by NUR HAZIQAH A MALEK / pic credit: ANNUAL REPORT

UOA Real Estate Investment Trust’s (REIT) earnings are expected to improve considerably for its financial year of 2021 (FY21), driven by its recently acquired asset, UOA Corporate Tower, in December 2020.

Hong Leong Investment Bank Bhd (HLIB Research) analyst Farah Diyana Kamaludin wrote that UOA REIT’s office segment remained stable despite the pandemic.

She said its current portfolio occupancy rate is decent at 82%, while it has also been consistently paying out more than 95% of its distributable income.

HLIB Research has initiated its coverage on UOA REIT with a ‘Buy’ call at a target price of RM1.26, based on FY22 forward distribution per unit (DPU) on a targeted yield of 7.2%, which is derived from its two-year historical average yield spread, versus 10-year Malaysian Government Securities.

“We like UOA REIT for its attractive dividend yield of 7.8%, which is above the average under our REIT coverage of 5.1% and its relatively more resilient profit amid Covid-19, given minimal retail exposure unlike other mall-based REITs,” Farah Diyana stated in the report last Friday.

She said the REIT’s latest acquisition of the UOA Corporate Tower is likely to drive up earnings moving forward.

She further said that the REIT’s FY21 gross revenue is projected to increase significantly by 63% year-on-year (YoY) attributable to the full year contribution from the acquisition.

“The property has a strong occupancy rate of 91% and is strategically located at a prime location in Bangsar South, Kuala Lumpur (KL), which we believe has resilient demand,” Farah Diyana noted.

HLIB Research forecast the REIT’s FY21/ FY22 earnings to increase by 57% and 5% to RM59.4 million and RM62.5 million, respectively, after imputing a healthy occupancy rate at an average of 86% and potential positive rental reversions circa 1.5%.

All six properties by the REIT are strategically located in prime locations in KL with good connectivity to public transport links, providing a bright future for the occupancy, tenant retention and rental rates.

The REIT’s portfolio mix consists primarily of office buildings, which makes up 90% of its portfolio.

“We view this as advantageous as we have seen retail and hotel REITs being severely affected in FY20 due to Covid-19 pandemic, while malls and hotels had restrictions on operations and rental assistance.

“Furthermore, office REITs are relatively more sheltered due to the usually longer tenancy as compared to retail REITs, and despite being hit by the pandemic, FY20’s net property income reduced by a manageable -12.4% YoY,” Farah Diyana added.

Based on the REIT’s consistent over 95% payout of its distributable income, the analyst wrote that this implies an average yield of 7.9% over the past six years.

“We forecast a DPU of 8.6 sen, which increased 2% YoY, translating into a yield of 7.8% in FY21, backed by the new acquisition in FY20,” she wrote.

UOA REIT shares closed unchanged at RM1.11 last Friday, valuing the company RM749.91 million.

Its asset size stands at RM1.74 billion with a total net lettable area (NLA) of 2.1 million sq ft as at June 2021.

The office segment makes up about 90% of NLA, while the rest comprises retail segments such as banking halls, food courts, food and beverage, which are situated inside their properties to cohesively support the office tenants in their buildings.