This article first appeared in The Edge Malaysia Weekly on August 5, 2024 - August 11, 2024

For the third consecutive year, UOA Real Estate Investment Trust (KL:UOAREIT) has emerged as the winner of the Highest Growth In Profit After Tax Over Three Years award in the real estate investment trust (REIT) category. This is no mean feat, given that the subsector the REIT is in — the office space — has faced a supply glut for years.

The commercial REIT is currently focused on Kuala Lumpur, where all six of its assets are located, according to its 2023 annual report. These assets are UOA Corporate Tower, Menara UOA Bangsar, Wisma UOA Damansara II, UOA Damansara Parcels, UOA II Parcels and UOA Centre Parcels.

UOA REIT’s income available for distribution or net profit — which jumped 68.4% from RM36.7 million in FY2020 to RM61.8 million in FY2021 at the height of the pandemic after it bought UOA Corporate Tower in Bangsar South from its parent company UOA Development Bhd — stayed steady at RM61.1 million in FY2022.

While its net profit dipped 13% to RM53.2 million in FY2023, the compound annual growth rate of its bottom line over the last three years was still a strong 13.2%, based on the computation for The Edge Malaysia Centurion Club Corporate Awards 2024, beating its peers in the REIT category.

But distribution per unit (DPU), which grew from 8.44 sen in FY2020 to 8.64 sen in FY2021, has been sliding, to 8.62 sen in FY2022, then to 7.82 sen in FY2023. Nevertheless, its distribution yield has managed to hold its ground at above 7% over the last three years, as shown in its latest annual report.

Still, the REIT could face a tough time this year. Its FY2024 started on a soft note, with its net profit falling 20% to RM11.67 million for the first quarter ended March 31, 2024, from RM14.61 million a year earlier, as its gross rental income dropped to RM26.2 million from RM28.7 million. The drop was due to a lower occupancy rate at Menara UOA Bangsar, which fell from 97% in 1Q2023 to 57% in 1Q2024, following the departure of its anchor tenant.

According to AmInvestment Research’s report dated May 3, 2024, Menara UOA Bangsar accounted for 21% of UOA REIT’s FY2023 gross rental income. “Based on our sensitivity analysis, a 40% drop in occupancy rate for Menara UOA Bangsar will result in a 9% decline in UOA REIT’s revenue,” it said.

Following the 1Q2024 results, AmInvestment Research downgraded the REIT to “hold” from “buy”, with a lower fair value of RM1.08 from RM1.23 previously.

Nevertheless, the research house believes Menara UOA Bangsar’s occupancy rate will gradually recover, given its prime location and direct connectivity to the Bangsar LRT station. It also said Menara UOA Bangsar was preparing to apply for the Malaysia Digital Cybercentre designation with enhanced infrastructure, which it believes will make it appealing to a wider tenant base, including information and communications technology companies.

While Menara UOA Bangsar’s occupancy rate fell, UOA Corporate Tower — a key contributor to UOA REIT — achieved an occupancy rate of 99% in 1QFY2024.

“We recognise that a significant portion of UOA REIT’s tenants with expiring leases in FY2024 are from UOA Corporate Tower.

Despite this, we are optimistic about the outlook for UOA Corporate Tower, driven by its MSC status and strategic location in MSC Malaysia Cybercentre @ Bangsar South City,” said AmInvestment Research.

In a May 6 note, Malacca Securities Research said it remained cautious about the outlook for the office space in the light of uncertainties arising from elevated inflation levels, future interest rate hikes and continued oversupply issues. On that point, it said rental rates in the sector are expected to be flattish. It had a “hold” call on UOA REIT, with a target price of RM1.02.

UOA REIT’s unit price had dipped 0.89% year to date to close at RM1.11 on July 19. This gives the REIT a market capitalisation of RM756 million, which is little changed from the RM749.9 million as at the March 31 cut-off date for the Centurion Club awards.

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