Two Acquisitions Announced This Year Were Completed Ahead of Schedule

KIP Real Estate Investment Trust (KIP REIT) is wrapping up an eventful 2024 with the early completion of the DPulze Shopping Centre (DPulze) acquisition last week, following the successful acquisition of TF Value Mart Gerik in November. Both transactions were finalised ahead of their initial 1Q 2025 timeline.

This year, KIP REIT announced three major acquisitions totalling RM433.1mn: DPulze, TF Value Mart Gerik, and four industrial properties, with the latter set to be completed by mid-2026 – see Figure 1. The fully occupied DPulze, located in Cyberjaya, Selangor, is KIP REIT's largest acquisition since its IPO, adding 311,499 sq ft of net lettable area (NLA). Meanwhile, TF Value Mart Gerik, with an NLA of 60,895 sq ft, offers strong rental growth potential and an attractive 7.5% initial yield.

With the two new retail assets, KIP REIT’s portfolio now comprises 13 properties with a total NLA of 2.46mn sq ft, including seven KIP Malls, AEON Mall Kinta City, and three industrial properties in Klang – see Figure 2.

Progressing Towards RM2.0bn Portfolio Target Over the Next 3 Years

We believe KIP REIT’s recent acquisitions are a significant step toward its target of expanding its portfolio value to RM2.0bn within the next three years, up from RM1.4bn currently (see Figure 3). These transactions highlight KIP REIT’s ability to execute its strategy of accretive growth through high-quality retail, industrial, and commercial properties. KIP REIT is well-positioned to achieve its target by leveraging its Right of First Refusal on two pipeline assets—KIP Mall Desa Coalfields and KIP Mall Kuantan—while actively pursuing third-party opportunities to further diversify its portfolio.

We also see strong potential in its focus on expanding the industrial portfolio, targeting manufacturing, logistics, and warehouse facilities to secure long-term, stable tenancies. With three existing industrial assets valued at RM79.6mn and four upcoming properties worth RM98.3mn, industrial assets will represent 12% of the total portfolio value upon completion, reflecting their growing role in driving portfolio resilience and sustainable income growth.

Focusing on Strategic AEIs and Portfolio Optimisation

In addition to its inorganic growth through acquisitions, we believe KIP REIT's focus on organic growth via Asset Enhancement Initiatives (AEIs) will be instrumental in driving portfolio expansion. KIP REIT has attracted quality tenants and strengthened asset performance by optimising properties and enhancing their value. This is reflected in the rising average occupancy rate, which improved to 94.4% in 1QFY25 from 94.1% in FY24 (see Figure 4).

While most assets have achieved occupancy rates above 90%, KIPMall Senawang and KIPMall Bangi remain exceptions due to tenant optimisation following major AEIs. However, the newly renovated ST Rosyam Supermarket at KIPMall Senawang (completed in September 2024) has lifted occupancy to 95%, while KIPMall Bangi saw occupancy recover from 70.1% in FY22 to 86.0% in 1QFY25, following the completion of a facelift in February 2024. To further enhance portfolio performance, KIP REIT has allocated RM20mn for phased AEIs in FY25–FY26, focusing on KIPMall Tampoi, property tech upgrades, solar installations, and minor works across its portfolio.

Impact

We have raised our FY25/26/27 earnings forecasts by 2%, 27%, and 29%, respectively, driven by contributions from newly acquired assets, partially offset by one-time acquisition fees incurred during the acquisition year and higher base management fees from a larger portfolio. However, the EPU and DPU for FY25 and FY26 have been adjusted downwards by 13% and 2%, respectively, while FY27 EPU and DPU were revised slightly higher by 0.1%. These adjustments reflect the issuance of 180mn new placement units, which has increased the total number of units issued by 29%. To recap, the placement, completed on 2 December 2024, raised RM148.5mn at 82.5 sen per unit to partially fund the DPulze acquisition.

Despite the enlarged unit base, we expect KIP REIT’s FY25 DPU to remain at FY24 levels, as there is only a 10-day gap between the timing of income flow from DPulze and the private placement. Looking ahead, we anticipate DPU growth of 15.5% in FY26 and 5% in FY27, driven by the full-year contribution from the newly acquired assets.

Valuation

We like KIP REIT for its strategic initiatives, demonstrating a clear commitment to delivering value to stakeholders while steadily advancing toward its portfolio expansion targets. We see potential earnings upside from the addition of new assets, further strengthening our confidence in its growth prospects. We peg KIP REIT's valuation to a lower target yield of 6.25% (previously 6.75%) to reflect the improved earnings outlook. This target yield remains reasonable as it aligns with the average FY25 yield of retail-focused MREITs. We maintain TP for KIP REIT at RM1.15/unit and reiterate our Buy recommendation on KIP REIT.

Source: TA Research - 18 Dec 2024