TheStar
ALTHOUGH Atrium REIT (real estate investment trusts) is among the smallest in terms of market capitalisation (RM130mil), it has in the past several months been enjoying quite a bit of the limelight.
Yield is comparable with the larger REITs and probably by virtue of its size and focus, it is probably also more pliable and dexterous.
Briefly, Atrium REIT’s focus is in logistics warehousing, a service industry that complements the country's export-oriented industries. Other REITs may have their focus on retail, commercial or office rental business.
As early as August, AmResearch has initiated coverage on Atrium with a Buy call that has a target price of RM1.48.
“Although we are in October,” analyst Chong Tjen-San says, his buy call remains. Just last week, he repeated the buy call.
He says Atrium has entered into a sale and purchase agreement to buy an industrial building at Senai Industrial Park for RM12.5mil cash.
“Rent is locked in for the next five years with multi-national company Flextronics Technology (M) Sdn Bhd until 2011. They have the option to renew that tenancy for another five years,” Chong says.
From this single statement, it is possible to outline Chong’s Buy call for Atrium.
First, it's the way Atrium manages its business. They deal with MNCs, not just anyone. Most of their tenants are from the Fortune 500 list.
Secondly, their rental agreement is between five to six years. This spells stability.
Third is their choice of locations. Most of the places where their properties are sited are very strategic. Other than this recent purchase, most of their properties are freehold.
The recently purchased property sits on seven acres of leasehold land expiring in 2054. Chong says that based on the annual gross rental yield of 9.6% and having considered the incremental property and non-property expenses and higher borrowing costs, he expects the acquisition to raise its financial year 2008 dividend per unit by 5% to 8.7 sen from 8.3 sen previously.
The acquisition will increase the gearing ratio to 33% from 28% currently, he says.
“We expect it can afford another acquisition to the tune of RM55mil before hitting the 50% gearing limit,” Chong says, adding that Atrium has said it will not exceed a gearing level of 40%.
Although the acquisition (RM12.5mil) is small – it raises its total asset size to RM171mil from RM158mil – Atrium is expected to be the fastest growing REIT on Bursa Malaysia.
“Before the year is over, it will have RM50mil more in purchase. The tenant will also be Flextronics,” he says.
By the end of 2008, Atrium is expected to have additional RM229mil worth of acquisitions to more than double its asset size to RM450mil.
“Atrium’s acquisition pipeline is highly realisable. Comparing Atrium with Axis REIT, he says the valuation gap between them is expected to close as Atrium’s asset size increases at a faster pace and with better quality tenant.
While Chong makes an overall comparison of the two, another source says it is best to be wary comparing apples and oranges. “Although it is fine to make a surface preliminary judgement, it is wise to take into account that Axis is into industrial space with an office space component while Atrium is predominantly logistics. There is demand for both, particularly for Grade A office space in Kuala Lumpur and the logistics business is good at present.”
On the overall Malaysian REIT horizon, another research house says winners in the REIT business will be those which have attractive underlying assets, a good asset pipeline and proven acquisition tract record.
Besides its recent acquisition in Senai, Atrium’s assets are located in Shah Alam, Puchong and Rawang. The growing trend of outsourcing of logistic services will boost Atrium’s income. It is estimated that third party logistics (outsourcing of the logistics component by MNCs) is expected to grow to US$28bil in revenue by 2012 from US$15bil last year. The market in Malaysia is expected to be worth US$3.5bil in 2007 (2006: US$3.3bil).
The overall increase in property prices in the country in all sub-sectors of property, also bodes well for the REIT business. Rising property prices usually parallel rental yield.
The oil factor is another element. Oil prices have hit the unprecedented US$90 a barrel. This will have a domino effect across all sectors of the economy, from transport to building raw materials. With cost of construction expected to rise further, property prices are expected to move up, hence the importance of having solid assets.
Disclaimer: Reading materials in this site are obtained from its respective website and it is for information purposes only. It is not Malaysia Unit Trusts - administrator view and it is not to be used against Malaysia Unit Trusts - administrator.
