In a somewhat unexpected development, Starhill REIT is proposing to sell its Starhill Gallery and Lot 10 properties to Starhill Global REIT (which is listed on SGX).

YTL is looking to position Starhill REIT as a pure Hospitality play, while Starhill Global REIT will be a Retail play.

Starhill Global REIT is around 29% owned by YTL Corporation. This is an extract from the announcement to Bursa Malaysia:

The Proposed Rationalisation will enable Starhill REIT to concentrate on the acquisition of the prime hotel properties located both in Malaysia and internationally, in areas including Phuket, Bali, Saint Tropez and other global destinations, subject to attractive valuations which will provide yield accretive returns to the unitholders of Starhill REIT. The hospitality assets that have been identified for potential injection into the Trust would expand Starhill REIT’s portfolio to approximately RM1.6 billion.

The Heads of Agreement between vendor & purchaser provides for a proposed sale price of RM629 million and RM401 million for Starhill Gallery and Lot 10 respectively to be satisfied by cash and/or Convertible Preference Shares in Starhill Global REIT. The selling prices are pretty near current book value. This is what the Manager says:

The adjusted net book value of the Properties based on the audited financial statements as at 30 June 2009 and after adjusting for the value of 42% or 490 of the existing car park bays in Starhill Gallery to be retained by J.W. Marriott Hotel Kuala Lumpur is RM1,055.5 million. Accordingly, on completion of the Proposed Disposal, Starhill REIT is expected to realise a net loss on disposal of RM25.5 million for the financial year ending 30 June 2010. The original cost of investment of Starhill Gallery and the Lot 10 Property by Starhill REIT was RM480.0 million and RM341.0 million, respectively. Starhill REIT completed the acquisition of the Properties on 16 December 2005 on the listing of Starhill REIT on the Main Board of Bursa Malaysia Securities Berhad. The Proposed Disposal will unlock the value of the Properties as it is expected to realise an estimated distributable income of RM228.9 million for the financial year ending 30 June 2010.

Following disposal, Starhill REIT will be just left with its JW Marriot Hotel & The Residences @ Ritz Carlton Service Apartments. With all that proceeds, I hope they will buy some hotels at decent prices. I presume some of them will be YTL connected assets, I’m always concerned when it comes to related party transactions.

But at the same time, I don’t want to end up with another cash vehicle in my portfolio… got enough of this with my overly conservative investment strategy.

The RM1.6 billion mentioned sounds like they will gear Starhill REIT with close to a billion ringgit eventually to buy all those identified assets. But its hard to tell at this stage as we don’t know how much Cash/Convertible Prefs it will be getting from Starhill Global.

This development should be watched closely by Starhill REIT unitholders.

The Board of Directors of Alaqar KPJ REIT

1. Can you share with us a bit about Johor Corporation, Al-Aqar KPJ Reit (“Alaqar”) and KPJ Healthcare Berhad? – how each member of the group fits together? Does KPJ Healthcare hold any stake in Damasara REIT Managers Sdn Bhd?
Alaqar was set up in June 2006 with KPJ as sponsor. In that year, KPJ sold six assets worth RM 481m to Alaqar, and Alaqar was listed on Bursa Malaysia. These assets were sold partly in cash and partly in units, therefore KPJ received units in Alaqar, amounting to around 49% of Alaqar’s capital.

Alaqar, Damansara REIT Managers and KPJ are different entities under the umbrella of Johor Corporation. Damansara REIT Managers is responsible for managing Alaqar REIT.

2. Do you think KPJ will sell down to below 20%?
This would be up to KPJ. It is not for us to say.

3. For example, KPJ Healthcare announced recently that it was buying Bandar Baru Klang Medical Centre for RM38 million. How does the group decide which vehicle is entitled to buy which hospital?
I can’t comment as this deal is with KPJ and not Alaqar.

4. What will be Al-Alaqar KPJ’s gearing position following completion of the recent acquisitions (ie Seremban Specialist Hospital, Taiping Medical Centre, Damai Specialist Hospital in KK etc)?
Upon completion, the third acquisition amounting to RM394m will result in a gearing position of 44% of total assets.

