REITs yielded solid returns in 2010

Real estate investment trusts (REITs) are good investing alternatives for the more risk averse investors, particularly during periods of increased market volatility, with their higher than market average yields and defensive profiles. The listings of Sunway REIT and CapitaMalls Malaysia Trust (CMMT), two of the largest REITS in the country, last year have further turned the spotlight on the sector and boosted investor interest.

Total 15% gains from CMMT since listing
Investors in CMMT have fared quite well, making some 11% in capital gains based on the prevailing price of RM1.09 and the closing price of 98 sen per unit on its first day of listing. The trust recently went ex-entitlement for its maiden income distribution of 3.4 sen per unit. Including this latest income distribution, investor returns would total a pretty smart 15% — for a seven-month holding period.

CMMT is currently the second largest REIT listed on the local bourse, by total assets and market capitalisation. It is also among the more liquid of the locally listed REITs with a fairly large free float of about 58% of total units issued.

The trust is focused on the retail sector. Its three properties are the Gurney Plaza in Penang, 205 strata parcels within Sungei Wang Plaza (which is about 61.9% of the mall's retail floor area plus car park) in the heart of Kuala Lumpur and The Mines in Selangor — valued at a collective RM2.14 billion with net lettable area (NLA) totalling almost 1.88 million square feet.

All three properties registered good occupancy rates last year, averaging 98.3%. Rental rates for tenancies renewed during this period, which accounted for roughly 22% of the portfolio's total NLA, were some 4.9% higher, on average.

CMMT is in the midst of finalising the acquisition of the extension to Gurney Plaza for RM215 million, which will add some 135,000 sq ft of NLA to its area under management. The acquisition will be part financed by new units to be issued to raise RM167.1 million.

It comes as no surprise that CMMT's latest earnings results (for the period from July 14 to Dec 31, 2010) were pretty much in line with the forecasts made in its listing prospectus. A relatively high degree of earnings predictability is one of the key characteristics of REITs.

Revenue totalled RM94.6 million while distributable income stood at RM45.9 million. As per its stated intentions, CMMT paid out all its distributable income last year — equivalent to 3.4 sen per unit — and is expected to do the same for the current year.

Based on the income estimate of RM101.5 million, distribution should increase to about 7.46 sen per unit. This translates into a gross yield of 6.8% for unitholders at the prevailing price.

Whilst this is at the lower end of the range of yields expected from locally listed REITs, we suspect CMMT's implied premium is attributable to its size as well as comparatively high liquidity and free float. Its net asset value stood at RM1.03 per unit at end-2010.

Potential re-rating for laggard Starhill
In fact, other than CMMT, unit price gains for most of the locally listed REITs have been fairly good over the past year — save for Starhill REIT, which is undergoing a restructuring exercise. As a result, the latter's unit price lagged the sector.

The trust disposed of the shopping malls, Lot 10 and Starhill Gallery, last year and is currently finalising the acquisition of nine properties, including the Ritz-Carlton Hotel, Hilton Niseko and Pangkor Laut Resort, that will see it emerge as a focused hospitality REIT.  

Starhill REIT is currently trading well below its net asset value (NAV) of RM1.16 per unit and could enjoy an upward re-rating upon completion of its restructuring exercise, expected by mid-2011. Meanwhile, the trust expects to maintain last year's distribution of 6.49 sen per unit in the current financial year ending June 2011. That will give investors a yield of roughly 7.6%.

Quill Capita trading below NAV of RM1.28
Another REIT trust that has lagged the sector and could do well in catching up is Quill Capita. Its unit price has gained just 3% since the beginning of last year and is still trading below the NAV of RM1.28.

Quill Capita is focused primarily on commercial-industrial properties. At present, the trust has 10 properties in its portfolio — with net lettable area totalling more than 1.288 million sq ft — worth about RM810 million. The assets are located in Cyberjaya, Kuala Lumpur, Selangor and Penang and the majority of its tenants are MNC/foreign related companies. It has not made any new purchases over the past two years but remains on the lookout for yield accretive acquisitions.

Nonetheless, Quill Capita has managed to steadily raise its distribution over the past few years — from 6.46 sen in 2007 to 8.03 sen last year. Based on a similar payout, income distribution in the current year could total some 8.26 sen per unit. That will earn investors a yield of 7.6% at the prevailing price of RM1.08.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.