Arreit - will you buy

By Maybank

Higher Costs In 1Q
Maintain HOLD.  ARREIT’s 1Q12  results came in as expected, accounting for 22% of our and consensus full-year estimates. Its 1Q12  DPU of 1.81 sen was also in line. We expect a pick-up in earnings in  the following quarters as refurbishment costs taper off, and hence our earnings forecasts and  MYR0.95 DCF-based TP are maintained. Positive surprises  could come from: 1)  the sale of the Wisma UEP building in Subang Jaya and 2) new acquisitions.   

YoY and QoQ decline in 1Q earnings. ARREIT’s 1Q12 net profit was  MYR9.7m (-11% YoY and  -6% QoQ) despite a 1.6% YoY and 1.4%  QoQ growth in the top line. The profit decline was due to: 1) the loss of  rental income and maintenance costs incurred at Wisma UEP and 2) higher refurbishment costs and provisions for landslip management at Wisma ARB.  Consequently, net property margin declined by 8.1ppts YoY and 8.5ppts QoQ to 89.1%. 

Disposing Wisma UEP. ARREIT  has received an MYR800k deposit for the sale of Wisma UEP. The sale  is currently pending the completion of the SPA. To recap, Wisma UEP has been vacant since July 2011 after the expiry of the tenancy lease agreement with Sime UEP Properties Bhd. The sale will release ARREIT from incurring MYR113k in monthly maintenance costs for the building. 

No payment from Silver Bird Group (SBG - a PN17 company). SBG (ARREIT’s third-largest tenant, accounting for 11% of rental income or MYR608k  in  monthly rents) has defaulted on  rental payments since early this year. Fortunately, the shortfall in rental income is covered by SBG’s security deposit (equivalent to 24 months of rent). We understand that ARREIT has  initiated talks with SBG’s major shareholder on this matter. The loss of SBG’s rentals may result in an 18.5% decline in our 2014 net profit and DPU forecasts.  

New acquisition soon? As at Mar 2012, ARREIT’s gearing remained unchanged at 0.35x, implying an additional MYR300m  in  new debt capacity based on the statutory 0.5x cap. ARREIT continues to hunt forgood-quality office properties backed by long lease agreements with rental guarantees. It does not discount the possibility of raising funds from the capital market. Also, proceeds from the sale of Wisma UEP
will likely be used to fund future acquisitions.

AmanahRaya REIT– Summary Earnings Table                  Source: Maybank-IB