We maintain our NEUTRAL view on MREITs as the sector is still lacking catalyst while downsides are already largely priced-in. In view of the possibility of fewer rate hikes implying lesser bond yield volatility, we have lowered our 10-year MGS target to 3.80% (from 4.00%) to better reflect upside to target prices for MREITs in the mid-term, and we will continue to monitor the situation closely throughout CY2016. At current levels, MREITs are offering gross yields of 5.0%-6.3%. We maintain OUTPERFORM call for PAVREIT (TP: RM1.83) for its asset stability and future asset acquisition potential and SUNREIT (TP: RM1.65) for its contribution from SPP and visible acquisition pipeline. We have MARKET PERFORM call on AXREIT (TP: RM1.60), KLCC (TP: RM7.42), and IGBREIT (TP: RM1.53). Meanwhile, we have UNDERPERFORM call on CMMT (TP: RM1.35) due to the lack of fresh catalyst and negative sentiment from Sungei Wang Plaza for CMMT. All in, we maintain all of our calls while TPs upgraded by 3.2-8.7%.

4Q15 results were mostly within expectations, except for KLCC and AXREIT, which came in below expectations. Overall, it was slightly worse off than 3Q15 as most results came in within, and only KLCC and CMMT broadly within expectations. QoQ, topline growth was mostly flattish to positive, except for AXREIT (-10%), which was slightly worse off than 3Q15. YoY, similar to 3Q15, both topline and bottomline growth were mostly positive. Earnings-wise, we trimmed FY16-17E earnings for SUNREIT and AXREIT on weaker occupancy expectations. Meanwhile, we upped IGBREIT’s FY16E earnings due to stronger reversion assumptions. This was worse off compared to 3Q15 in which earnings were largely unchanged, except for a 2% cut in AXREIT’s FY16E earnings. All of our calls were unchanged in the 4QCY15 results review, but due to earnings adjustment, we lowered TPs for SUNREIT and AXREIT and upped IGBREIT’s TP.

All in, we believe fundamentals are mostly intact. In 4Q15, we continued to see MREITs facing weaknesses such as: (i) AXREIT’s weak office/multi-tenanted assets and loss of income from Axis PDI Centre, (ii) CMMT’s negative rental reversion on Sungei Wang Plaza, (iii) weaker hotel segment for KLCC and SUNREIT due to softer market demand. That said, we have already accounted for AXREIT’s weaker occupancy, CMMT’s negative reversions of -30.0%, lower occupancy assumption for KLCC (Mandarin Oriental to 55.0%, from 65.0%) and SUNREIT (Sunway Hotel Seberang Jaya from 75.8% to 60.0%, Sunway Putra Hotel from 51.5% to 40.0%). We expect modest earnings growth from MREITs in our universe with an average of 7.1-5.9% in FY16-17E. As such, we believe fundamentals are mostly intact, given that most earnings risks have been accounted for and our estimates are relatively conservative as compared to consensus, save for AXREIT and CMMT, which are largely in line with consensus.

IGBREIT and PAVREIT emerged as the top performers under our coverage. IGBREIT stood out at the top gainer YTD, appreciating by 13.4% to RM1.52, which we reckon may be due to its asset stability from high occupancy and stable reversions, while gross yields before the share price run-up was fairly attractive at 6.2%, above our MREITs average of 5.8% back then. The other strong gainer was PAVREIT (+7.7% YTD), as share price ran up to a peak of RM1.80 (+16.1%) in mid-March 2016, which we believe was mainly due to: (i) asset stability - as it is a tourist-centric mall in a landmark location allowing for stable occupancy rates (> 98%), (ii) visible asset acquisition pipeline (i.e. fahrenheit88) while gearing still remains low at 0.25x even post the acquisitions of Intermark Mall and Damen Mall by 1Q16, (iii) FY16 is a major lease expiry year for PAVREIT (69% of NLA), which we expect 5.4% GRI growth from PSM on single digit rental reversions. Save for AXREIT, other MREITs under our coverage saw positive YTD gains, in tandem with contracting bond yields and minimal lease expiry (22%-37% of NLA) in FY16E. AXREIT was the worst performer, which we believe is due to the weaker-than-expected 4Q15 results and negative sentiment from loss of income contribution from Axis PDI Centre in FY16. 

Source: Kenanga Research - 5 Apr 2016