5. What is your target or optimal gearing level?
This really depends on the expansion strategies that we are undertaking. Gearing may be undertaken where the right acquisition opportunity presents itself. Furthermore, current interest rate cost of around 4%+ is attractive so we also want to take advantage of this opportunity. When we decide to make an acquisition, we will make plans and ensure an adequate buffer for the purchase. But we will try to cap our gearing level at 45%.

6. Is the income for Al-Aqar KPJ sourced purely from property rental? or the operations of the hospital itself?
90%+ is from property rental and the remaining is from profit sharing of income from fixed deposits. Alaqar only owns the property and is not involved in the operations of the hospitals.

7. Currently KPJ is tenant for all the hospitals under Alaqar. Will all future assets acquired by Alaqar be run by KPJ or can another company be brought in to do so?
We are not restricted to only have KPJ as our tenant. But since they have a history and good track record with us, why don’t we just stick with them? After all, we enjoy a very good partnership with KPJ. However, this will not stop us from exploring opportunities with other hospital operators.

So far, KPJ have been very good tenants and prompt paymasters.

8. How are the property rentals determined – is it by arms-length negotiation with your tenants?
It is based on market price and formula. In the initial stage, the rental is determined at a certain yield, say 7%. Then there is a yearly increment which gives us an increase every year and rental rate will be reviewed every three years.

Our leases go for 15 years with the option to renew another 15 years and every 3 years we have a rental revision based on a formula. It is calculated by Market Value of the Property x (MGS + 2.88 basis points).

Even in the event of an economic crisis, we will still be able to meet our Minimum distribution promise of 6.5 sen per unit to unitholders. Therefore investors are protected during the good and bad times.

We are not so affected because of our tenant nature of business. Regardless of the economy, people will still need healthcare. Also, our assets are rented out on a Gross Floor Area basis, so in this aspect we maximize our rental income. Contrast this to other commercial property where the landlord gets rental on the space they let out, which gives rise to vacancies when times are bad.

9. Does KPJ Healthcare tenant all of your hospitals?
Yes, the KPJ group tenants all our hospitals.

10. Would you look into any other assets other than hospitals?
Actually, our focus is not only on hospitals but on healthcare-related assets. Meaning we could acquire nursing colleges, factories that produce medicine, hotels with syariah compliance operations to cater for health tourism – anything related to healthcare. But we find that among all these assets, hospitals provide the best returns. So we classify hospitals as Class A assets in our REITs.

Currently, we hold 20 assets comprising of 18 hospitals, one college and one hotel.

11. According to your Group Structure, Al-Aqar KPJ REIT pays Maintenance and Management Fees to Healthcare Technical Services Sdn Bhd (HTS) as the “Maintenance Manager”. Who owns this company and what exactly does this company do?
HTS was the property and maintenance manager for KPJ hospitals before the setting up of Alaqar REIT. According to guidelines, if a property falls under the Board of Valuer Act, then we need to appoint a registered valuer to manage it.  However, hospitals do not fall under property governed by the Board of Valuer Act therefore we are required to instead appoint a specific party as property manager. So we appointed HTS because of their vast experience in hospital maintenance.

Not all our assets are maintained by HTS. For example, our hotel and college falls under the Board of Valuer Act, therefore a registered valuer is appointed to manage it.

12. Is HTS a subsidiary of KPJ group?
No, HTS is no longer a subsidiary under KPJ, but they are all within the Johor Corporation group.

13. What are the elements you look for in a property/hospital building before investing in it?
The population catchment is an important factor to consider. The Ministry of Health (MOH) will conduct a market study of an area before approving the construction of a hospital to ensure there is a market need. So we look at this quite carefully.

14. How about looking into factors such as the projected selling price of the asset?
Yes, we do. But in this business, we will hardly sell an asset. The healthcare industry is a long-lasting business and we are more likely to hold our assets. However, we would look into whether the asset has any land which can be further developed such our Ampang Puteri asset, which is a prime area with a large piece of vacant land adjoining it.

15. Are there similar REITs in the Asia region focused on hospitals & medical centres?
I have heard that there are only two in Asia. One is in Singapore and the other is our company. But I believe every REIT has its own special features.

