The Al-Aqar KPJ real estate investment trust (REIT), the first Islamic healthcare REIT in the world, is among the most active REITs on the local bourse in terms of asset-portfolio expansion.

Since listing on Bursa Malaysia in August 2006, the trust has expanded its portfolio from six hospital buildings — worth RM481 million — to the current 20 valued at a collective RM1.07 billion. All of its hospital assets have similar long-term lease agreements with KPJ Healthcare, one of the country’s largest private healthcare providers, which underpin the relative resilience for its income stream going forward.

Currently, the REIT is in the midst of completing the acquisition of four more hospital buildings, two of which are located in Indonesia, for a combined value of RM159.9 million. The purchase will be financed by RM104.4 million in cash plus the issuance of 56.64 million new units.

It has also proposed to acquire an aged-care facility and retirement village in Queensland, Australia. The latter consists of independent villas and apartments, all of which are situated on a 14.8ha piece of freehold land. The acquisition costing RM134.9 million will be funded equally by cash and new units, and is slated for completion in 1H11.

Enlarged portfolio and liquidity to widen investor appeal

Al-Aqar’s expanding asset portfolio and capital base — and, in turn, the trust’s liquidity — will widen its appeal, especially to bigger, institutional investors including foreign funds. At the same time though, the new acquisitions should not be earnings dilutive to existing unit holders.

Lower distribution per unit on enlarged capital base?

Al-Aqar’s earnings results for 3Q2010 were broadly in line with expectations.

Net profit stood at RM9.9 million for the quarter, bringing total earnings for the first nine months of the year to RM30.4 million. We estimate net profit for the full year at RM40.7 million, up from last year’s RM36.7 million, after excluding revaluation gains of RM17 million.

However, based on its enlarged capital base of 580.2 million units — up from 518.4 million units in 2009 — the total distribution per unit could be lower this year.

Assuming a 100% profit payout, distribution per unit is estimated at roughly 7.5 sen. Last year, Al-Aqar distributed some 8.1 sen per unit or 108% of net earnings, excluding revaluation gains. Nevertheless, investors will still earn a fairly good 6.58% yield based on its prevailing unit price of RM1.14.

Boustead REIT buying more plantation estates

Elsewhere, Al-Hadharah Boustead REIT has also proposed to acquire more plantation estates from the Boustead group of companies. Two oil palm estates and a 55 tonnes per hour palm oil mill have been valued at a combined RM189.2 million.

All three assets will be leased back to Boustead. In addition to fresh borrowings, the trust will undertake a private placement for 75 million new units to part finance the purchase.

Listed back in February 2007, Boustead REIT is Malaysia’s first and to date, only, Islamic plantation REIT. Currently, its asset portfolio consists of ten oil palm estates and two palm oil mills — located in the states of Perak, Johor, Kedah and Kelantan — collectively valued at about RM840 million. Upon completion, slated for 1Q2011, its plantation land acreage will increase from 16,403.6ha to 19,983.5ha.

Total assets will be lifted above the RM1 billion threshold.

The REIT reported better net profit of RM17.2 million in 3Q2010 bolstered by higher performance-based income on the back of better crude palm oil prices during the quarter. Its lease agreements include a profit sharing clause when crude palm oil (CPO) prices go beyond a pre-determined level, currently fixed at RM2,000 per tonne.

Higher CPO prices boost
income from profit-sharing arrangement

In effect, Boustead REIT can offer investors a limited degree of exposure to rising CPO prices while retaining its defensive qualities with downside risk limited by fixed rental income.

For the nine-month period, Boustead REIT recognised income of RM11.6 million from this profit-sharing arrangement, with CPO prices averaging roughly RM2,570 per tonne.Looking at prevailing prices, we expect this portion of its income to rise

further in the next two quarters, at least. CPO prices are estimated to average around RM3,100 to RM3,200 per tonne in 4Q2010 while the benchmark futures contracts are now trading above RM3,500 per tonne.

Net profit for the first nine months of the year totalled RM49.8 million and is on track to meet our estimates of RM67.9 million for the full-year, including some RM17.6 million in performance-based income.

The “bonus” income will enable the trust to exceed its minimum distribution per unit, estimated at about 7.6 sen per unit. An interim distribution of 3.8 sen per share was made earlier in the year. We estimate distribution to total 10.15 sen per unit for 2010, which would give unit holders an attractive 7.25% yield at the current price of RM1.40.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.