The recent MREITs results season was very much within expectations, except for AXREIT which came in slightly lower at 94% of our forecast due to higher-than-expected trust expenditure. The US Fed implemented a second round of QE tapering on 29th Jan 2014, whereby the 10-year MGS yield rose to a high of 4.30% prior to the tapering announcement. Nevertheless, our yield forecast of 4.15% at this juncture is maintained as the 10-year MGS yield has cooled off lately to 4.09% possibly due to the less sanguine economic data coming out of the US. Meanwhile, MREITs have suffered from a subdued acquisition environment in CY13. Although we expect CY14 to be another quiet year, we do not discount the possibility of asset acquisitions by AXREIT and CMMT in 1H14. Upgrade to NEUTRAL (from UNDERWEIGHT) on MREITs. Our TPs and CALLs are: KLCCSS (MP; TP: RM5.86), SUNREIT (MP; TP: RM1.23), CMMT (MP; TP: RM1.44), AXREIT (OP; TP: RM3.11) and IGBREIT (MP; TP:RM1.23).

4Q13 results review. All the MREITs under our coverage performed within expectations, except for AXREIT which 4Q13 results came in at 94% of our forecast. This was due to higher-than-expected trust expenditure in terms of manager’s fees and administrative expense. MREITs under our coverage (AXREIT, CMMT, IGBREIT, KLCCSS, SUNREIT) recorded YoY growth of 3%-15%, with retail MREITs such as CMMT, IGBREIT and SUNREIT recording stronger double digit RNI growth of (15%, 13% and 11%, respectively). Growth in earnings was underpinned by positive rental reversions and healthy occupancy rates (ranging between 94%-99%). YoY-YTD growth was also stronger for retail based MREITs with SUNREIT and CMMT recording 8% and 9% respectively. The exception was CMMT’s Sungei Wang (SW) which recorded negative rental reversions (-3.7%) due to ongoing MRT works, although The Mines (+10.3%) and East Coast Mall (+21.2%) managed to more than negate SW’s weaker performance. Overall, MREITs QoQ growth was rather flat at 1% to 2%, for most of the MREITs under our coverage, while the outliers were: (i) IGBREIT at -1% QoQ due to higher operating cost, and (ii) SUNREIT at 12% due to strong rental reversions from Sunway Pyramid.

A second round of QE tapering. The U.S. Federal Reserve on 29th January 2014 announced a second round of tapering by a further USD10b reduction in its monthly bond purchases, lowering its monthly bond buying to USD65b. While we did expect the US Fed Reserves to taper bond purchases progressively over 2014, the second round of tapering came in sooner than expected given that the first round was announced on 18-Dec-13. This generally puts upward pressure on Malaysian bond yields as a large proportion of Malaysian bonds are held by foreign investors. As a result, the rise in Malaysian bond yields would evidently exert downward pressure on MREITs’ share prices as MREITs typically trade at a yield spread to the 10-year MGS. Prior to both rounds of QE tapering, we had noticed the 10-year MGS yield creeping up, reaching a high of 4.3% on the 28th Jan 2014 (a day before the 2nd round of QE tapering). However, the yield has cooled-off recently and is currently at 4.09%. This could be due to less-than-positive economic data coming out of the US, reducing the chances of yet another round of tapering in the near-term. As such, we maintain our 10-year MGS target of 4.15%.

A quiet year for asset acquisitions, indeed. There was no asset acquisition in 4Q13, let alone throughout CY13, which was due to the low cap rate environment. Nonetheless, AXREIT took the opportunity to dispose of one asset in 4Q13 (Axis Plaza). Going forward, we believe there are asset acquisition opportunities in CY14 as the property market appeared to be taking a breather while some MREITs are also sounding slightly more optimistic. AXREIT is eyeing close to RM380m-RM400m worth of assets, which is likely to materialize with the acquisition of an industrial asset by 1H14. To recap, AXREIT has yet to complete its placement exercise, which given an extension until April 2014 to allot and issue new units for a placement which is usually used to fund acquisitions. CMMT has also extended the time frame for the listing approval by six months to April 2014, to issue 20% of its existing fund size, which may be for a potential acquisition.

We upgrade MREITs to NEUTRAL (from UNDERWEIGHT). We upgrade MREITs to NEUTRAL (from UNDERWEIGHT) by virtue of heavyweights KLCCSS and IGBREIT providing total returns of 3.0% and 12.5%. Over the last results season, we have: (i) upgraded our KLCCSs’ CALL and TP after reducing our spread to the 10-yr MGS due to minimal earnings risk from KL assessment rate hikes, (ii) upgraded SUNREITs CALL and TP after rolling forward our TP to FY15E, (iii) upgraded CMMT’s TP post housekeeping by a marginal +2% on RNI for FY14E, and (iv) downgraded AXREIT’s TP slightly to RM3.11 (from RM3.13) due to the slightly expanded share base from the IDRP issuance. We make no changes to our target yield at this juncture as the 10-yr MGS yield has been cooling off and is currently below our 10-your MGS target of 4.15%. Our TPs and CALLs are: KLCCSS (MP; TP: RM5.86), SUNREIT (MP; TP: RM1.23), CMMT (MP; TP: RM1.44), AXREIT (OP; TP: RM3.11), and IGBREIT (MP; TP: RM1.23).

Source: Kenanga