16. Is the market for Hospital properties a large/liquid one? For example, how saleable are your hospitals should you decide to exit an investment?
According to our agreement, the First Right of Refusal goes to KPJ. If we want to buy or sell any asset, we must first offer it to KPJ. If KPJ declines, then we may approach other parties.

17. What is the current Management Fee charged by Damansara REIT Managers following the proposed change late last year?
Previously our Management Fee was based on 0.15% of NAV but this was revised recently. Now we have a new scale which is 0.10% to 0.125% of GAV. I believe we are among the lowest of all REITs managers in the market.

18. Would you consider developing your own properties? Would you consider acquiring properties under construction or overseas assets?
According to guidelines, REITs cannot be developers or financiers. But since we have land (eg. Ampang Puteri), perhaps we may consider development through another vehicle.

We will also consider properties under construction; however, we are only allowed to invest up to 10% of our assets, according to guidelines.

19. Does Alaqar have any other expansion plans lined up locally or overseas?
We do have expansion plans in place but are waiting for the economy to pick up before we proceed.

20. How are your hospitals valued generally – is it by Discounted Cash Flow, Yield etc?
Both. We are required by the SC to have our assets valued by an independent registered valuer. And we use both methods as check and balance.

21. Which are some of your assets that require more capex?
Daily maintenance expenses are borne by KPJ. But Total Asset Replacements such as lifts, air-conditioning, would be borne by Alaqar REIT. These are items which affect the overall building system.

Hektar is led by its Chairman & CEO, Dato Jaafar Bin Abdul Hamid.

1. What is the percentage of Hektar REIT & Hektar Asset Management owned by Fraser Centrepoint group? How is Fraser Centrepoint involved in the management of Hektar REIT?
Frasers Centrepoint is a Strategic Partner of the Hektar Group. Frasers Centrepoint Trust owns a 31% cornerstone stake in Hektar REIT while Frasers Centrepoint Limited’s subsidiary owns a 40% stake of Hektar Asset Management Sdn Bhd, manager of Hektar REIT. Currently, Frasers sits on the Board of Directors and the Executive Committee of Hektar Asset Management and plays a strategic role in the development of Hektar REIT.

2. In your 2008 Annual Report, you mentioned that there were some 84 tenancies expiring in FY2009, almost 30% of the total tenants in your portfolio (or 11% of NLA). Have most of these been renewed?
As of the second quarter ended 30 June 2009, we have 42 new and renewed tenancies representing about 6% of our Net Lettable Area (NLA).

3. What is the current occupancy rate for Subang Parade & Mahkota Parade?
Currently, the occupancy in Subang Parade is 100.0% while in Mahkota Parade it is 96.6%. Our third property, Wetex Parade has an occupancy of 89.6% which is currently undergoing a tenancy re-mixing exercise, that is, we are changing the tenant mix. Overall, our occupancy average is 97% as at 30 June 2009.

4. How much of Subang Parade does Hektar REIT own (in terms of NLA)?
Hektar REIT’s NLA is roughly 1.1 million square feet, of which Subang Parade’s NLA is 474,612 sq ft as at 30 June 2009. In terms of sold lots, less than 5.9% of Subang Parade has been sold and we have been steadily acquiring back the sold lots.

5. Which centres do you consider to be your key competitors for:
Subang Parade is a neighbourhood mall, in that it is focused on the surrounding neighbourhood. It is half the size of KLCC, so in terms of size, it is appropriate for the markets around Subang Jaya. As the largest neighbourhood mall in that area, it has indirect competition from the regional malls which are usually 1 million square feet. In our last market research, we have found that most Subang Jaya residents would consider MidValley or 1Utama as indirect competitors or alternative for Subang Parade.

Mahkota Parade is the leading shopping centre in Melaka. Within the last 2+ years, a new mall has opened across the street in the form of Dataran Pahlawan. While initially providing some competition in the form of an additional choice for shoppers, keep in mind that both shopping centres are located in the centre of commercial Melaka and adjacent to the historical sites. As such, over time, the area becomes a shopping precinct, similar to the Bukit Bintang area in KL.

