MQREIT’s 1Q20 core net profit of RM19.8m (+6.4% QoQ, +1.9% YoY) was above our estimates but within consensus, due to lower than expected total expenses. Overall, the improved performance was due to new tenancy although it was offset by rental loss from QB5 building. We anticipate resilient earnings for FY20 from these new tenants. We increase our earnings by 6% for FY20-21 to account for lower expenses and contribution from new tenancy. Maintain our BUY call with a higher TP of RM0.79 (from RM0.71).

Above expectation. 1Q20 core net profit of RM19.8m (+6.4% QoQ, +1.9% YoY) was above our estimates but within consensus, accounting for 32% and 26%, respectively. The deviation was due to lower than expected total expenses. No dividend was declared as it is usually payable semi-annually.

QoQ. Total gross revenue edged down -0.6% to RM41.7m. However, due to lower operating expenses (-10.1%) and lower total expenses (-6.8%), core net profit was higher by 6.4%.

YoY. Top line increase marginally by 0.8% attributable to (i) income contribution from Menara Shell due to new tenancies with Microsoft and Google (occupancy rate rose to 99% in 1Q20 from 94% in FY19), (ii) income contribution from Tesco and (iii) increase occupancy of Wisma Technip whereby Technip took up 1 additional floor (from 74% in FY19 to 90% in 1Q20). Nonetheless, it was offset by rental loss from QB5 (still vacant) and rental rebates given to retailers in Plaza Mont Kiara (PMK). As a result of the declining total expenses by -2.8% due to lower finance cost (-3.1%) and lower administrative expenses (-36.7%), core net profit showed an increment by 1.9%.

Lease expiry. In 2020, 19% of MQREIT's total net lettable area (NLA) or approximately 371k sq. ft. are due for renewal. 2% of these leases were due in 1Q20 (with 93% take up) while most of it will be due in the 4Q20. MQREIT has started early negotiations for the balance of the leases with the intention to lock in the tenancy ahead of its expiry and we believe chances of tenancy renewal are high due to nature of business of their tenants (big corporations and multinational co mpanies like Shell, HSBC, DHL and etc.).

Other updates. Overall occupancy rate increased marginally to 90.5% (FY19: 90%). MQREIT has granted rental assistance in form of rental discount to its retailers in PMK (PMK contributed only about 3-4% of total revenue), which most of it will kick in 2Q.

Outlook. We anticipate resilient earnings for FY20 from these new tenants. Furthermore, we believe MQREIT is relatively shielded from the Covid-19 and MCO impact due to its large exposure of office and miniscule exposure of retail unlike the other mall based REITs. We noted that the current office market outlook for office REITs remains lacklustre due to unabated oversupply of office in KL city. However, we believe MQREIT able to sustain its earnings, at least in the near term, due to their tenancy with big corporations and MNCs.

Forecast. We increase our earnings by 6% for FY20-21 to account for lower expenses and contribution from new tenancy. Introduced FY22 projection at RM72.8m.

Maintain BUY, with a higher of TP: RM0.79 (from RM0.71) based on FY21 forward DPU on targeted yield of 8.1% which is derived from its 2 years historical average yield spread of MQREIT and 10-year MGS. We like MQREIT for its attractive dividend yield of 8.8% (highest among REITs in our universe) and its relatively more resilient earnings amid Covid-19 given minimal retail exposure unlike other mall based REITs

Source: Hong Leong Investment Bank Research - 18 Jun 2020