Acquisition of Four Industrial Properties for RM98.3mn

KIP Real Estate Investment Trust (KIP REIT), through its trustee Pacific Trustees Bhd, has entered into four conditional sale and purchase agreements to acquire four industrial properties located in Selangor, Sarawak, and Johor for a total cash consideration of RM98.3mn. An independent market valuation conducted by Laurelcap Sdn Bhd places the total market value of these assets at RM99.3mn – see Figure 1.

This transaction marks KIP REIT's second acquisition within the span of just one week, and its second venture into the industrial sector. This follows the trust's initial acquisition of industrial assets in Pulau Indah, Klang, announced in July 2022. According to the announcement, the proposed acquisition is expected to be completed in 4QCY24. The purchases will be fully funded in cash through two tranches of medium-term notes, each with a five-year tenure. KIP REIT stated that these notes will carry monthly coupon payments at a rate of cost of funds plus 1.2% per annum. After the proposed acquisition is completed, approximately 650,695 sq ft of lettable area will be added to KIP REIT's portfolio.

Long Lease Agreement

These properties will be leased to related companies of the Hextar group on a triple net basis for a fixed period of 12-15 years from the date of completion of the SPAs at a total initial annual rental of approximately RM8.25mn with built-in agreed rental escalations of approximately 11%-13% scheduled in Year 4, Year 7, Year 10, and Year 13 (review every 3 years). The proposed acquisitions and leases are considered related party transactions, requiring the approval of both KIP REIT's unitholders and Hextar’s shareholders. This is because Datuk Eddie Ong Choo Meng, who is a major shareholder in Hextar, is also a significant unitholder in KIP REIT.

Reasonable Acquisition Cost

Based on the acquisition cost of RM98.3mn and NPI of RM7.2mn, the net yield of the assets works out to 7.3% for the initial term. Referring to the Bursa announcement, the net property yield is competitive within the range of net rental yields for similar industrial properties, which typically fall between 6.0% and 9.0%.

Additionally, the rental escalation per term of 11%-13% translates into an effective annual increment rate of approximately 3.18%-3.35%, which aligns with the effective annual increment rates for industrial properties based on comparable concluded tenancy/lease agreements, generally ranging between 3.0% and 3.5%. This data indicates that the acquisition cost is fair and reflects current market conditions for industrial properties.

Our View

This marks KIP REIT's third acquisition in 2024, increasing its total net lettable area by 30.8% from 2.08mn sq ft to 2.73mn sq ft. The acquisition will also raise the total asset value of KIP REIT's properties by 9.3%, from RM1,061.6mn to RM1,159.9mn, with the new properties contributing approximately 8.5% to the total asset value under management – see Figure 2.

Source: TA Research - 30 Aug 2024