Highlights

• We attended a panel discussion by the prominent REIT managers organized by Malaysian REIT Managers Association (MRMA) yesterday pertaining to the proposed revision of REITs guidelines with the following key takeaways.

• Long Term Positive. The panellists are positive on the proposed greenfield development as it enables them to grow the DPU in the longer term within maturing REITs space and assure that there will be no short term DPU dilution as all the development costs (inclusive of financing charges) will be geared and capitalized.

• Development Risks Mi tigated. They are confident that the associated risks will be well-mitigated given their management expertise and proven track records as well as via checks and balances within the proposals such as 15% threshold for development, 50% capping on gearing limit, 2 years holding period post development and stricter disclosures requirements.

• Private Leases. Allowing private lease arrangement would provide more flexibility and open up more investment opportunities such as possibility of acquiring interest in Malay Reserve Land. On the flip-side, it increases the risk to the REIT in the event of contractual or ownership dispute.

• Possible M&A activities? The provision of allowing the change of REIT manager by way of a resolution passed by a simple majority of unitholders voting at a general meeting may help to keep REIT manager on their toes but it also opens up possible M&A activities.

• Property Management and Internal Management provisions allow REIT to further diversify their income by acquiring interest in the REIT managers as well as property management companies that manage the assets owned by the REITs and managed by same REIT managers with possible downside on potential conflict of interest.

Catalysts

• Potential acquisition of quality assets to achieve growth as softer property outlook presents such opportunity.

• Further improvement in sentiments and higher retail spending.

• Venturing into potential high yielding development activities.

• Regulatory intervention in limiting the supply for office/mall.

Risks

• (1) Prolonged erosion in consumer sentiment; (2) Failure to execute the planned asset injections and strategy; (3) Significant slowdown in broad economic activities.

Ratings

• OVERWEIGHT

• Maintain OVERWEIGHT with limited downside risk given the accommodative monetary conditions, sustainable and attractive yield amid low global yield environment.

Top Picks

• Maintain BUY on MQREIT (TP: RM1.34) given its high dividend and sustainable yield of ~7%.

• Maintain BUY on PREIT (TP: RM1.95) banking on its income growth in FY17 post acquisitions and major reversion with DPU yield of 5.5% at current price.

• Maintain BUY on KLCCSS (TP: RM8.35) given its projected DPU yield of 5.1% (vs targeted yield of 4.6%); stable asset and premier assets location.

Source: Hong Leong Investment Bank Research - 23 Aug 2016