Wetex Parade is the only department store-anchored shopping centre in Muar town and as such, does not face any direct competitors in the town. We have therefore invested in Wetex by introducing new and exciting retailers in our current tenant mix make-over.

6. Wetex’s occupancy seems to be quite low (around 83% as at 31/12/08). Are you re-developing or re-positioning the centre to improve this?
As part of any new acquisition, we essentially conduct market research to determine the gaps within the tenant mix. Currently, we are implementing changes in Wetex Parade and introducing new retailers. This process should take about a year. As mentioned earlier, Wetex Parade’s occupancy has moved up to 89.6% as we are steadily changing the tenant mix of the shopping centre. We have introduced new and exciting retailers including the Elephant Bean Kopitiam, The Chicken Rice Shop and other new F&B outlets.

7. How is visitor traffic measured in your centres?
We use a system known as FootFall, a camera-based system from the U.K. It is in use in over 500 shopping centres worldwide and essentially it consists of a dedicated camera at key entrances of the mall linked to a computer server which captures traffic going in and out of the centre. Last year, we recorded 17.9 million visits to our shopping centres using this method.

8. Generally, have rentals in your centres increased in 2009 (compared to 2008)? What is the outlook for 2010?
So far our rental reversions for the year are flattish with roughly 42 new or renewed tenancies with a -2% rental decrease compared to the previous rental period. However, year-to-date, Hektar’s revenue is 10% higher than the corresponding period in 2008. They key to note in our business model is that we have a turnover rent system – almost 89% of our tenancies in Hektar REIT are on some form of turnover rent which means we collect a certain percentage of their retail sales if it exceeds a threshold. As a result, this provides some buffer on the revenue side, particularly if retailers are having a solid year. For example, last year in FY2008, we collected RM1.6 million in turnover rent in addition to our tenancy rental income. More importantly, even if retailers ask for a lower rental period now, if the economy picks up and the retailer sales improve, we can collect turnover rent later.

9. Your current borrowing levels represent around 40% of your total assets, which is higher than most of your peers in the REIT sector? Are you comfortable with this? Any plans to raise more equity in the near future? What is your target or optimal gearing level?
In general, we are comfortable with our gearing level mainly because we are comfortable with our financing. Our debt is financed by an Al-Murabahah instrument which is structured as a fixed-term tenure, annual floating rate term debt. Currently our debt is divided into 2 tranches which expire in 2011 and 2013, so Hektar does not have any refinancing risks in the short term. Our current weighted cost of capital is 4.06% from these 2 tranches. We also have a solid working relationship with our financiers. We will study raising equity in the future for prospective acquisitions, considering the scope for upside of the acquisition and the equity market.

10. Are there any acquisition opportunities for regional shopping centres in the Klang Valley? Would you look at acquiring neighbourhood centres?
We look at both regional and neighborhood shopping centres throughout Malaysia. We believe the best scope for growth lies outside of the Klang Valley as it is the most developed; however, we do study potential acquisitions within the Klang Valley, particularly for opportunities to refurbish old shopping centres. Our Subang Parade refurbishment has been a significant success for the investors, retailers and consumers and we hope to replicate that success in potential turnaround projects.

13. Which part of Malaysia would be a priority for you in terms of acquiring a centre?
As mentioned earlier, we are looking at all types of shopping centres in Malaysia. We can’t specify an area at this time, as we are still in negotiations for a couple of potential acquisitions. I cannot divulge any more details at this time.

14. What are the elements you look for in a property before investing in it?
The target property must have decent fundamentals; as a start, the market catchment must be identifiable with decent prospects in terms of population growth, employment prospects and household spending; second the property itself must have decent physical attributes such as adequate parking and even a simple physical layout.

We then study the tenant mix – whether the current tenant mix is meeting the demands of the target market. If we can identify gaps or deficiencies, we can see opportunities in improving the tenant mix after acquiring the property.

Hektar’s competitive advantage is our access to retailers. We have relationships with more than 300 retailers in our shopping centres and access to more within the region. We have established a track record with these retailer groups and as a result are able to negotiate their entry into new markets and new shopping centres.

