MRCB deal injects new life into company
In a lull since 2008, real estate investment trust (REIT) Quill Capita Trust Bhd is being injected with a new lease of life.
This follows the just announced deal that it will acquire Platinum Sentral from Malaysia Resources Corp Bhd (MRCB) in return for cash and shares. As a result, MRCB will become the single largest shareholder in QCT with a 31% stake.
But it’s not just the presence of MRCB as its new major shareholder that is noteworthy. Another game changer for QCT could take the form of future deal flows from giant pension fund, the Employees Provident Fund (EPF).
The EPF is the single largest shareholder of MRCB with a 38.87% stake in the company. The second largest shareholder is group managing director Datuk Mohamad Salim Fateh Din, who had assumed control of MRCB back in 2013 via a privatization exercise that saw the pension fund dilute its holdings in MRCB, with Salim the entrepreneur taking up 12.51% following the injection of his privately held assets into MRCB.
With the EPF and Salim firmly entrenched as partners in their ownership of MRCB, and with MRCB now becoming the single largest shareholder of QCT, insiders say EPF may explore the possibility of injecting some of its assets into QCT.
As at Sep 2013, the EPF has real estate and infrastructure investments worth a massive RM14.72bil.
For some time now, the EPF has been an active investor in the property sector, with one area of focus being tenanted commercial buildings that provide a decent yield.
QCT’s ambition is to become one of the biggest REITs in Malaysia in three years with an asset base of some RM5bil from RM1.6bil presently.
Further emphasizing the significant changes taking place, QCT will soon be known as MRCB-Quill REIT.
EPF knows Quill
To be sure, the EPF and the Quill group are no strangers themselves.
Last March, the EPF signed a sale and purchase agreement to buy the Quill Group’s Quill City Mall in Jalan Sultan Ismail for RM1.2bil or RM1,561 per sq ft. This sale is subject to certain performance targets.
EPF and Quill Retail Malls Sdn Bhd, the unit set up by Quill to undertake the development of Quill City Mall, will also enter into a type of sale and leaseback arrangement that will allow Quill to manage the mall under EPF’s ownership. The mall is expected to open this September.
It has also been widely reported that the EPF bought the Quill 7 building, also known as the Axiata building in KL Sentral back in 2011 from the Quill Group.
Quill 7 is a 29-storey office building with a six-storey podium. The building has an estimated value of RM428mil or RM1,200 per sq ft at that time.
The building is fully tenanted out and includes tenants from Axiata and Nokia Siemens.
Catalyst for new growth
On the surface of its latest signing, QCT’s property asset base will double to RM1.6bil, implying that its income will increase.
MRCB’s Salim says that both MRCB and QCT intend to inject assets worth at least RM1bil into QCT every year.
MRCB will have a pipeline of RM20bil worth of properties over the next few years while QCT has more than RM1bil worth of properties to be injected over the near to middle term.
“We want to be one of the largest office REITS around. Aside from MRCB’s pipeline, we have some five buildings that we intend to inject into QCT over the short to mid term,” said Quill group executive director Datuk Michael Ong.
These include the RM250mil Quill Building 6, the RM300mil Quill Building 9, the RM750mil Quill service apartments and office towers and the RM450mil Quill 18 building.
QCT’s earnings have been rather stagnant over the last few years. Its share price performance has been insipid, trading mainly between a 90 sen to RM1.25 band.
Its market capitalisation has not exceeded the RM500mil level. It does, however, offer the fourth highest yield among the Malaysian Reits with a yield of 7.82%.
The insipid share price movement could also be due to the lack of asset injections since 2008.
Its asset value as of 2009 was RM818.17mil, and has only increased marginally to RM860.12mil as of end 2013.
When QCT was first listed in 2007, it started off with four Quill Buildings at Cyberjaya worth some RM400mil.
Five months later, QCT had acquired both Wisma Technip and the commercial units and car parks of Plaza Mont’Kiara for RM215mil.
In 2008, it acquired Quill Building 5-IBM, Quill Building 8-DHL (XPJ) and Quill Building 10-HSBC (Section 13) for RM94.5mil.
Later that year, QCT announced the completion of the acquisition of the TESCO Building in Jelutong Penang. With that, this brought QCT’s total portfolio to 10 properties. These properties deliver an average yield of 6% and have an occupancy rate of 95%. QCT acting chief executive officer Yong Su-Lin admits that there has been a lull since 2008. This was due to a combination of preparing its buildings to be injected into QCT, and the difficulty of securing third party assets.
“We were actively looking for third party assets, but its never been easy. This is also seen in the relative inactivity of Malaysian REITS over the last few years,” says Yong.
“On Quill’s side, we had a pipeline of buildings, but Datuk Michael wanted to stabilise the buildings first before injecting them into QCT. Quill 6 for instance already had a ready tenant in HSBC, but these tenants were moving into the building in stages,” explains Yong.
On the challenges of acquiring third party assets, Yong says that many building owners want to personally manage their own buildings.
“Pricing was another issue. There were times when they offered valuations which made it not yield accretive for us,” says Yong.
She adds that moving forward, QCT would not only be depending on MRCB’s and Quill’s pipeline. It would continue to actively look for third party assets.
“With MRCB as our partners, it could make this process easier,” she says.
Meanwhile, Platinum Sentral consists of five blocks with four-to-seven stories of commercial buildings housing office-cum-retail space, a multi-purpose hall and two levels of car parks.
Its office space, with a net lettable area of 450,000 sq ft, is 100% occupied, while its 79,000-sq-ft retail portion is 77% occupied.
With this acquisition, QCT’s units will increase to 681.35 million from 390.1 million. The new shares consists of the 206.25 million units for MRCB and another 85 million units via a private placement.
For the fourth quarter to Dec 31, 2013, QCT’s net profit was up 8.62% to RM8.6mil on the back of a 1.02% increase in revenue to RM17.3mil.
For the full year, net profit was almost unchanged at RM34.54mil from RM34.36mil previously. Revenue dropped 0.79% to RM68.94mil.