This article first appeared in The Edge Malaysia Weekly on December 11, 2017 - December 17, 2017

AMANAHRAYA Real Estate Investment Trust (ARREIT) plans to sell four of the 16 assets in its portfolio as part of its strategy to focus on high-yielding quality assets.

Targeted to be completed within a year, the assets — a hotel, office buildings and factories valued at a total of RM173.9 million — were acquired a decade ago and are considered to have little growth potential.

In a recent interview, AmanahRaya Bhd’s (ARB) group managing director Adenan Md Yusof tells The Edge that the proposed sale forms part of its strategy to enhance the assets held by the REIT. “We have a two-pronged strategy: one is to increase and improve our portfolio of assets and the other is to clean up our portfolio through asset divestment.”

ARB is the majority unit holder of  ARREIT and Adenan sits on the board of ARREIT.

Together with 15 other assets with an estimated value of RM109.3 million put up for sale by ARB in October, the total assets to be sold by the two companies amount to RM290 million. ARB, together with KDA Capital Malaysia Sdn Bhd, manages ARREIT via AmanahRaya-

Kenedix REIT Managers Sdn Bhd. KDA Capital is wholly owned by Kenedix Asia Pte Ltd, which in turn owns Japan-listed Kenedix Inc.

ARB will not inject its assets into the REIT as they do not meet its requirements. At the same time, ARB does not want to own any investment asset apart from its headquarters in Kuala Lumpur. Instead, it wants to focus on the investment of properties via ARREIT.

The assets identified for sale by ARREIT are Silver Bird Factory in Shah Alam (valued at RM102 million); South City Plaza (Block A and B), Seri Kembangan, in Selangor (RM16 million); Holiday Villa Alor Star (RM35.9 million); and Gurun Automotive Warehouse in Kedah (RM20 million).

“These are mature properties and we see no upside for capital gain,” Adenan tells The Edge.

ARREIT expects to make only a small profit from the divestments but he notes that the REIT has enjoyed the rental income from these assets over the years.

After the disposals, the number of assets held by ARREIT will be reduced to 12 from 16, which includes Vista Tower at the Intermark in Kuala Lumpur, which it is still in the process of acquring.

“ARREIT’s total asset value (TAV) is now RM1.037 billion. Of this, RM986.4 million is investment property and the rest is cash and deposits,” says Noorbaizura Hermeyney, CEO of the REIT.

She adds that after the acquisition of Vista Tower is completed, the TAV will increase to RM1.56 billion.

While the trust is looking at selling some of its aged assets, it is also in talks to add new assets to its portfolio.

Noorbaizura says ARREIT is looking at two to three assets in the industrial and office building category. “These are at a preliminary stage [of negotiations] as our focus is to make sure the purchase of Vista Tower is duly completed,” she adds.

“Our immediate target now is to increase our fund size. At the beginning of the year, we were at RM1 billion, now we are RM1.5 billion [after Vista Tower]. We want to double that [to RM2 billion],” Adenan says. He expects it could take two to three years to hit the mark. “It is not easy to get hold of a good building with the kind of yield we want,” he points out.

“We are looking at (assets that can provide) between 6% and 7% in net yield,” Adenan says. For industrial buildings, which tend to be long-term tenancies, ARREIT would consider assets that offer an initial yield of 6% and going forward, are able to reach 7% and up to 8%.

“Moving forward, we want to focus on commercial buildings. We would preferably not want to be involved in hotels as we do not have the expertise,” he adds. Should it dispose of Holiday Villa Alor Star, the only remaining hospitality asset it will have will be Holiday Villa Langkawi.

ARREIT is interested in acquiring  Grade A buildings, ideally within the Klang Valley, and factories within industrial zones. As for retail assets, it is willing to consider those that can be sustained over the long term, including ones in secondary towns. Its sole retail asset is Selayang Mall in Selangor.

As for education-based assets, Adenan says ARREIT is not keen on increasing or disposing of its existing assets. “At this point of time, the yield when it comes to education is strong. We are not ready to let go of our education assets because of the yield.”

According to him, SEGi University in Kota Damansara and SEGi College in Subang Jaya give a yield of 7.9%. ARREIT will spend RM3 million next year on asset enhancement at SEGi University.

On the REIT’s appetite for acquisitions, Adenan says, “Our gearing level is currently at 30% and post-acquisition of Vista Tower, it will reach 49%, which is very close to the 50% [gearing] limit [for REITs]. But, it will drop to below 40% when the [four identified] assets are sold.”

Asked why Vista Tower was first sold to Kenedix instead of being sold directly to ARREIT, Adenan explains that BlackRock Inc had to divest the property urgently, which was held by a British Virgin Islands-incorporated company, and ultimately, by a fund. BlackRock also had to shut down the companies that held the assets. ARB, as a unit of The Minister of Finance Inc, would need the ministry’s approval to buy a BVI company. “We did not want to go through that hassle as it would have been a tedious affair. (And) Blackrock could not wait as it had to close the fund by end-2018. Kenedix, however, was willing to purchase the asset and then inject the property at cost into the REIT.”

“When you look at the overall acquisition, the distribution per unit (DPU) will increase to 7.21 sen from 5.9 sen now,” Noorbaizura says. The asset was bought for RM455 million or RM825 psf. “It is a value-accretive acquisition for the unit holders.” she adds.

In fact, since the signing of the deal in September, ARREIT has managed to increase the occupancy in Vista Tower to 77% from 74%.

In the third quarter ended Sept 30, 2017, ARREIT saw its net income slip to RM24.85 million from RM27 million a year ago due to higher operating costs. Revenue for the period came in at RM45.32 million compared with RM43.09 million previously. The total DPU for 9MFY2017 is 4.16 sen.

ARREIT is funding the purchase of Vista Tower through a RM450 million medium-term note (MTN) programme and RM5 million of its own funds. The bonds were solely underwritten by Public Bank Bhd. Adenan expects that the REIT will likely raise funds for future purchases through the issuance of bonds as the cost of borrowing is lower. “Going via MTN, we also save on stamp duty,” Adenan says, adding that MTN also allows bullet payment type of borrowings which ensures that its DPU will not drop drastically.

With its Japanese partner in the picture since last year, ARREIT sees potential growth in venturing into big data centres, retirement homes and possibly even going abroad to Japan in the longer term.

Kenedix, which is one of the largest REITs in Japan, now holds 49% of AmanahRaya-Kenedix REIT Manager via wholly-owned KDA Capital. Kenedix also holds a 15% stake in ARREIT. As it only has a minority shareholding, it provides input and advice but doesn’t directly manage the assets.

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