We upgrade MREITs to NEUTRAL. We do not expect any further earnings risk from MREITs under our coverage as we believe that most earnings downside risks have been accounted for. The MGS appears to be stabilising at current levels of 3.90% after a volatile CY14, rising to 4.30% in Dec (from 3.9% in Nov) but declined to low of 3.76% in early Feb-15 as foreigners sold Malaysian bonds post the free fall in oil prices and weakening MYR. However, the MGS quickly reverted to current levels where it appears to be settling comfortably at the 3.90% level despite further declines in oil prices and worsening MYR. Additionally, we believe the market has well anticipated and priced-in a potential interest rate hike by the US Federal Reserve in 2H15, implying that most bond yield downsides have been priced in. We reckon that investors should reposition for a better 4Q15 as the oil crisis and the 10-year MGS would have likely stabilised by then, and retail spending would have picked up post GST. In the meantime, we advise investors to opt for MREITs with better-than-average earnings growths and strong yields. Our preferred pick is SUNREIT due to strong earnings growth in FY16 mainly boosted by value accretion of Sunway Putra Place (SPP). WE upgrade MREITs to NEUTRAL (from UNDERWEIGHT) and upgrade all our TPs by 4.6%-5.8% based on a lower 10-year MGS target of 3.90% (from 4.20%). Our Calls with TPs are KLCC (MP; TP: RM7.06), SUNREIT (OP; TP: RM1.76), CMMT (UP; TP: RM1.42), IGBREIT (MP; TP: RM1.33), PAVREIT (MP; TP: RM1.38), and AXREIT (MP; TP: RM3.42).

4Q14 results review. MREITs’ 4Q14 results were mostly within expectations, save for AXREIT which came in below consensus and our estimates due to higher-than-expected expenditure (admin expense and managers fees) and finance cost. QoQ, topline was flattish to positive for all MREITs (0% - 6%), save for PAVREIT (-1%) due to lower turnover rent. However, RNI was a mixed bag (-9% to 16%) as PAVREIT (-9%), IGBREIT (-6%) and SUNREIT (-1%) saw declining margins from higher operating cost, expenditure and financing cost. YoY, RNI was positive for all retail MREITs (1%- 16%), but office/industrial-based AXREIT declined (-4%) due to the absence in revenue from Axis Plaza and declining margins from higher operating cost, and administrative expense.  

Source: Kenanga Research - 6 Apr 2015