When we examine potential property targets, we always look for ways in which we can leverage our retailer relationships and leasing to create value for the shopping centre in the post-acquisition phase. For example, we are executing on this aspect in Wetex Parade currently.

15. Your MER appears to be at the high end of the spectrum compared to other REITs. Any plans to bring this down?
Our MER is 1.37% in 2008. One of the reasons why our fees are slightly higher is that we spend more on market research compared to other REITs. The reason is due to our retail focus.

Hektar is the first retail-focused REIT in Malaysia and therefore has a slightly different business model; one of the differences is that so far, we have acquired multi-tenant properties. We may only have 3 shopping centres in our portfolio, but over 300 retail tenancies in total. Keep in mind, each tenancy represents a growth opportunity in that whenever a tenancy is renewed, it may result in a higher rental rate. For a lot of other REITs, some of their properties are sale/leasebacks in that they acquire the property and lease it back to the same tenant. This means only one tenant per property in most sale/leaseback scenarios. Therefore, when we look at a shopping centre with say, an average of 100 tenancies, there is a lot more research which is required. Part of the administrative expenses for Hektar REIT goes towards market research expenses which we conduct on new and prospective markets.

So long as we are producing results for Hektar REIT, we do not intend to cut down our market research expenses at this time.

16. Is the public spread issue in Hektar REIT now resolved?
Yes, we have resolved the public spread issue through our filing to Bursa Malaysia on 22 May 2009. We stated at that time that 28% of units were held by 1,093 public unitholders.

17. Does Hektar REIT have significant CAPEX requirements on any of your assets in the near future?
We are currently commencing on a RM30 million refurbishment of Mahkota Parade in Melaka. Mahkota is now 15 years old and in need of a revitalisation. We plan a complete makeover of Mahkota Parade including the flooring, ceiling, lighting, signage and customer amenities. We will increase the car park by 12% to accommodate higher traffic and will aim to improve the ambience of the shopping centre overall.

We intend to carry out this refurbishment at night, from 10pm to 7am, so it will not disrupt the operations of our retailers during the day. As a result, we plan to stagger the refurbishment in phases, which is expected to be completed in May 2010.

The project will be handled by the same team which handled Subang Parade and which eventually won a Silver Award in the Development and Design category in the International Council of Shopping Centres Asia Shopping Centre Awards in 2008.

Hektar REIT Financials

KrisAssets Holdings Berhad – the name may not ring a bell.

But mention Mid Valley Megamall and who hasn’t heard of it? Such is the disparity in branding.

KrisAssets owns Mid Valley Megamall. And yes, you can buy a piece of it on Bursa Malaysia. Which was what I did earlier today. Previously an old manufacturing company, KrisAssets was brought to life a few years back by IGB Corporation Berhad. Basically it owns Mid Valley Megamall – the shopping centre, car parks and all. But IGB still holds on to The Gardens, Cititel and some other parts of Mid Valley City.

Earnings Details

KrisAssets (KASSETS) is not a potential 2 or 3 bagger share but it does have defensive characteristics which I value quite a bit in the current market.

Hardly anyone in the investment community would say that KrisAssets is expensive. At RM2.59, it is around 17% below its NTA of RM3.12 and trades at under 9x PE Ratio. It has been a total laggard in the recent market rally.

The key issue is whether management wants to unlock the value in this company.

First let’s look at the NEGATIVES:

1. Thinly traded – Hardly any shares change hands each day and the Buy-Sell spread is usually wider than other companies its size. IGB holds 74.9% of KrisAssets, add to this all the other insitutions and the result: retail investors have to make do with less than 10%. In fact, there were some issues that KrisAssets was not meeting the Bumiputra Equity conditions imposed by the SC. Although this issue was resolved only a few days ago.

2. Low Dividends – KrisAssets has been paying out 15 sen per share for the past few years. Earnings have been growing but dividends have not followed suit. This notwithstanding, KASSETS dividend yield is still pretty decent compared to most other mid-large cap stocks.

3. Inefficient Structure – if KASSETS was a REIT, it would save a lot in taxes and would be paying out 28-29 sen in distribution. Most likely it will trade at a premium to all the other REITs because of its asset quality, which means its unit price should be around RM3.50 – RM4.00. Check out an article by TheEdge 2 years back entitled Looking at KrisAssets as a REIT (around 1MB to download).

