We downgrade MREITs to NEUTRAL. MREITs’ 2QCY14 results were mostly inline, with the exception of AXREIT. There was finally an asset acquisition as AXREIT proposed to acquire 5 office/industrial assets. However, we do not expect this trend to follow through with other MREITs as the asset acquisition environment remains challenging. Organic growth rate is at 3.0%-6.8% for MREITs (save for SUNREIT at 10.6% due to SPP) under our coverage after accounting for the indirect impact of GST and other cost pressures. Despite the delayed timeline of the European QE, we are still bullish on the possible implementation and maintain our 10-year MGS target at 3.80%; but we may review our sector call if it fails to materialise by CY14. We are also comfortable with our 10-yr MGS yield-spread valuations basis because we have previously assumed more conservative spreads, while sector risks have been priced in. Thus, we keep our valuations and earnings estimates largely unchanged, except for CMMT. We downgrade MREITs to NEUTRAL (from OVERWEIGHT) as most MREITs’ share prices have appreciated over 3QCY14 (save for CMMT). We have downgraded our calls for KLCC, SUNREIT, IGBREIT and PAVREIT to MP (from OP), and reduced our TP for CMMT due to weaknesses at SWP; despite that the stock remains an unwarranted laggard. Our TPs and CALLs are: KLCC (MP; TP: RM6.90), SUNREIT (MP; TP: RM1.56), CMMT (OP; TP: RM1.57), IGBREIT (MP; TP: RM1.35), AXREIT (MP; TP: RM3.53) and PAVREIT (MP; TP:RM1.41)

2Q14 results review. All MREITs’ results were within expectations save for AXREIT’s 1H14 results which came in slightly below our expectations at 41%, but within consensus due to higher-than-expected financing and operating cost. QoQ, topline growth was flattish to negative. Retail MREITs such as IGBREIT and SUNREIT (1% topline growth) saw flattish growth from minimal rental revisions, while other retail MREITs recorded negative growth due to lower occupancy rates and the seasonality factor (KLCC and PAVREIT) as 2Q is usually the weaker quarter for the hotel segment, and lower percentage rent for retail. AXREIT also saw negative topline growth from both lower occupancy and weak rental reversions at 0.65%, which is a historical low. This dragged down RNI as most MREITs, save for IGBREIT, recorded negative RNI QoQ (-2% to -10%), mainly due to higher utilities expenses. KLCC and AXREIT’s lower RNI was due to a one-off occurrence from higher refinancing cost for KLCC, and the absence of gains on disposal for AXREIT.

YoY, all retail MREIT’s recorded positive topline growth (3% to 10%) on the back of positive rental reversions, but industrial-based AXREIT saw no growth due to slower reversions, and one asset lesser than 1H13 after disposing Axis Plaza. Retail MREITs’ positive topline pushed earnings, as RNI increased (by 4% to 36%) with IGBREIT and

KLCC on the upper end of the spectrum at 16% and 36%, respectively. IGBREIT’s stronger growth was due to strong reversions and its ability to better manage cost, while KLCC’s REIT structure became effective in 2Q13 allowing for tax incentives. AXREIT increase in RNI (3%) was mainly due to the gains on disposal of Axis Plaza; excluding the gains, RNI actually decreased by 1%.

Source: Kenanga