PETALING JAYA: The rental upside in the long run for Hektar Real Estate Investment Trust’s (REIT) proposal to purchase the building and facilities of KYS College would outpace its existing neighbourhood mall assets.
Hong Leong Investment Bank (HLIB) Research said that based on estimates, the deal is expected to enhance the REIT’s forecast core net profit for financial year 2023 (FY23) by 18.9%. Hektar-REIT is also entitled to a guaranteed rent of RM8.1mil for the first year, followed by a 2.5% yearly step up.
“Although the rental yield at the first-year term works out to be only at 5.4% versus about 7% portfolio rental yield in FY22, it is well compensated by the 30-year stable rental stream with annual increment of 2.5%,” said HLIB Research in a report.
Hektar-REIT has proposed to acquire the building and facilities of KYS College at a purchase consideration of RM150mil, to be partially satisfied via 20% placement of existing issued units.
The property is being leased to KYSA Education Sdn Bhd – the operator of KYS College – starting from 22 June 22, 2023, on a quadruple-net lease basis for 30 years with a guaranteed rent of RM8.1mil for the first year, followed by a 2.5% annual step up.
According to the research firm, the proposed deal is a timely diversification from the highly competitive retail industry, especially for neighbourhood malls.
Besides this, minimal operations expenditure is required due to the nature of the quadruple net lease agreement.
However, HLIB Research said it was overall “neutral” on this development, as the favourable lease structure of the property is anticipated to be offset by earnings per unit (EPU) dilution in the mid-term.
“Accounting for the expansion in share base of 20%, forecast FY23 EPU is expected to be diluted by minus 1.8%. Assuming the deal is to be completed, our target price would decrease to RM0.57.
“This is under the assumption that the remaining balance of RM93mil (net of RM57mil equity issuance) would be funded by debt, given Hektar-REIT’s limited cash available in its balance sheet, which stood at RM16mil as at the second quarter of 2023 (2Q23).”
Meanwhile, gearing is expected to increase to 46% as at 2Q23 from 44% previously, which will approach the permissible gearing limit of 50%.
