We expect 4QFY24 distributional income of UOA REIT to be higher at RM12mil (+14.3% QoQ) driven by a slight improvement in occupancy rate of Parcel B - Menara UOA Bangsar (MUB) which will lift the gross rental income. Besides, non-recurrence of sinking fund expenses for MUB after completion of refurbishment works is expected to lower 4QFY24's property operating expenses. Our view of a limited DPU growth in the near term is unchanged. Oversupply of offices is expected to limit positive rental reversions while AEIs are required to be implemented to sustain existing and attract new tenants in aged office buildings. We maintain HOLD on UOA REIT with an unchanged TP of RM1.06/unit based on DDM. Our TP implies a neutral 3-star ESG rating.

• Expect an improvement in earnings in 4QFY24. UOA REIT's 4QFY24 results are targeted to be released on the 23rd of Jan 2025. Distributional income in 4QFY24 is expected to improve to RM12mil (+14.3% QoQ) from 3QFY24's RM10.5mil supported by a slight increase in gross rental income and lower property operating expenses. This is expected to lead to a FY24 distributional income of RM43mil (-20.1% YoY).
• Occupancy rate for Parcel B - Menara UOA Bangsar (MUB), is expected to rise moderately in 4QFY24. 4QFY24 is likely to see the occupancy rate of MUB rising to above 60% from 58% in 3QFY24. About 7 out of 8 floors of MUB which were unoccupied in earlier quarters of FY24F due to the departure of an anchor tenant have been filled. UOA REIT has found a replacement anchor tenant for 85% of the floor space. Meanwhile, another 3 floors of MUB occupied by a key tenant which departed in 3QFY24 have yet to be filled. Nevertheless, UOA REIT has prospects to lease out the vacant floor spaces.
• Property operating expenses are likely to trend lower in 4QFY24 due to the completion of refurbishment and upgrading works at MUB and Wisma UOA Damansara II. With the completion of chiller plant replacement of MUB, contributions to sinking funds for the asset which increased property operating expenses in earlier quarters of FY24F are not expected to recur moving forward. Looking ahead, UOA REIT will only optimize the chiller plants and will not carry out full replacements for UOA Damansara I and II. More than 90% of the renovation works at Wisma UOA Damansara I have been completed. In FY25F, refurbishments works are expected to be carried out for UOA Centre and Wisma UOA II.

Source: AmInvest Research - 27 Dec 2024