MQREIT’s 3Q19 core net profit of RM17.6m (+7.2% QoQ, -14.3% YoY) brought 9M19 sum to RM53.5m (-14.9% YoY); this was below both ours and consensus expectations due to lower than expected revenue contribution. We reduce our FY19/20/21 earnings forecasts by -6.4%/-4.1%/-2.1% respectively after factoring in lower rental income. We maintain our HOLD call with a lower TP of RM1.05 (from RM1.10) based on FY20 forward DPU on targeted yield of 6.6%

Below expectations. 3Q19 core net profit of RM17.6m (+7.2% QoQ, -14.3% YoY) brought 9M19 sum to RM53.5m (-14.9% YoY). The results were below both ours and consensus expectations, accounting for 70% and 71%, respectively. The deviation was due to lower than expected top-line (see YTD para).

Dividend. None as dividend is usually payable semi-annually.

QoQ. Total gross revenue increased marginally by 2.9% to RM39.9m, which then led to a rise in core net profit to RM17.6m (+7.2% QoQ). The increase was mainly due to lower income contribution in 2Q19 (due to repositioning of tenant).

YoY. Top line was decreased by 7.7% attributable to lower revenue contribution; mainly from Platinum Sentral, Wisma Technip and QB5; however this was slightly mitigated by decrease in property operating expense (-2%) due to tighten control on costs, which in turn brought down the net property income (NPI) by 9.4%. As a result, bottom line showed a decrement of 14.3%.

YTD. Revenue for 9M19 decreased by 8.1% to RM120.1m. Similarly, core net profit of RM53.5m showed a decline of 15.2%. The lower revenue was due to (i) loss of revenue from QB8 (disposed in April 2018); (ii) lower occupancy rate from Platinum Sentral (SPAD downsized & MyHSR moved out), Wisma Technip (tenant downsized) and QB5 (IBM moved out). Nevertheless, it was cushioned by marginally (i) lower property expenses (-3.2%) and (ii) lower finance costs (-1.3%).

Occupancy and gearing. Occupancy rate stayed at 89% (2Q19: 89%). The average debt to maturity decreased to 1.82 years from 2.07 years (2Q19), while average cost of financing was kept at 4.5%. As for gearing level, it edged up to 37.4% (2Q19: 37.1%), with a majority of its total borrowings being charged a fixed interest rate (76%).

Outlook. 19% of MQREIT’s net lettable area are due for renewal for FY19 where: (i) 11% of it has been renewed as of 3Q19, (ii) 4% of leases is expiring in 4Q19, and management is still under negotiation with the tenants while (iii) the remaining 4% are not renewed. We envisage flattish reversion for its assets given lacklustre overall office market and flattish top line growth from these new leases by 4Q19. Going forward, management will focus on cost discipline and tenant retention. We believe MQREIT will continue to sustain with its long-term tenancy with Shell (comprising of 31% of its NLA), despite the moving out of tenants in a few assets.

Forecast. We reduce our FY19/20/21 earnings forecasts by -6.4%/-4.1%/-2.1% respectively after factoring in lower rental income.

Maintain HOLD, TP: RM1.05. We maintain our HOLD call with a lower TP of RM1.05 (from RM1.10) based on FY20 forward DPU on targeted yield of 6.6% which is derived from 2 years historical average yield spread of MQREIT and 10-year MGS. Although MQREIT provides investors with attractive dividend yield of 6.5% (highest among REITs in our universe), we are vigilant on market outlook for office REITs as it remain lacklustre due to unabated oversupply of office in KL city.

Source: Hong Leong Investment Bank Research - 26 Nov 2019