Maintain NEUTRAL. Recent 4Q18 results were mostly within expectations, save for AXREIT’s which was above and MQREIT’s slightly below, while prior results seasons had consistently met expectations for five quarters in a row. The sector’s fundamental outlook remains sluggish with rental reversions either weak or limited given the oversupply of retail and office spaces. As such we maintain mildly negative to single-digit reversions for MREITs’ assets under our coverage, resulting in slightly positive DPU growth YoY of 3-1% in FY19-20. The 10-year MGS yields have been declining (-7% YTD) to 3.80% currently, likely due to ongoing macro uncertainties (from major events such as the US-China trade war and growth moderation outlook across major economies) as well as the US Fed’s dovish outlook on interest rate hikes. As such, we lower our 10-year MGS yield target to 3.90% (from 4.20%) which is close to current MGS levels and lower most of our spreads close to historical average levels on positive share price sentiment from perceptions of interest rate cuts. All in, we increase TPs by 3-13%, and upgrade KLCC, IGBREIT and PAVREIT to MP (from UP). Reiterate NEUTRAL on MREITs with CMMT (OP; TP: RM1.25) as our Top Pick given its attractive 7.0% gross yield (vs. MREITs’ average of 5.8%).

Results mostly within expectations on rather unexciting fundamentals. MREITs’ recent results were mostly within expectations, save for AXREIT, which came in above, while MQREIT came in below. Up till last quarter, MREITs under our coverage maintained a consistent trend of meeting earnings expectations for five quarters in a row. QoQ, top-line growths were mostly positive (1-16%), save for SUNREIT, which was marginally lower by 3% and MQREIT (-1%). This translated to bottom-line growth for most (4-7%), save for SUNREIT (-9%) and MQREIT (-5%). YoY-Ytd, bottom-line was a mixed bag with four REITs showing growth (1% to 25%) on positive reversions and improved occupancy, save for CMMT (-4%), SUNREIT (-6%) and MQREIT (-6%) on higher operating and financing costs. All in, we left most earnings and TP’s unchanged, save for MQREIT’s TP which we lowered on weaker results, and AXREIT’s TP and call were upgraded on positive results. We also took the opportunity to downgrade PAVREIT and IGBREITs on limited upsides and lower yields vs. peers.

MREITs under coverage up 7% YTD on average in line with the KLREI Index (+7%) (as at our report cut-off date on 22nd March 2019). All MREITs saw positive YTD gains for 1Q19 of 2-15%, led by AXREIT, likely as its 4Q18 results exceeded both our and market expectations due to a lumpy rental recognition in 4Q18, translating to a higher dividend payout for FY18A of 8.74 sen (+16.5% YoY). KLCC’s YTD gain (+2%) was the lowest among coverage likely due to minimal upsides expected in 2019 on the back of lower–than-average yields among MREITs under coverage of 4.9% (vs. MREITs average of 5.8%). Other MREITs saw YTD gains as results continued to meet expectations and augmented by decent yields, while MQREIT’s share price remained stable (+4% YTD) with yield above average at 7.1%.

Source: Kenanga Research - 29 Mar 2019