billion in assets, out of which about 20% are invested in real estate and 70% in fixed income.
Going by the RM1 billion target, at least a further RM350 million of properties have been identified.
Subsequently, ARREIT may look at properties in Europe and the US, Azahari said.
“We are not desperate for properties, because we have a pool of our own that we are grooming, and which we think will fulfil the investment requirements. Rest assured it will be a very dynamic REIT,” he said
While the momentum is up for now, ARREIT has hardly attracted much attention. Its properties of choice may have something to do with it.
Unlike Hektar or Tower REIT, which proposed acquisitions of shopping complexes or office buildings in the city centre, ARREIT has so far opted for industrial buildings, warehouses and college campuses including existing properties from the portfolio of the Amanah Raya common fund.
Defending ARREIT’s preference, Azahari said its priorities lay in capital preservation, and stability of rental income. In other words, the REIT will be dynamic but conservative.
“Location is one factor when we look at properties, the other is the counter party,” he told The Edge Financial Daily.
“You might have a property smack in the middle of Kuala Lumpur but what is important is to ensure the credibility of the counter party to honour the lease because when people buy REITs, it’s for the medium to longer term,” he added.
Typically, ARREIT would go for properties in which it could lock-in terms of at least 10 years, Azahari said. For instance, the proposed asset purchases, which totalled RM308 million involving 10-year leases with step-ups, with parties such as Silverbird, Tamadam, AIC, and SEG International.
Azahari said these contracts came with irrevocable bank guarantees for security in collection. Furthermore, ARREIT demands a two-year deposit payment from its tenants, and these funds are deposited with the AmanahRaya common fund for an average annual return of 5%.
The yields on the five new properties to be injected currently carry average annual net yields of about 8.5%, Azahari said. Overall, it will raise ARREIT’s current yield of just under 7% to an indicative rate of 7.1% to 7.2% a year.
“That’s our thrust… we know these (tenants) are going to be there. For the next 10 years our REITs managers know they are able to get at least 7.14% or 7.2% even without new asset injections. It’s the security and stability in income that is very important,” he said.
It is ARREIT’s commitment that annual yields are maintained at a minimum of 7%. It may have to tweak its capital structure a little if it wants to keep yields strong in the longer term.
ARREIT’s gearing will fall from 48% to about 38% after the acquisition. However, REITs are allowed to gear up to 50%. If it can secure better financing terms, yields could improve as it leverages on borrowed funds to buy assets.
“We are looking at a new borrowing rate of 4.5% to 4.6%, currently it’s about 5.2%. The question of gearing will depend on the interest rate. So if interest rates are reasonable we can definitely gear to our maximum,” Azahari said.
For unit holders, capital appreciation in the net asset value (NAV) per unit and yield are equally sought after. The immediate result of the asset injection, however, will lower the NAV per unit from 95 sen as at March to 93 sen. ARREIT traded at 94 sen last Friday, a discount to its unaudied NAV per unit of 97 sen.
Azahari said ARREIT’s largest unit holder, Amanah Raya, would over time sell down its share to roughly 30%. This asset injection for the time being will raise Amanah Raya’s 36% share of the REIT to almost half the new number of 215.4 million units.