Maintain NEUTRAL. MREITs’ fundamental outlook remains unexciting, on stable but uninspiring reversion rates due to the oversupply of retail, office and hospitality spaces. We prefer the industrial segment as it commands similar reversions on more long-term leases (6 years vs. 2-3 years). All in, we expect modest DPU growth of 1-2% YoY in FY19-20. Valuation wise, we lower our 10-year MGS target to 3.40% (from 3.70%) on increased demand for bonds in light of market uncertainty and are relieved for now on FTSE Russell’s decision to maintain Malaysia in the World Government Bond Index (WGBI). Additionally, we lowered our spread for more stable MREITs (IGBREIT and AXREIT) and increased spread for REITs facing YoY declines (CMMT and MQREIT). As a result, TPs were increased by 0-14%, and have upgraded AXREIT and CMMT to an OUTPERFORM (from MP). Maintain NEUTRAL as we have accounted for most foreseeable upsides while MREITs under our coverage are offering average gross yields of 5.5% which we deem as decent.

Results mostly within expectations. Almost all MREITs’ results met expectations, save for MQREIT and SUNREIT that came in slightly below. Hence, this quarter is slightly worse off than the previous quarter when all came in within. QoQ, top-lines were mostly declining (-1% to -6%), as 2Q is seasonally a slower quarter and on tenant movements during that period, save for PAVREIT which was marginally higher by 5%. Bottom-line growths for most REITS were between 2% to 15%, save for AXREIT which was flat. YoY-Ytd, top-line growths were mostly positive (2-18%), save for CMMT (-2%) and MQREIT (-8%) on lower rental contributions. As a result, bottomline also followed suit with CMMT (-12%) and MQREIT (-15%) declining, but other MREITs continued to see bottomline growth of up to 20%. Post results, most of our earnings estimates were unchanged save for SUNREIT and MQREIT which we lowered by 8% and 10%, respectively. Our calls for CMMT and MQREIT were lowered from OP to MP, in-line with the rest of the sector. Our TPs were increased by 0-6% post rolling forward our valuations to FY20, but we also took the opportunity to lower Target Price for SUNREIT (-5%), CMMT (-4%) and MQREIT (-9%) due to earnings weakness.

MREITs under coverage up 4% YTD on average, in line with the KLREI Index (+3%) (at our report cut-off date on 20th September 2019). Almost all MREITs saw positive YTD gains for 9M19 of 3-13% save for CMMT (-2%) and MQREIT (-8%). IGBREIT was the top gainer YTD (+13%) with is results well within expectations and it is also one of the few MREITs with consistently stable assets that continued to record high occupancy on the back of positive reversions. Meanwhile, MQREIT was the worst performer due to downward rental pressures. Other MREITs saw YTD gains as results continued to meet expectations and on decent yields.

Source: Kenanga Research - 3 Oct 2019