KIP REIT Buys KIP Mall Kota Warisan from Major Unitholder for RM80mn

Pacific Trustees Bhd, acting as the trustee of KIP Real Estate Investment Trust (KIP REIT), has entered into a conditional sale and purchase agreement with Cahaya Serijaya Sdn Bhd to acquire KIPMall Kota Warisan for RM80.0mn. The market value of this property, as assessed by independent market valuer CBRE WTW Valuation & Advisory S/B, also stands at RM80.0mn.

This deal falls under the category of related-party transactions. Datuk Ong Kook Liong holds key positions as a director and major shareholder of Cahaya Serijaya, while also serving as the managing director and a major unitholder of KIP REIT.

More about KIPMall Kota Warisan 

Opened in August 2017, KIPMall Kota Warisan is part of the 37-acre KIP Sentral @ Sepang development in the Kota Warisan township. Alongside the mall, this development includes two towers comprising 466 units of serviced residences/SOHO units and 132 units of semi-detached and terraced boutique shop lots. The mall enjoys proximity to residential neighbourhoods, commercial establishments, and educational institutions. In terms of connectivity, the mall is conveniently accessible via main highways including the ELITE Highway, Putrajaya-Cyberjaya Expressway, and Maju Expressway. Moreover, the nearby Salak Tinggi ERL station offers convenient access to KL Sentral, Putrajaya/Cyberjaya, and Bandar Tasik Selatan.

Given the ongoing expansion of new townships in the area, including Saujana KLIA by Glomac, Warisan Puteri by IOI Properties Group Bhd, Serenia City by Sime Darby Property, and Sunsuria City by Sunsuria Bhd, the population is projected to grow substantially. Consequently, KIPMall Kota Warisan is poised to thrive as a community-centric mall in Sepang. With a net lettable area (NLA) of 186,080 square feet, the mall features one and a half storeys of retail space and maintains an impressive 98% occupancy rate, as outlined in Appendix 1.

Proposed Private Placement of up to RM10.0mn

KIP REIT has proposed to undertake a private placement of new KIP REIT units to raise gross proceeds of up to RM10.0mn to partially finance the acquisition. Based on an illustrative issue price per placement unit of 81.5sen, this entails issuing up to 12.3mn placement units. This represents 2.0% of the existing fund size of 606.4mn units, resulting in an enlarged fund size of 618.7mn units.

In addition to the proposed private placement, the acquisition will be financed through a combination of bank borrowings (RM47.9mn) and the unutilised proceeds from a previous private placement exercise (RM22.2mn), as depicted in Figure 1. Both proposals, which are conditional upon the approval of KIP REIT's non-interested unitholders at an extraordinary general meeting to be convened at a later date, are anticipated to be completed by 4Q23 (or 2QFY24).

Our View

The acquisition of KIPMall Kota Warisan is a significant milestone for KIP REIT, as it expands the total assets under management beyond RM1.0bn. Following the acquisition, KIP REIT's portfolio will consist of 11 properties, including 8 community malls and 3 industrial properties. The acquisition leads to an 8.5% increase in assets under management, amounting to RM1.02bn, and a 10.0% increase in NLA to approximately 2.04mn square feet.

The acquisition is consistent with KIP REIT's strategic goals, as management has previously stated. KIP REIT has actively pursued opportunities for acquisitions in both the retail and industrial sectors, with a target of growing the portfolio value to RM1.0bn by the end of 2023 and further increasing it to RM1.5bn by FY26. Out of the four right of first refusal assets granted by KIP REIT's promoters, management disclosed in the last analyst briefing that KIPMall Kota Warisan was identified as a promising asset due to its maturity, high occupancy rates, and stable rental income.

The acquisition is expected to be yield accretive to KIP REIT. Based on KIPMall Kota Warisan's annualised net property income for the 4-month period ended 30 April 2023, the net property income yield works out to 8.0%, surpassing the average yield of KIP REIT's other retail properties for FY22 (6.7%) and our projected FY24 distribution yield (7.8%).

Considering the range of acquisition yields for retail malls in Malaysia acquired by listed Malaysian Real Estate Investment Trusts between 2016 and 2022, the acquisition price appears attractive, exceeding the range of 5.7% to 7.3%.

We estimate KIP REIT’s gearing will increase from 33.2% as at end Mar-23 to 37.2%, following the proposed private placement and acquisition. Although minority unitholders may experience some earnings dilution due to their exclusion from the capital-raising process, we believe private placement remains the ideal method of raising capital due to its quicker execution time.

For illustrative purposes, assuming the private placement and the acquisition are completed by the end of 2023 (end 2QFY24), we anticipate a net impact on our projected FY24 and FY25 earnings of -2% and +5%, respectively, based on a 6- month earnings contribution in FY24 and a full-year contribution in FY25, as depicted in Figure 2. This accounts for a 6-month earnings contribution in FY24 and a full-year contribution in FY25. Overall, we are positive about the acquisition due to its appealing purchase price and the potential for earnings accretion.

Forecast

We leave our earnings forecasts unchanged for now, pending finalisation and approvals of the relevant proposals for the acquisition.

Valuation

We maintain our Buy recommendation on KIP REIT with an unchanged target price of RM1.05, based on CY24 target yield of 6.75%.

Source: TA Research - 19 Jun 2023