Investment Highlights

• We maintain BUY on UOA REIT with an unchanged fair value (FV) of RM1.42/unit based on dividend discount model (DDM). No changes to our neutral 3-star ESG rating (Exhibits 8 & 9).

• UOA REIT’s 9MFY22 distributable income of RM47mil came in within our expectation. It accounted for 74% of both our and consensus’ FY22F earnings. Thus, we make no changes to our earnings forecast.

• In 3QFY22, UOA REIT’s gross revenue fell 4% YoY while net property income (NPI) dipped 2% YoY. This was mainly driven by a decline in occupancy rate of most of its buildings, particularly Wisma UOA Damansara II, UOA Centre Parcels and Wisma UOA II (Exhibit 3).

• QoQ, UOA REIT’s revenue was flattish at RM29mil while NPI improved 6%. The higher NPI was mainly attributed to lower direct operating expenses incurred in UOA Corporate Tower.

• Average occupancy rate has remained stable QoQ at 79%. The decline in occupancy rates of Wisma UOA Damansara (-3% QoQ) to 69% and UOA Centre (-1% QoQ) to 73% were offset by higher occupancy rates in its remaining office buildings (Exhibit 3).

• Nevertheless, its major assets, UOA Corporate Tower and Parcel B Menara UOA Bangsar (both contributing to 61% of the gross rental income) still maintained their occupancy rates at above 90% amid the rising demand for new and tech-enabled office spaces (Exhibits 2, 3).

• 21% of its tenancies are set to expire in FY22 (Exhibit 4). We expect rental reversion to be flattish upon the renewal of tenancies given the growing oversupply of office spaces, coupled with heightening inflationary pressures on tenant sales.

• UOA REIT’s debt-to-asset ratio increased slightly to 40%, below the REITs’ statutory limit of 50% (statutory limit after 31 December 2022).

• The group’s borrowings are all under revolving credit facilities on floating (40%) and fixed interest rates (60%). The mix of variable and fixed-rate borrowings is envisaged to be able to mitigate the risk of higher interest rates ahead.

• No income distribution was declared in 3QFY22. The REIT’s distribution in 3QFY22 will be paid together with that of 4QFY22 in line with its semi-annual distribution policy

• The recent aggressive policy rate hikes in the United States (US) has caused US treasury yields to rise and this in turn has spilled over and resulted in an increase in 10-year MGS yield. However, we anticipate that the uptrend in 10-year UST yield to be tapering off with the expectation that the Federal Reserve may ease off aggressive rate hikes after the end of 2022 as a result of weaker economic data. Hence, we expect UOA REIT to be appealing to yield-seeking investors with its higher yield spread against 10-year MGS (Exhibit 7).

• We like UOA REIT for its long-term prospects bolstered by its: 
  (i) strategically located properties which are well-connected in neighbourhoods via bridges, major highway and public transportation; 
  (ii) diverse tenant mix, which could mitigate potential rental collection risk during economic downturns (Exhibit 5); 
  (iii) excellent track record of distributing at least 94% of net income to unitholders with a strong distribution yield of more than 7% from FY22F to FY24F; and 
  (iv) large pipeline of potential asset injections from its sponsor – UOA Development (Exhibit 6).
• UOA REIT currently trades at a compelling FY23F PE of 12x vs. 4-year average of 17x. Meanwhile, FY23F distribution yield of 8% is attractive vs. 10-year MGS yield of 4%.

Source: AmInvest Research - 21 Nov 2022