SC announced yesterday that it will temporarily increase the gearing limit for MREITs from 50% to 60%, effective immediately, until 31 December 2022. We believe the temporary increase in the ratio limit is mainly to help ailing REIT with their cash flow and allowing REIT managers to manage their REIT’s debt and capital structures more efficiently during the Covid-19 pandemic. Furthermore, with the low interest rate environment coupled with this increase in gearing ratio, we believe some REIT managers may capitalise on this to acquire assets to expand their portfolio. We maintain our NEUTRAL stance on the sector. That said, at the current level, the average yield for our stocks in coverage seem decent at 4.6%. Our top picks are Axis REIT (BUY, TP: RM2.47) and MQREIT (BUY; TP: RM0.79) for their resilient earnings amid Covid-19 and MCO/CMCO/RMCO, and their relatively high occupant tenancy.

NEWSBREAK

The Securities Commission Malaysia (SC) announced yesterday that it will temporarily increase the gearing limit for Malaysian real estate investment trusts (MREITs) from 50% to 60%, effective immediately, until 31 December 2022.

HLIB’s VIEW

Provide greater cash flow flexibility…. We believe the temporary increase in the ratio limit is mainly to help ailing REITs with their cash flow and allowing REIT managers to manage their REIT’s debt and capital structures more efficiently, especially in light of the challenging operating environment during the Covid-19 pandemic. 1H20 has been hurtful for mall and hotel based REITs due to the rental assistance (i.e. rebates and deferment) given to retailers and hoteliers. This in turn has inevitably hurt their cash flows while fixed opex remains. By allowing this temporary increase in gearing limit, affected REITs will be able to increase their debt level to continue fixed unavoidable opex during this challenging time.

…and promote future acquisition. With the low interest rate environment coupled with this increase in gearing ratio, we believe some REIT managers may capitalise on this for acquisitions to expand their property portfolios. We reckon that this initiative bodes well for Axis REIT, given it has been actively pursuing quality acquisitions with focus on Grade A logistics and manufacturing facilities as a prime focus.

No immediate impact for now. Based on our channel checks, none of the REITs under our coverage has the intention to increase their debt level, for now. Furthermore, their gearing levels are still on the healthy range (below the previous limit of 50%; see Figure #2) even during this crisis.

Maintain NEUTRAL on the sector. That said, at the current level, the average yield for our stocks in coverage seem decent at 4.6%. Our top picks are Axis REIT (BUY, TP: RM2.47) and MQREIT (BUY; TP: RM0.79) for their resilient earnings amid Covid19 and MCO/CMCO/RMCO, and their relatively high occupant tenancy.

Source: Hong Leong Investment Bank Research - 13 Aug 2020