4. Low Transparency – Read through the company’s Annual Report and website and you’ll soon figure out that management is holding the cards close to its chest. I’ve got no idea how big is Mid Valley Megamall, how many tenants they have, what is the rental income breakdown, what is their strategy and so on.

But I’m only a small investor…. so I don’t need to know.

5. Acquisitions – Market talk has been that there will be acquisitions to come – there is speculation that perhaps The Gardens might go into KrisAssets. Given that the assets will most likely come from IGB, I hope we minority shareholders are not taken for a ride when it comes to pricing.

OK now let’s look at the POSITVES:

1. Top Asset – Mid Valley Megamall (along with 1-Utama) is probably the best shopping centre in Malaysia. It dominates a huge catchment area to the credit of IGB team which had an early foresight, vision and guts to execute their plan. It was the project that almost sunk IGB 11 years ago but has since paid off handsomely and become the Jewel in their Crown.

(Mid Valley Megamall is an integral part of the overall Mid Valley City, Kuala Lumpur’s “City within the City”)

I don’t think that any significant competition would appear any time soon. Even Westfield would be proud to own this asset. Every time I get stuck in the car park on Saturday, I’ll just try to remember that I own some shares in this thing… if you see that person smiling in the car parking jam, you know who that is

2. Pure Play – KrisAssets is a single asset company, but because it is a top class asset, it offers pure un-adulterated exposure to Kuala Lumpur’s retail property sector. There is no office block, industrial warehouse or some fancy hotel to dilute this. If I wanted to invest in other asset classes, I know who to go to. Let’s not have all the other stuff in Kris Assets… keep it pure. But somehow I don’t think it will stay this way for long.

3. Conservative – So far there are no wild acquisitions by the company. Earnings is consistently used to pay down its borrowings. This is prudent and I hope that it does not gear up excessively to buy assets from IGB Corp at inflated prices, or even worse, buy unwanted assets from IGB.

For the past 2 years, KrisAssets has beeen a sideways performer at best (see below chart).

I believe that the downside for this counter is quite limited even if the stockmarket crashes, as we saw last year. On the other hand, it’s not hard to see a 10%+ price appreciation within a 2-year timeframe. Mid Valley Megamall is a bread-and-butter shopping center. It is resilient – one of those rare properties that can continue to command growing rental income in this climate.

Whether KrisAssets can grow its asset base, acquire more top quality shopping centres and add value to shareholders remains to be seen. It certainly has the firepower. But what is needed is that good ol’ IGB vision, guts and resolve that have made Mid Valley Megamall a household name to so many in KL.

If management decides to unlock value through a REIT structure or higher dividend payout, then I should be in for some windfall. But this will be a bonus.

A model of the Mid Valley City Masterplan. Some RM250 million alone has been invested in roads and traffic flow around Mid Valley City.

Currently QCAPITA is the sixth largest REIT on Bursa Malaysia as measured by market capitalization.

Tenancy Profile by NLA: Quill Capita REIT continues to diversify its asset base. Following its recent acquistion of Tesco Penang, Cyberjaya properties now account for less than 50% of its portfolio (by Valuation).

Q&A Session with Quill Capita Trust on 1 July 2009

Quill Capita Trust management team headed by CEO Chan Say Yoong

Quill Group Founders Dato Low Moi Ing and Dato Michael Ong

QCAPITA Financial Overview
QCAPITA Recent News
QCAPITA Share Price Chart

Hmmm… I’m beginning to sound like a vegetarian. But what I mean is that if you strip out new property acquisitions and property revaluations, you will find that most REITs are currently demonstrating flatline earnings.

For those of you who follow REITs on Bursa Malaysia, you will know that QCAPITA and AXREIT are the more active players in terms of acquiring new properties. AXREIT announced their recent Q2 results which were again driven by property revaluations and portfolio growth. QCAPITA announced its Q2 results yesterday, here’s a snapshot:

 Notes:

• Revenue and Income After Taxation in 2009Q2 were higher mainly due to the rental income from all 10 assets currently in QCAPITA’s portfolio (compared to 9 assets in 2008Q2).
• Distribution Per Unit has for the half year to Jun-09 totals 3.78 sen (compared to 3.36 sen pcp).
• There were no property revaluations so far for the current year.
• Total Property portfolio is now RM787 million, while Net Borrowings is around RM294 million.

