• All MREITs under our coverage underperformed in 2Q20. The MREITs’ 6M20 realised earnings per unit (EPU) shrunk an average of 34% yoy due to rental assistance given to tenants, lower assets’ occupancy, higher operating costs and an increase in share base (AXRB)
• Moving forward, rental assistance will be given at a smaller quantum and on a case-by-case basis. This should lift 2H20 earnings (relative to 1H), but not to pre-Covid-19 levels as we expect the weak macro environment and social distancing to weigh on the retail and hospitality sectors
• We reiterate our NEUTRAL stance on the MREITs, as we do not think the sector is out of the woods yet. For exposure, we like AXRB (HOLD, TP RM1.97) and KLCCSS (HOLD, TP RM7.91). Meanwhile we raised YTLREIT’s cost of equity to 11.8% (from 10%) to reflect prolonged weakness in the hotel segment; maintain SELL on YTLREIT with a lower TP of RM0.68.

2Q20: All 6 MREITs’ Performance Were Below Expectations

Facing unprecedented challenges brought forth by the pandemic and movement control orders, the MREITs managers opted to give varying degrees of rental assistance to tenants. Broadly, the retail and hotel assets were the worst hit while other asset classes were resilient/stable during this period. At the realised net profit level, only AXRB (warehouse and logistics asset portfolio) reported a growth in 6M20, while others reported declines of 13%-65% yoy.

Recovery Is Underway But Hotel Outlook Remains Weak

Moving forward, we expect the retail segment to recover at a gradual pace as consumers adjust to a new normal. However, the hotels’ outlook remains weak due to lacklustre tourism activities, cross-border restrictions and weak corporate and events bookings. In view of the weak economies and challenging business environment, we expect rental assistance for retailers to continue, albeit at a reduced quantum and to be given on a case-by-case basis. Elsewhere, the nearterm outlook for the other assets (ie, offices, warehouses, healthcare) should remain stable.

Maintain NEUTRAL

We had downgraded our earnings projections for all MREITs during the results reporting due to their earnings disappointment. For exposure, our preferred picks are (i) Axis REIT (AXRB MK, HOLD, TP RM1.97) for its industrial / warehouse portfolio which is more resistant against the pandemic disruptions and (ii) KLCCP Stapled Group (KLCCSS MK, HOLD, TP: RM7.91) for its highly defensive earnings and sustainable yield. Meanwhile, we maintain YTLREIT as a SELL with a lower price target of RM0.68 as we raised the cost of equity to 11.8% (from 10%) to incorporate its depressed earnings outlook and slow recovery in hotel/tourism activities.

Source: Affin Hwang Research - 15 Sept 2020