We came away from KIP REIT’s 1QFY23 results briefing feeling neutral on the trust’s near-term prospects. While 1QFY23 earnings only accounted for 21% of our earnings forecasts, we anticipate stronger performance in the subsequent quarters, supported by higher occupancies and rental rates, and additional earnings contribution from new assets. Occupancy rates improved to 90.1% as KIPMall Bangi secured new anchor tenants. It achieved a positive rental reversion of 6% with a tenant retention rate of 82%. Management will keep evaluating growth opportunities in its existing and new asset classes, including retail, commercial, and industrial assets. No change to our FY23-25 earnings forecasts. Maintain Hold with an unchanged target price of RM0.98, based on CY23 target yield of 6.75%

1QFY23 Results Recap

KIPREIT's earnings increased by 5% YoY to RM8.8mn in 1QFY23, thanks to the reopening of the local economy. The results were in line with our expectations, accounting for 21% of our full-year projections. We expect KIP REIT to post stronger results in 2HFY23, supported by higher occupancies and rental rates, as well as the maiden earnings contribution from the three industrial property assets in Klang.

Improved Operating Metrics

The average portfolio occupancy of KIP REIT increased to 90.1% in 1QFY23, up from 86.8% in the previous quarter. Specifically, the occupancy rate of KIPMall Bangi increased to 72.3% from 56.7% in the previous quarter due to the opening of two new anchor tenants, My Hero Supermarket and Noko. We understand that the major facelift of KIPMall Bangi is on track to be completed by September 2023 as planned. The management anticipates that the occupancy rate of KIPMall Bangi will recover to above 90% once the renovations are complete. In 1QFY23, KIP REIT achieved a positive rental reversion of 6% and a tenant retention rate of 82%. While KIP REIT has 40% of leases left to be renewed in FY23, management does not see any significant vacancy risks. Gearing reduced to 32.9% from 35.2% a quarter ago, owing to an increase in cash levels following the completion of the first two tranches of private placement exercise which raised RM59.9mn.

Aims to Increase Portfolio Value to RM1.5bn by FY26

Management maintains the target of growing KIP REIT’s portfolio value to RM1.5bn by FY26. To achieve this, management will keep evaluating growth opportunities in its existing and new asset classes, including retail, commercial, and industrial assets. KIPREIT's portfolio value is expected to rise 9% to RM931mn post the completion of the acquisition of 3 industrial assets in 4QFY23. While there is not a specific acquisition target on the table, management shared that it will continue to pursue yield-accretive industrial and logistics investments. Nonetheless, management acknowledges that yield-accretive acquisitions are particularly scarce in the industrial and logistics sectors. According to CBRE WTW Research and Consulting, the average net rental yields for industrial properties in the Klang Valley range from 6.5% to 7%. This appears yield-dilutive compared to KIP REIT's 7-8% distribution yield.

Forecast

Maintain FY23-FY25 earnings forecasts.

Valuation

We anticipate that KIP REIT's retail portfolio performance will remain relatively stable as community-centric retail malls like KIPMalls provide a competitive alternative to hypermarkets and neighbourhood retail malls for lower- to middle-income Malaysians in smaller towns and suburbs. However, near-term earnings and DPUs are expected to be diluted by the 20% private placement. We maintain our Hold recommendation on KIP REIT with an unchanged target price of RM0.98, based on CY23 target yield of 6.75%.