Tesco Penang – Quill Capita’s recent foray into the Retail Property sector

Stay tuned next week for our Q&A session with Quill Capita management…

Chan Wan Leong and Chong Hong Chuon (Chief Executive Officer and Group Financial Controller of GLM REIT Management Sdn Bhd respectively) speaks with Horizon.my and shares some of their insights on Tower REIT.

1. Can you provide a brief background of GLM REIT Management and how you are related to Hong Leong Group?

Chan: GLM REIT Management is the manager of Tower REIT and is wholly-owned by GuocoLand Malaysia Berhad (GLM). GLM is a subsidiary of GuocoLand Limited Singapore (GLS), whose parent company is Guoco Group Limited, a public company listed on The Stock Exchange of Hong Kong Limited. All the above companies are members of the Hong Leong Group.

2. What is your optimal gearing ratio and does Tower REIT have any plans for equity raising in the near future?

Chan: Currently our gearing is around 20% of total assets. We can consider gearing up to 35% of total assets. If the right property comes along, we can finance it either by bank borrowings or new unit issue.  However, when the market condition is not conducive, such as it is at the present moment, we may finance our purchases through 100% bank borrowings. Subsequently when the market improves, a right issue may be carried out to scale down our borrowings back to the optimal 35% ratio.

3. Would you go beyond 35%?

Chan: We may go beyond that, but only temporarily.

4. Do you have any plans to diversify into other asset classes (eg retail / industrial properties)?

Chan: Our main focus is prime office properties, and only those with substantial value. Of course, we would look into other opportunities that come around such as good retail assets or shopping centres. We are not, however, looking at industrial or hotel properties for now.

5. Is it difficult to source for prime properties at the current market condition?

Chan: It has been a challenging time for us under the current economic environment and there has been a lack of meaningful prime office transacted recently. However, there are still quality properties in the main growth areas. In fact, the current market environment may result in more properties with distressed valuations. This will give REIT players more opportunities to acquire meaningful assets.

6. There are three properties under Tower REIT, are they considered prime properties?

Chan: They are all considered prime property especially due to their respective locations and value, although they may be categorised more specifically. Menara HLA is considered prime property due to its location, while HP Towers is a freehold, Grade A office building. Menara ING, also because of its location and being a freehold building, is a Grade A property as well.

7. Are your leases usually structured with periodical rental reviews/increase? Can you share with us some examples for some of your main tenants?

Chan: Our leases generally span three years and rents are fixed for that period. Upon renewal, rents are subject to the prevailing market rate at that point in time. There are a few existing tenants with a cap in rental rate but all were signed before Tower REIT acquired the properties i.e. the tenancies was novated to Tower REIT subsequent to the acquisition. For new tenants, we do not cap on rental adjustment nowadays.

8. What is the current valuation of the properties?

Chan: As of December 2008, the current valuation of Menara HLA is RM 714 per square feet, while HP Towers and Menara ING are valued at approximately RM 600 per square feet each.

9. Are there any arrangements with Hong Leong / Guoco Group on acquisition or dealings of properties (eg first right of refusal over properties developed by the group etc).

Chan: Being a member of Hong Leong Group, we do get first hand information on the Group’s various developments and projects

10. The Trust Deed entitles you to management fees or 0.75% of GAV + 4% of net property income. Based on last year fees of RM2.438 million, this works out to be approximately 0.42% of average GAV for 2007/2008. Did GLM REIT opt to take a lower fee than what it was entitled to?

Chong: Currently, the Manager is charging a base fee of about 0.25% and performance fee of about 3%. When the market takes a turn for the better and the fund performance improves further, subject to Trustee approval, we may review the fees up to the % as stipulated in our Deed or Prospectus. Generally, we believe our current fees are very competitive compared to other REITs in the market.

