Maintain OVERWEIGHT. We believe MREITs are ripe for bottom-fishing in light of the overdone sell-downs in Feb-March 2018 (-6 to -29% YTD). Results met expectations over the last two quarters, while the outlook remains status quo; unexciting but stable. We believe investors are concerned over (i) oversupply issues, which are not alarming for landmark assets, while we have accounted for weak reversions going forward, and (ii) potential OPR hikes which based on our analysis has no major impact on earnings and valuations. The 10- year MGS remains stable at c.3.90% but spreads have spiked to +1.6 to +4.3ppt, close to historical highs and surpassing record highs for CMMT and MQREIT (vs. 3-year average of +0.8 to +3.0ppt). To address investor concerns, we highlighted three worst-case scenarios for; (i) earnings risk, (ii) valuations risk, by assuming the highest historical yearly spreads for all MREITs (of +1.7ppt to +3.7ppt), and (iii) a combination of both; concluding that CMMT and MQREIT are still attractive with 26% and 9% total returns under our most pessimistic scenario. Cognisant of investors’ concerns, we increased our spreads to +1.4ppt to +3.3ppt (+0.5SD above historical averages). We lower TPs by 4-12%, save for AXREIT, PAVREIT and KLCC. We downgrade our calls for SUNREIT and IGBREIT to MP, but upgrade KLCC to MP (from UP). At current levels, MREITs are attractive, commanding favourable yields of 5.5- 8.1% (vs. 4.8-6.1% in Dec-17). CMMT and MQREIT are our TOP PICKS.

Results within, IGBREIT above expectations. MREITs’ 4Q17 results were all within expectations, save for IGBREIT which came in slightly above on low borrowing cost. This was better than 3Q17 when all MREITs’ results came in within our expectations, and PAVREIT missed consensus estimates. YoY-Ytd, top-line was mostly positive (1-37%), save for CMMT (-1%) on stable occupancy and modest reversions, which also translated to positive bottom-line growth. MQREIT’s high growth of 49% was due to the completion of acquisition of Menara Shell in Dec-2016. QoQ, top-line was flattish to positive due to similar reasons mentioned above which resulted in positive bottom-line for most. However, SUNREIT saw lower RNI (-11%) due to increased maintenance cost and allowance for doubtful debts, while PAVREIT’s (-7%) lower RNI was due lower borrowing cost in 3Q17. We left MREITs’ earnings unchanged, save for AXREIT which we reduced marginally on lower occupancy for some assets. Our TPs and calls are also maintained, save for AXREIT TP which was lowered on lower earnings.

YTD share price losses unwarranted. MREITs recorded YTD losses of 6-29% which we believe is unwarranted as recent 4Q17 reporting season was within expectations, while most MREITs’ fundamentals are intact. The KLREIT Index is down 12% YTD, mainly dragged down by large cap MREITs, while we noticed that smaller cap MREITs’ declines were not as severe (2- 16% YTD). We reckon that MREITs under our coverage saw substantial declines YTD on perceptions of a growing oversupply of office and retail spaces in the Klang Valley, and expectations of a negative impact from an OPR hike, which we view as unsubstantiated.

CMMT is the top loser YTD (-29%), which we infer was due to investors’ perceptions of its assets weak reversions, namely Sungei Wang Plaza (SWP) and The Mines (TM), as well as potential rental downtime in FY18-19 due to asset enhancement initiatives (AEI) at SWP, TM and Tropicana City Mall (TCM). We met up with management post results and have accounted for rental downtime as well as lower reversions going forward. It is also important to note that CMMT’s reversions have been improving to -1.3% currently (from -4.5% in 3Q16) due to improvements on SWP’s reversions, and on the back of stable occupancy of 95%.

Source: Kenanga Research - 4 Apr 2018