Monday, November 29

MREITs’ results a mixed bag in 2Q17


KUCHING: Results of Malaysian Real Estate Investment Trusts (MREITs) in the second quarter of 2017 (2Q17) were a mixed bag according to the research arm of Kenanga Investment Bank Bhd (Kenanga Research).

Of the seven MREITs under Kenanga Research’s coverage, the research arm revealed that four had come in within expectations while three came in below.

The three MREITs below expectations were Axis REIT (AXREIT), KLCC REIT (KLCC) and Pavilion REIT who were plagued with delayed acquisitions, higher cost and lower pay-outs.

While some of the MREITs had missed their marks with Kenanga Research, overall year over year (y-o-y), most of them saw positive top-line growth between 1 to 39 per cent, save for Capitalland Malaysia Mall Trust (CMMT) who saw a -1 per cent growth.

Following suit is growth in bottom line as most MREITs saw a 0 to 49 per cent growth expect for CMMY with minus one per cent RNI and Pavilion REIT with minus eight per cent RNI due to higher operating and financing cost.

In share price, the top performer for this quarter was IGB REIT who was up 8 per cent since September 21, 2017 due to their asset stability from strong occupancy, double digit reversions and decent 1H17 results.

On the other hand, AXREIT and CMMT both saw contractions in their share prices of -8 and -7 per cent respectively due to earning weaknesses and a lack of strong re-rating catalysts.

“All in, MREITs’ share prices in calendar year 2017 (CY17) appear to have stabilised, with average share price virtually unchanged for all MREITs, compared to the strong run-up in CY16 which saw 9 per cent average gains when investors were chasing for dividends due to market volatility,” said the research arm.

In spite of the stabilisation, Kenanga Research reckons that the MREITs’ share prices have to reflect their true valuations as Malaysian Government Securities (MGS) have been declining while investors are deterred by additional perceived risks.

“Most MREITs share prices have yet to play catch up, despite the 10-year MGS declining 8.7 per cent,” said the research arm while explaining that a declining MGS will cause MREITs’ share prices to revert upwards as MREITs are viewed as a less risky option to the MGS.

“Although we believe we have priced in foreseeable earnings risk for MREITs under our coverage, valuations appear sticky as investors may likely perceive additional earnings risk for REITs due to on the ground sentiment from the supply glut of office spaces in the Klang Valley, and the influx of retail space entering the market over the next 2 to 3 years.

“As such, we are taking a more conservative approach and increasing all our MREITs’ spreads to the 10-year MGS by 5 per cent, and thus lowering our target prices by 1 to 2 per cent to account for investors’ negative sentiment on MREITs’ valuations.

“We widen our spreads by 5 per cent based on the additional perceived earnings risks by an additional 5 per cent on top of what we have trimmed from our earnings.”

With that said, Kenanga Research continues to maintain their ‘overweight’ rating on the sector as they noted that the MREITs under their coverage have not reacted with yield spreads in their share prices.

“At current levels, most MREITs are commanding attractive total returns of 13 to 19 per cent, and are backed by 5.4 to 6.5 per cent dividend yields, providing security to investors.”

Their top pick for the sector is MQREIT due to their higher than average yield of 6.5 per cent, earnings stability and minimal downside risks due to its long lease expiry profile, and minimal lease expiries with 14 to 26 per cent expiring in FY17-18.

Additionally, MQREIT tenants are also unlikely to move out in the future due to the MSC status of most of its buildings.