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Tower Real Estate Investment Trust (Tower REIT) is expanding its portfolio and will inject a third property, known as Menara Guoco by the third quarter of this year.
The asset acquisition is in line with the REIT's objective to grow the distributable income and to provide unitholders with regular and stable income distributions, it said in a bourse filing today.
The 19-storey office building forms part of the Damansara City integrated commercial development in Damansara Heights.
Damansara City, a project by Guocoland (Malaysia) Bhd includes other properties like a Grade A office building, a five-star hotel, a retail mall, serviced apartments and car parks.
Guocoland, the property investment arm of Hong Leong Group is selling Menara Guoco to Tower REIT for RM242.1 million cash, in a related party transaction (RPT). The proposed disposal is deemed to be an RPT as Guocoland is a major unitholder of Tower REIT.
In a separate bourse filing, Guocoland said its indirect wholly-owned subsidiary, DC Offices Sdn Bhd, has entered into a conditional sale and purchase agreement (SPA) with Tower REIT's trustee, MTrustee Bhd for the asset disposal exercise.
DC Offices acquired the development rights in respect of the office building in 2012 and completed the construction in 2015 with a total cost of RM165.1 million as of 6 February 2020.
A valuable asset for Tower REIT
Tower REIT said Menara Guoco has good prospects, despite the uncertainties posed by the market, coupled with the subdued economic growth.
It said commercial properties could face continued downward pressure, as tenants look at pricing over location centrality to manage their operating expenses.
The Board observes that many companies are increasingly looking to move to the urban fringes where new sub-commercial locations have emerged such as Bangsar South, Damansara Heights, Petaling Jaya and Subang Jaya, away from the central business district and Golden Triangle areas. Menara Guoco is strategically located in Damansara Heights with good accessibility and situated among some of the prime commercial locations and affluent neighbourhoods such as Bangsar, Sri Hartamas, Mont’ Kiara, Bukit Tunku, and Taman Duta.
"Also, the property is a Grade A office building with green building features and Multimedia Super Corridor (MSC) Malaysia Cybercentre status, and is enjoying an occupancy rate of about 97.1 per cent with tenants comprising multinational and established local companies. Taking into consideration the above factors, the Board expects that good quality and a well located property would benefit from the trend of tenants in the central business district relocating to urban fringes and would continue to achieve healthy occupancy and provide stable portfolio returns," it said.
Tower REIT was listed on 12 April 2006. The investment objective is to invest in a portfolio of quality office buildings and commercial properties. It currently has in its portfolio two commercial office buildings - Menara HLA and Plaza Zurich - located in Kuala Lumpur.
Upon completion of the proposed acquisition, Tower REIT's consolidated asset base is expected to increase by about 42.3 per cent to RM814.3 million and lower the average building age of its property portfolio to 18 years from 23.
Tower REIT said a younger property portfolio would likely attract more investor interest in the REIT due to lower requirement for asset enhancement initiatives or capital expenditure in the near term.
It also expects Menara Guoco's proximity to the Mass Rapid Transit station to raise the profile of the property, positioning Tower REIT to benefit from robust tenant demand.
Tower REIT said that Menara Guoco's current occupancy rate of about 97.1 per cent is expected to increase the pro forma occupancy rate for its portfolio to 59.8 per cent from 48.1 per cent
It said the proposed acquisition will enhance the diversification of its tenant base across a broader range of sectors. This includes multinational and local companies involved in property development, tobacco, information technology, and engineering.
The more diverse tenant base is expected to contribute to the stability of the REIT's income, it added.
The top three tenants of Menara Guoco collectively accounted for about 70.4 per cent of the total net lettable area of the property.
Guocoland to focus on property developer
Guocoland said the disposal of Menara Guoco will provide the group with an opportunity to realise its investment in property and focus on property development.
It also said proceeds from the proposed disposal will provide Guocoland with the necessary funds for existing working capital requirements and to partly repay its bank borrowings.
Guocoland intends to use RM145.3 million of the proceeds raised from the proposed disposal to pare down the group's existing borrowings of about RM1.21 billion.
It said, based on the weighted average cost of borrowings of about 4.4 per cent per annum, such repayment is expected to result in an annual interest savings of about RM6.4 million for the group.
"The repayment of bank borrowings using the proceeds from the exercise is expected to result in interest savings, which would improve the group’s overall cash flow management," it said.
Tan Sri Quek Leng Chan, Kwek Leng Beng and Kwek Leng Kee are the major shareholders of Hong Leong Company (Malaysia) Bhd, Guocoland, DC Offices and major unitholders of Tower REIT.
The three parties, including Datuk Edmund Kong Woon Jun, who is the group managing director of Guocoland and a director of DC Offices will abstain from voting on the proposed disposal at the relevant board meetings in respect of their direct and/or indirect shareholdings in the respective companies.
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