Atrium REIT (5130) is an industrial REIT listed in Malaysia Bursa Main Market, with a dividend yield of 6 to 7%. On 8th July, Atrium made a fund raising announcement, and Atrium also published the latest quarterly report later in July. So let’s look into both together.
(Last update: Based on quarterly financial report issued on 28th July 2022. Updates are made in red. For readers that would like to read superseded version, please free to contact by email)
Table of Contents
Background and business of Atrium
Atrium is the only 100% industrial REIT listed in Malaysia stock market. With market cap of only about RM300 million, it is considered as a small-size REIT.
Before year 2019, Atrium was only holding warehouse properties. With acquisition of Atrium Bayan Lepas 2 in October 2019, Atrium is now holding two types of industrial properties – warehouse and factory.
Properties under Atrium
Below is list of properties owned by Atrium, along with information when lease contract signed with customer will expire. As of Sep 2021, occupancy rate of properties owned by Atrium is 100%, except for the newly acquired Atrium Shah Alam 4. Management has mentioned before that 100% occupancy is expected throughout the whole year 2021.
Acquisition of PNB Shah Alam Factory from Permodalan Nasional Berhad (PNB) was completed in Q1 2021, and it is now renamed as Atrium Shah Alam 4.
- Atrium Shah Alam 1 warehouse (Ninja Logistics) – Jun 2027
- Atrium Shah Alam 2 warehouse (Samsung SDS) – Mar 2024
- Atrium Shah Alam 3 warehouse (??) – Occupied but details are unknown
- Atrium Shah Alam 4 warehouse – Acquisition completed in Q1 2021, no tenant yet, it will be modified to grade A warehouse facility, enhancement work is expected to complete in 2022 Q1
- Atrium Puchong warehouse (Lazada Express) – Sep 2023
- Atrium USJ Block A warehouse (Rohlig) – Aug 2023
- Atrium USJ Block B warehouse (Rohlig) – Feb 2024
- Atrium USJ Block C warehouse (Skynet) – July 2022
- Atrium Bayan Lepas 1 factory (Lumileds) – Oct 2035
- Atrium Bayan Lepas 2 factory (Lumileds) – Oct 2034
Financial of Atrium
Net income vs realized income
Atrium is doing property re-valuation every year, and the associated paper gain/loss will be captured in net income. Note that valuation has to be done every year in compliance with REIT guideline issued by SC Malaysia, see here for more information. In addition, in case Atrium decides to sell any property with valuation gain, there will be associated tax, and this is shown as deferred tax liability beginning from 2019 financial reports.
Valuation gain, valuation loss and associated tax liabilities are all paper gain/loss. For REIT, what’s more important is realized income (more precisely, realized income per unit of share), that will determine amount of dividend.
So don’t rely on news headline on the income performance, look into financial report for better clarity.
Credit risk
Atrium is doing warehouse and factory business. Unlike retail/hotel/office REIT, this company is only relying on a few customers, so the credit risk is very concentrated.
In case of any customer defaults in payment, it could be a big hit to Atrium. This happened to Atrium Puchong before and the case was brought to court (settled in Q1 2021). Good thing is credit term granted by Atrium is only 30 days, this will help to minimize the impact if it happens.
Gearing ratio
According to REIT guideline issued by Securities Commission (SC) Malaysia here, total borrowing of REIT must not exceed 60% of total asset, i.e gearing ratio cannot exceed 60%.
(Note: On 13th Aug 2020, SC Malaysia announced that gearing ratio limit of Malaysia REIT will be temporarily raised from 50% to 60%, effective immediately until end of 2022. The aim is to relieve financial burden of REIT company in the midst of COVID-19, see here for more details.)
It is always important to monitor gearing ratio of any REIT company. When a REIT company plans to acquire new properties, gearing ratio level will decide whether company can still leverage from borrowing, or need to raise equity (i.e. issue new shares).
Following completion of acquisition of Bayan Lepas 1 factory in October 2020 and Atrium Shah Alam 4 factory (now being upgraded to warehouse) in 2021 Q1, it can be clearly seen that non-current borrowing has increased. Gearing ratio of of Atrium REIT now stands at around 48 % as of June 2022.
Funding for new acquisitions
With completion of acquisition of PNB factory (Atrium Shah Alam 4), gearing ratio is very closed to 50%. Although gearing ratio threshold of 60% would not be exceeded, but this relaxation of gearing ratio to 60% will expire in 2022. Considering normalized gearing ratio of 50% beyond 2022, borrowing level of Atrium is close to threshold, that is the reason why Atrium needs to issue new shares to raise fund for enhancement work of Atrium Shah Alam 4.
Influence from OPR
In case of Atrium, because all the borrowing are in floating rate. With the interest rate going up, Atrium will need to incur more interest expenses. This is not something unique to Atrium, in fact all REITs will face the same situation.
End
- Revenue and profit in the first half of 2022 is within my expectation, although it is slightly lower compared to 2021. One of reasons, is extra income in 2021 coming from partial settlement received from a defaulted debtor.
- The next growth prospect is Atrium Shah Alam 4 acquired in 2021 Q1. It was a factory and Atrium is planning to enhance it to be a grade A warehouse. The enhancement work is expected to complete by Q1 2023.
- Now coming to the fund raising announcement. According to the notice, new shares account to 30% of total issued units currently, and this is expected to raise approximately RM85 millions of new capital, used for Atrium Shah Alam 4 enhancement activities. Among the 30%, it is already announced that 20% will be listed on 17th Aug. This fund raising move is understandable, since the current gearing ratio is closed to 50%. However as investors, we must be cautious on the dilution effect it will cause, especially during the period between new shares listing date and completion of Atrium Shah Alam 4. If we calculate using current share price of RM1.45, the dividend yield would be diluted from around 6.5% to 4.5~5%. Ex date of next dividend is 12th Aug so it won’t be affected, but for sure dividend expected in November and Feb next year would be much lower. Looking at timeline of the listing and completion of Atrium Shah Alam 4, the dilution effect on dividend would probably last for 3 quarters. In this period, there could be selling pressure on the share price, because basically people are buying REITs for its dividend.
- Actually this is not the first fund raising activity by Atrium, the last one was in 2019 during acquisition of Bayan Lepas 1 and 2 factories. Back then because of the pandemic, the acquisition process was delayed slightly and in the end, dividend for 3 consecutive quarters was badly impacted, creating a big selling pressure on the share price. Until the new properties started to contribute, share price slowly picked up from there.
- Over long term, I believe Atrium can benefit from the fast-growing E-commerce that will require warehouses at prime location. For those who are interested in Atrium, knowing new shares listing dates and monitoring progress of Atrium Shah Alam 4 are recommended.
In case you want to know more about dividend investing, feel free to check out my article about ultimate guideline for dividend investing here.
Disclaimer: This article is purely my notes from studying this company. This is not a BUY or SELL call. I am not a registered investment advisor nor an investment guru, please be reminded to do your own homework and invest at your own risk.