UOA REIT’s earnings are expected to improve greatly in FY21, backed by newly acquired asset, UOA Corporate Tower in Dec 2020. Furthermore, the office segment has been stable despite the Covid-19 pandemic. UOA REIT’s current portfolio’s occupancy rate is decent at 82%. Also, it has been consistently paying out more than 95% of its distributable income. We initiate coverage on UOA REIT with a BUY call at a TP of RM1.26; this is based on FY22 forward DPU on a targeted yield of 7.2%, which is derived from its 2 year historical average yield spread (vs 10-year MGS). We like UOA REIT for its attractive dividend yield of 7.8% (average under our REIT coverage: 5.1%) and its relatively more resilient profit amid Covid-19 given minimal retail exposure unlike other mall based REITs.

Latest acquisition to drive up earnings. We project the newly acquired UOA Corporate Tower (Dec FY20) to drive up earnings moving forward. FY21 gross revenue is projected to increase significantly (+63% YoY) thanks to the full year contribution from the said acquisition. The property has a strong occupancy rate of 91% and is strategically located at a prime location (Bangsar South), which we believe has resilient demand. We forecast FY21/FY22’s earnings to increase by 57%/5% after imputing a healthy occupancy rate (average: 86%) and potential positive rental reversions (c. +1.5%).

Strategic location. All 6 properties are strategically located in prime locations at Kuala Lumpur with good connectivity to public transport links (i.e. Bangsar and Kerinchi Putra LRT Station, Semantan MRT Station). Thus, it augurs well for UOA REIT’s occupancy, tenant retention, and rental rates. Also, current portfolio occupancy remains decent at 82% despite Covid-19 pandemic impact (FY20: 86%, FY19: 91%).

Defensive exposure. UOA REIT’s portfolio mix consists primarily of office buildings (c.90%). We view this as advantageous as we have seen retail and hotel REITs being severely affected in FY20 due to Covid-19 pandemic (malls and hotels had restrictions on operations and rental assistance). Furthermore, office REITs are relatively more sheltered due to the usually longer tenancy as compared to retail REITs. Despite being hit by the pandemic, FY20’s net property income reduced by a manageable -12.4% YoY.

High dividend payout. UOA REIT has consistently paid out >95% of its distributable income since FY15 (requirement 90%). This implies an average yield of 7.9% over the past 6 years. We forecast a DPU of 8.6 sen (+2% YoY, translating into a yield of 7.8%) in FY21, backed by the new acquisition in FY20.

Forecast. We forecast earnings of RM59.4m (+57%, YoY) in FY21 and RM62.5m (+5%, YoY) in FY22. The commendable earnings increase in FY21 would be backed by its newly acquired asset, UOA Corporate Tower (Dec FY20).

Initiate with a BUY, TP RM1.26. We initiate coverage on UOA REIT with a BUY call and TP RM1.26. Our TP is based on FY22 forward DPU on targeted yield of 7.2%, suggesting a 21.3% total return. Our targeted yield of 7.2% is derived from the 2 years historical average yield spread of UOA REIT and 10-year MGS. We like UOA REIT for its attractive dividend yield of 7.8% and its relatively more resilient earnings amid Covid- 19 given minimal retail exposure unlike other mall based REITs.

Source: Hong Leong Investment Bank Research - 13 Aug 2021