11. Menara HLA shows an occupancy rate of 88% as at 31-Dec-08. Do you see this growing substantially soon?

Chong: With the current market sentiment, we expect the occupancy rate to maintain. 
 
12, Horizon: Your Quarterly Report for the period ending Mar-09 shows a significant jump in net earnings of around 18% compared to the same period last year.

Chong: Tower REIT’s recent growth in net earnings was mainly driven by strong positive rental revisions.

13. Has there been any stress on your tenancies lately?

Chan: Temporarily, we may see slight changes in tenancy movements at HP Towers. However, our current rental rates are still very competitive, so we don’t see a problem in filling up the vacancy, if any.

For Menara HLA, Hong Leong Assurance Bhd’s front office will be moving to their newly purchased building in PJ City along the Federal Highway by the end of the year. We have appointed a leading marketing agent to source for a new tenant for us.

As for Menara ING, we have already locked in 100% occupancy. We own 78% of the share unit entitlement of the building, all of which are occupied by ING Insurance Berhad. The remaining 22% are owned by various individuals and other companies.

14. Does Tower REIT have significant capex requirements on any of your assets in the near future?

Chong: On a scheduled basis, we do upgrade the infrastructure and facilities of the buildings to ensure that our tenants continue to enjoy a conducive and quality work environment. This year, we focused on upgrading the lifts and other M&E of Menara ING. We are also planning for some M&E upgrading works for HP Towers.

Other plans in the pipeline for our property include upgrading the air-conditioning systems and building automation systems in order to increase efficiency in energy consumption as well as to improve services to our tenants.

15. Are these kinds of expenditures usually expensed through property operating expenses or are they capitalised?

Chong: If the expense enhances the value of the capital asset, such as those mentioned earlier, then we will capitalise it. Otherwise, if it is operating expense in nature, then we will just expense it off.

16. Would you consider acquiring properties under construction or overseas assets?

Chan: Our focus is on Malaysian properties currently. Under the REIT guidelines, we can only acquire properties under construction up to 10% of our gross asset value (GAV). With our GAV being at approximately RM 590 million, we can only invest up to RM 60 mil, which becomes quite restrictive.

17. Would you consider properties outside of the Klang Valley?

Chan: For now, we are focused on prime office and seek good quality and yield accretive assets within the growth area of the Klang Valley where opportunities arise.  In addition, there are not many worthwhile deals outside the Klang Valley, even in other larger markets like Penang or Johor.

18. Do you know the reason for this?

Chan: There is simply no rental power for office buildings to provide a decent yield. Companies prefer cheaper rentals at shop houses.

Chong: We also feel that the potential for capital appreciation is higher here in the CBD (central business district) areas. Generally, we would like to position Tower REIT to be a premier office REIT that focuses on prime offices in Klang Valley.

18. Currently with the low unit price, if you were to make an acquisition, would it be possible to raise equity capital?

Chan: If we were to raise equity, we have to issue units at about RM1 (the current market price per share), and with the current NAV of RM1.59, from the shareholders perspective, the timing is not quite right. Unless we make a huge acquisition, then we will go for equity.

19. Should this event arise would there be any restrictions to raising equity at such a low price?

No, there are no restrictions.

20. How is the structure of your department? Do you have separate teams for fund management and asset management?

Chan: Our asset & fund management is under one team. If we grow larger in size and acquire more properties, then we will probably need a separate fund management team.

Chong: We have a licensed property manager, Jones Lang Wootton in charge of property maintenance. Of course, we also have an in-house team responsible for overall property management including tenancy management. All parties work closely with one another.

(From left: Larry Lam, Chan Wan Leong and Chong Hong Chuan)

Brief Profile
Tower REIT was listed on Bursa Malaysia Main Board in April 2006. It focuses on high grade office properties and holds properties with a total value of RM590 million. Menara HLA and HP Towers were the seed investments of the fund, sold by GLM into Tower REIT, while Menara ING was acquired after listing (in October 2006). The market capitalization of Tower REIT is currently around RM280 million.

Tower REIT’s property portfolio
Tower REIT financial info

Compiled by: Jean Chong
(Date of Interview: 17 June 2009)