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)

Following our interview with Tower REIT, below is a summary of Tower REIT’s property portfolio. The fund was sponsored by the Hong Leong Group and listed on Bursa Malaysia on April 2006 and owns three prime assets which are Menara HLA, HP Towers and Menara ING.