HLBank Research Highlights

Author: HLInvest   |   Latest post: Mon, 23 Nov 2020, 11:51 AM


REIT - Defensive But Only Selectively

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Outlook for office space remain lacklustre due to oversupply issue s, barring the offices of KLCCSS and MQREIT due to its niche assets and long-term tenancy with big corporations and MNCs. As for retail REIT, near-term outlook has been impaired by Covid-19 and we expect slow recovery in their earnings due to weak consumer sentiment. Industrial REIT remains defensive amid the crisis and we believe there’s strong growth potential driven by the surge of e commerce activity. We downgrade the sector to NEUTRAL (from Overweight) as Covid-19 crisis has impaired REIT earnings across most assets. Our top pick are Axis REIT (BUY, TP: RM2.47) and MQREIT (BUY; TP: RM0.79).

Office REIT: Oversupply issue remains concerning. The outlook for office space remains lacklustre due to an unabated glut coupled with more incoming supply. Hence, we believe rental reversion in office space will be under pressure and remain soft. Occupancy across office space has been impacted over the past few years in KL City due to the glut and we believe it will be deteriorating further in light of new supply, barring the offices of KLCCSS and MQREIT due to its niche assets and long term tenancy with big corporations and MNCs. We expect these REITs to remain sustainable and not impacted significantly by the MCO/CMCO/RMCO, at least in near term, alongside its healthy cash flow foundation.

Retail REIT: Expect slow recovery due to weak consumer sentiment. 1H20 has been hurtful for mall based REITs due to the rental assistance given to retailers. Although malls are already operating close to 100% in 2H20 and all REIT managers assured that rental assistance will not be extended into 2H20, we still expect weak earnings to persist in 2H20 as Covid-19 and MCO/CMCO/RMCO has placed a dent on the economy which has impaired consumer sentiment and the overall retail industry. As for rental reversion, we believe that expiring lease will register flattish or negative reversion amid the crisis, in order to sustain retailers’ occupancy.

Industrial REIT: Remain defensive against MCO/CMCO/RMCO. We see industrial REITs staying relatively resilient amid Covid-19 and MCO/CMCO/RMCO. We also see there is a demand in industrial properties driven by the surge in e-commerce activity (projected to grow at 11% CAGR according to A.T. Kearney), which has prompted more establishment of distribution centre by retailers and e -commerce players. Within this segment, we like Axis REIT as a leading player in industrial segment with its strategy of pursuing quality acquisitions with focus on Grade A logistics and manufacturing facilities.

Widened yield spread. The yield spread between M-REITs and the 10-year MGS (MAG10YR) is currently at 4.19%, which is above +2SD with its 5-year mean of 2.18%. We believe that the yield spread has widened drastically in recent times given the OPR cut and heightened risk aversion. Although historically the widened yield spread bodes well with REIT’s share price, this may not be the case for this time as concerns from Covid-19 and MCO/CMCO/RMCO has impaired retail industry, which constitute a large portion in Malaysian REITs. We expect REITs’ share price to remain subdued amid the crisis, with exception of the more defensive ones (i.e. Axis REIT and MQREIT), which may gain some interest among investors during this crisis. As for our MAG10YR yield assumption, we leave it unchanged at 3.25% vs the current level of 2.64%, (FY20 average: 3.02%).

Downgrade to NEUTRAL (from Overweight) as Covid-19 crisis has impaired REIT earnings across most assets. That said, at the current level, the average yield for our stocks in coverage seem decent at 4.7%. Our top pick are Axis REIT (BUY, TP: RM2.47) and MQREIT (BUY; TP: RM0.79) for their resilient earnings amid Covid 19 and MCO/CMCO/RMCO, and their high occupant tenancy in portfolio.

Source: Hong Leong Investment Bank Research - 14 Jul 2020

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