KIP REIT has proposed to acquire DPulze Shopping Centre for RM320mn. Separately, the trust has proposed to undertake a placement of new units up to 180mn to raise up to RM146.7mn to part finance the proposed acquisition. We are optimistic about this acquisition because it aligns with its goal to scale up operations and increase total asset under management to RM2.0bn in the next three years. We leave our earnings forecasts unchanged, pending finalisation and relevant approvals for the proposed acquisition and private placement exercise. Maintain Buy with an unchanged TP of RM1.14/unit based on a target yield of 6.75%.

KIP REIT Buys DPulze Shopping Centre for RM320mn

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 DPulze Venture Sdn Bhd to acquire DPulze Shopping Centre for RM320mn. The acquisition price, negotiated on a willing-buyer, willing-seller basis, represented a marginal discount of 0.3% to the market value of RM321.0mn appraised by an independent market valuer, Nawawi Tie Leung Property Consultants Sdn Bhd.

More About DPulze Shopping Centre

DPulze Shopping Centre is a 7-storey commercial building with 2 basement levels. Its anchor tenants are Jaya Grocer and TGV Cinema. Other notable retailers include Ace Hardware, Celebrity Fitness, Daiso, Decathlon, Guardian, MR DIY, MPH Bookstores, Skechers, Starbucks, Sushi King, The Body Shop, Watsons, and Yamaha Music School.

Located in the heart of Cyberjaya's major commercial area, DPulze Shopping Centre is part of the integrated commercial development known as DPulze Cyberjaya, which also comprises two hotels and serviced apartments – see Appendix 1. The property is accessible from Kuala Lumpur city centre via Jalan Tun Razak, Maju Expressway, and several other major roads, approximately 27 km southwest of Kuala Lumpur and 5 km west of Putrajaya. The Cyberjaya City Centre MRT station and Cyberjaya Utara MRT station are approximately 2 and 3 km from the property, respectively.

The immediate vicinity of DPulze Shopping Centre features a mix of residential and commercial developments, as well as several higher education institutions, including Multimedia University, University of Cyberjaya, Cyberjaya University College of Medical Sciences, Limkokwing University, and University of Malaya Centre for Continuing Education.

DPulze Shopping Centre is poised to thrive as a neighbourhood mall, supported by the steady stream of potential customers from the surrounding residential, commercial, and student populations. Additionally, there are limited retail spaces or shopping malls in Cyberjaya, with nearby options including GEM-In Mall, Malakat Mall, Tamarind Square, and Shaftbury Square Cyberjaya. With a net lettable area (NLA) of 311,499 square feet, DPulze Shopping Centre maintains an impressive 100% occupancy rate, as outlined in Appendix 2.

Proposed Private Placement of Up to 180mn Units RM146.7mn

To finance the acquisition, KIP REIT has proposed to undertake a private placement of new KIP REIT units to raise gross proceeds of up to RM146.7mn (or 45% of the acquisition price) by way of book-building. Based on an illustrative issue price per placement unit of 81.5sen, this entails issuing up to 180mn units. The placement represents 29.1% of the existing fund size of 618.6mn units and would increase the enlarged fund size to 798.6mn units.

The managing director, Dato’ Ong Kook Liong, who holds a 10.7% stake in KIP REIT (including indirect stakes), has pledged to subscribe up to 15mn placement units.

Including acquisition-related fees and expenses, the total acquisition cost is estimated to be RM326.4mn. This will be financed through a combination of bank borrowings and proceeds from the proposed private placement, 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 later, are anticipated to be completed by 1Q25 (or 3QFY25).

Our View

The proposed acquisition, which is KIP REIT’s largest since its IPO, will significantly enhance the trust's scale and demonstrate its commitment to strengthening portfolio resiliency and providing long-term, sustainable income to unit holders.

Post-acquisition, KIP REIT's portfolio will consist of 12 properties, including 9 retail malls and 3 industrial properties. This will result in a 30.6% increase in assets under management to RM1.36bn, as well as a 15.0% increase in NLA to approximately 2.39mn square feet. DPulze Shopping Centre is set to become the largest retail asset within KIP REIT's portfolio. We are optimistic about this acquisition, as it aligns with KIP REIT’s goal to scale up operations and increase total asset under management to RM2.0bn in the next three years.

Based on DPulze Shopping Centre’s net property income for the financial year ended 31 January 2024 and the acquisition price, the net property income yield works out to 7.0%. This compares favourably against KIP REIT’s existing retail portfolio yield of 6.8%. Additionally, considering the range of acquisition yields for retail malls in Malaysia acquired by listed Malaysian Real Estate Investment Trusts between 2016 and 2024, the acquisition price appears reasonable, falling within the range of 5.7% to 8.0%.

We estimate that KIP REIT’s gearing will increase from 35.5% as at end Mar-24 to 40.0%, following the proposed private placement and acquisition. While 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 the first quarter of 2025 (end 3QFY25), we anticipate a net impact on our projected FY25 and FY26 earnings of -18% and -6%, respectively, based on a 3-month earnings contribution in FY25 and a full-year contribution in FY26, as depicted in Figure 2. However, we expect the actual dilution to be lower, considering potential upward rental adjustments upon lease expiry.

Forecast

We leave our earnings forecasts unchanged, pending finalisation and relevant approvals for the proposed acquisition and private placement exercise.

Valuation

We maintain our Buy recommendation on KIP REIT with an unchanged target price of RM1.14, based on CY25 target yield of 6.75%.

Source: TA Research - 28 May 2024