MQREIT 1H18 core net profit RM44.5m (-1.6% YoY) was in line. Declared semi annual dividend of 4.23 sen per unit. The decline was due to the disposal of QB8 along with higher operating expenses and finance costs. Going forward, MQREIT will be focussing on cost management and tenant retention to ensure sustainability of yield. We retain our forecast. Reiterate BUY call with unchanged TP of RM1.29 based on targeted yield of 6.9%.

Within expectations. 1H18 revenue of RM87.5m (-3.5% YoY) translated into core net profit of RM44.5m (-1.6% YoY). The results were in line with ours and consensus expectations, accounting for 49.6% and 50.2%, respectively.

Dividend. Declared semi-annual dividend of 4.23 sen per unit (1H17: 4.23 sen) going ex on 21 August 2018.

QoQ. Revenue declined by 1.5% to RM43.4m mainly caused by loss of contribution after the disposal of QB8-DHL XPJ (QB8) since April 2018. However, core net profit increased by 11.8% to RM23.5m. This was essentially due to lower property operating expenses with efficient cost control initiatives.

YoY. Core net profit increased by 6.5% to RM23.5m. The improvement was driven by lower property expenses and expenditure incurred. Lower property operating expenses was attained thanks to tighter control on costs and lower expenses incurred. Nevertheless, the increment was partly mitigated by higher finance costs.

YTD. Revenue for 1H18 decreased by 3.5% to RM87.5m. The lower revenue was due to (1) loss of revenue from QB8 after disposal in April 2018; (2) lower occupancy rate from Platinum Sentral and Menara Shell. Likewise, core net profit of RM44.5m showed a decrement of 1.6% attributable to higher administrative expenses incurred pertaining to the disposal of QB8. Similarly, finance costs increase due to higher interest in borrowings after the drawdown made in March 2017.

Occupancy and gearing. Overall occupancy rate remained healthy at 96% (1Q18: 96%). Average debt to maturity has decreased slightly from 2.55 years to 2.30 years, while average cost of debt maintained at 4.4%. The gearing level decreased slightly to 37% (1Q18: 38%), which is still comfortably below the 50% limit.

Outlook. Out of the 14% total NLA that are due for renewal in 1H18, management has achieved approximately 70% renewal rate and are currently in advanced negotiations with tenants for the balance of leases due in 2H18. Also, management has successfully secured new leases with demand driving from IT, business consultancy, medical and retail sectors. Going forward, management will be focussing on cost management and tenant retention. We continue to like MQREIT given its attractive dividend yield of 7.6% (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate.

Forecast. Maintain as the Results Were in Line.

Maintain BUY, TP: RM1.29. We maintain our BUY call with unchanged TP of RM1.29 based on targeted yield of 6.9% which is derived from 2 years historical average yield spread of MQREIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 9 Aug 2018