This article first appeared in The Edge Malaysia Weekly on September 18, 2023 - September 24, 2023

UOA Real Estate Investment Trust (UOA REIT), a commercial REIT that invests in office and commercial buildings and whose assets are all in Kuala Lumpur, saw its earnings almost doubling even at the height of the pandemic between 2020 and 2021, thanks to the acquisition of UOA Corporate Tower in Bangsar South from its parent company, UOA Development Bhd, for RM701.65 million at end-2020.

The new acquisition boosted its net profit, which had fallen from RM39.54 million in FY2019 to RM36.72 million in FY2020, to RM61.8 million in FY2021 — an increase of 68.4% — as gross income expanded to RM116.88 million from RM72.69 million. The group then reported a slight easing of its bottom line to RM61.08 million in FY2022, as gross income dipped to RM114.8 million.

The bottom-line growth translated to a compound annual growth rate of 19.5% over the three-year period, based on The Edge Malaysia Centurion Club Corporate Awards methodology, clinching it the award for highest PAT growth over three years in the REIT sector for 2023. This is the second consecutive year that UOA REIT has bagged this award.

The acquisition expanded UOA REIT’s portfolio to six (the other five being UOA Centre Parcels, UOA II Parcels, UOA Damansara Parcels, Wisma UOA Damansara II and Parcel B of Menara UOA Damansara), raising the value of its investment properties to RM1.72 billion as at Dec 31, 2022, after adding RM718 million to the tally.

The REIT’s return on equity (ROE), which came in at 4.4% in FY2020, subsequently shot up to 6.3% in FY2021 but dipped a little to 6.1% in FY2022. This gave it a weighted ROE of 5.8% over the three years, based on the awards methodology, up from 5.5% in the previous three-year period of FY2019-FY2021.

The acquisition also bolstered its distribution per unit, which had been impacted by the pandemic. From 8.44 sen in FY2020 — down from 9.11 sen in FY2019 — DPU rose to 8.64 sen in FY2021, before easing to 8.62 sen in FY2022.

However, things are looking a little bumpy for the REIT. For the first six months of FY2023 ended June 30 (1HFY2023), the REIT’s net profit dropped to RM28.33 million, down 8% from RM30.8 million in the same half-year period in FY2022, as gross rental dipped slightly to RM57.12 million from RM57.59 million.

The net profit for 1HFY2023 was below analysts’ expectations, with the drop largely attributed to the slower-than-expected recovery of occupancy rates in Wisma UOA Damansara II and UOA II.

Based on a research note by AmInvestment Bank Research, the overall average occupancy rate for UOA’s properties amounted to 81% for the second quarter of FY2023 (2QFY2023). Nevertheless, Wisma UOA II and Wisma UOA Damansara II’s occupancy rates had fallen from 1QFY2023’s 64% and 79% respectively, to 61% and 76% in 2QFY2023.

“The occupancy rates in Wisma UOA II and UOA Damansara II have continued to be lower in 2QFY2023. The rental income of both assets made up 25% of UOA REIT’s rental income in FY2023F. Based on our sensitivity analysis, a 5% decline in the occupancy rate for both properties will result in a 1% drop in UOA REIT’s FY2023F distributable income,” AmInvestment Bank Research wrote in a note following the release of the 2QFY2023 results.

“Apart from the upcoming termination of tenancy in Parcel B of Menara UOA Bangsar, management is confident that leases for 80% of its tenants that are set to expire in FY2023 will be renewed, as most of the existing tenants have expressed interest in renewing tenancies.

“Nevertheless, we expect rental reversion to be flattish upon the renewal of tenancies, given the growing oversupply of office spaces, coupled with inflationary pressures impacting tenant sales,” the research house added.

Likewise, Malacca Securities Sdn Bhd expects rental rates to be flattish, as it noted that market sentiment remained soft amid uncertainties arising from elevated inflation, future interest rate hikes, as well as the persisting oversupply of office spaces.

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