Maintain NEUTRAL. CY20 will undoubtedly be one of the most challenging years for MREITs in recent history given the threat of Covid-19 pandemic on all facets of the economy. YTD, MREITs’ share prices were not spared, down 3% to 44% save for AXREIT (+1%), with MREITs’ with weaker asset profile took a heavier beating. Retail and hospitality MREITs’ tenants would be hardest hit by the MCO while office and industrial tenants would likely feel the pinch if this situation prolongs. Additionally, valuations are also under threat with a rising 10-year MGS (to 3.58% currently) on concerns of rising Covid-19 cases as well as the health of the Malaysian economy given the sharp dip in oil prices, while MREITs’ valuations are further impacted by risk-off stance in the equity markets as most investors prefer cash under current circumstances. We prioritise MREITs with strong value and capital preservation over high yields at this juncture, and MREITs that have the ability to be the first movers once the Covid-19 is resolved. Post rolling forward our valuations to FY21 and increasing our MGS target to 3.70%, our preferred picks are KLCC (MP; TP: RM7.45) on 5.1% yield and IGBREIT (MP; TP: RM1.50) with 5.7% yield for their balance sheet strengths.

A virus that does not discriminate, defensive MREITS have not been spared. 2020 has been a tumultuous year thus far, but nothing has disrupted markets quite as much as the fears and uncertainty surrounding Covid-19 which surfaced in Jan 2020. The impact has been felt globally and MREITs known for their defensiveness were not spared either (refer to Graph below). As a result, MREITs under our coverage have declined sharply, between -3% to - 44%, save for AXREIT which was up 1% YTD. MQREIT and CMMT saw the steepest declines at 44% and 22%, respectively, likely as investors remain cautious of the asset quality and tenant profiles which may come under pressure due to Covid-19. Meanwhile, AXREIT (+1%) and KLCCSS (-3%) held up the best as they have a more stable tenant profile on longterm leases. This is despite the fact that all MREITs’ results came in within expectation during

Source: Kenanga Research - 3 Apr 2020