MQREIT is the first REIT under our universe to open its doors to co-working space. We feel this will act positively to MQREIT as it will give them a larger tenant base with multiple companies under the umbrella of the co-working space provider. Going forward, MQREIT will be focusing on cost management and tenant retention to ensure yield sustainability. Multiple AEIs are in place for FY19 in an attempt to stay relevant in the market. Our forecasts were adjusted by -5% post annual report and model upkeep. Following the dovish tone by major central banks and BNM, we revise our 10-year MGS yield assumption to 3.9% (from 4.1%) and roll forward valuation to mid FY20. We maintain BUY call with lower TP of RM1.17 (from RM1.23) based on targeted yield of 6.7% (from 6.9%).

First to welcome co-working space. MQREIT is currently the first and only REIT under our coverage that has its opened doors to co-working space; with 45k sq ft in Platinum Sentral being leased to a multinational co-working space operator. Often, co working space operators would enter the business with the landlord by means of profit sharing. However in MQREIT’s case, this is on traditional rental terms. We comprehend that this will be a long tenure of 9 years with the option to extend for an additional 3 years, with an agreeable rental revision every 3 years. We understand that refurbishment works will begin this month and operations are expected to commence in July. We feel with the mushrooming of co-working spaces presents a symbiotic relationship to REITs. We believe that REITs will benefit by attaining better take up rate certainty through signing on 1 large tenant as opposed to multiple fragmented smaller tenants and we also believe that co-working operators can capture a larger tenant base than REITs can.

Asset enhancement initiatives (AEIs). Allocated capital expenditure for 2019 is approximately RM10m which is mainly for AEIs. With the expectations of a challenging office market, MQREIT intends to enhance the aesthetics of the buildings to maintain its quality in order to preserve occupancy. Planned improvement works on several properties include: Wisma Technip (washrooms and external façade), Quill Building 5 – IBM (air conditioning system), Platinum Sentral (several common area facilities upgrades) and Menara Shell (lift systems). Looking ahead, management will be prioritising cost management as well as tenant retention over reversion growth.

Occupancy and gearing. Occupancy rate fell but remained healthy at 93% (FY17: 96.3%); considering the average occupancy rate in Klang Valley has been falling and stood at 80% in 2018. The gearing ratio stood at 37.7%, comfortably below the 50% limit, with a majority of its total borrowings (76%) being charged a fixed interest rate.

Forecast. Post release of annual report, our FY19-20 forecast adjusts by -5% due to model housekeeping. We also take this opportunity to introduce our FY21 numbers. 1QFY19 results will likely be released on 9 May after market close.

Maintain BUY, TP: RM1.17. We maintain BUY with lower TP of RM1.17 from RM1.23 based on targeted yield of 6.7% (from 6.9%). Following the dovish tilt by major central banks (Fed and ECB) as well as BNM, we revise our assumption of the 10-year MGS yield to 3.9 (from 4.1%; currently at 3.8%). We also roll forward valuation to mid-FY20. To note, our valuation model is based on the targeted yield of 2-year historical average yield spread between dividend yield and 10-year MGS yield. We continue to like MQREIT given its attractive dividend yield of 7.0% (highest among REITs in our universe), stable assets in prime location of KL Sentral with high occupancy rate.

Source: Hong Leong Investment Bank Research - 18 Apr 2019