We maintain HOLD on UOA REIT with a lower fair value (FV) of RM1.06/unit (from RM1.08/unit previously) based on a revised DDM after factoring in higher estimates for property operating expenses. Limited DPU growth as oversupply of offices limits positive rental reversion while AEIs need to be implemented to sustain existing as well as attract new tenants on aged office buildings. Nevertheless, distribution yield is decent at 6.4% for FY25F. Our FV implies a neutral 3-star ESG rating

• FY24F/FY25F/FY26F distributable income has been lowered by 16.4%/15.3%/4.9%. This is to reflect higher property operating expenses.
• Results below expectations. 9M24 distributable income of RM31mil was below expectations accounting for 60.5% of our and 67.8% of consensus projection. The variance was mainly due to lower-than-expected occupancy rate for Menara UOA Bangsar and higher property operating expenses.
• YoY. 9M24 UOA REIT's gross rental fell 4.8% due to the departure of anchor tenants from Parcel B - Menara UOA Bangsar. Occupancy rate for this asset declined to 58% from 98% the previous year. Meanwhile, NPI fell by 15.5% contributed by higher operating expenses from the upgrading works carried out at Menara UOA Bangsar.
• QoQ. The average occupancy rate of the assets under management slip slightly to 77% in 3Q24 from 79% in 2Q24 (Exhibit 3). Occupancy rates for UOA Centre, Wisma UOA II and UOA Damansara II improved while occupancy rate of UOA Corporate Tower, with MSC status and strategically located within the MSC Malaysia Cybercentre @ Bangsar South City remained robust at 100%.
• Rental reversion of aged office buildings to stay flattish amidst the continued oversupply of offices. Pressure on rental rates on offices persist. Meanwhile, rental reversion for newer office building and green certified UOA Corporate Tower is expected to be slightly positive at 2-3%.
• UOA REIT has potential prospects to fill in vacant spaces left by the departure of anchor tenants in Parcel B - Menara UOA Bangsar. This could see the occupancy rate for the asset rising back again once new tenants have been secured.
• UOA REIT currently trades at FY25F PE of 15x. Distribution yield of 6.4% provides a decent spread of 250bps against the 10- year MGS of 3.9%.

Source: AmInvest Research - 15 Nov 2024