REITs expected to be active in greenfield, brownfield projects

Real estate investment trust sector
Maintain neutral: There are no surprises for 2QCY18 earnings for  real estate investment trusts (REIT). Core net income (CNI) of the six out of the seven REITs under our coverage were in line with our full-year forecasts. 

Among them, Pavilion REIT’s CNI for the quarter was slightly above our expectations due to higher-than-expected rental income, recording an 11.8% year-on-year (y-o-y) growth. 

For 2QCY18, five REITs under our coverage registered positive CNI growth except for KLCCP Stapled Group, comprising KLCC Property Holdings Bhd and KLCC Real Estate Investment Trust, which was flat and CapitaLand Malaysia Mall Trust (CMMT) at -16.0% y-o-y. 

Overall, most REITs recorded higher earnings for the cumulative period except for CMMT due to the negative rental reversion from its Klang Valley malls.

Besides the ongoing lookout for yield-accretive assets, REITs are expected to participate in greenfield and brownfield projects more actively. 

Notably, Axis REIT has handed over Axis Mega Distribution Centre to Nestle and is working on the Axis Aerotech [email protected] with a development cost of RM74.2 million, which is expected to be completed by 4QCY18. 

Meanwhile, Sunway REIT is expanding Sunway Carnival’s net lettable area by 330,000 sq ft or 66% over three years. Completion of the RM353 million development is expected in 3QFY21.

In August, Pavilion REIT announced that it was invited by Malton Bhd to participate in the ongoing development of Pavilion Bukit Jalil. No indicative value was mentioned. We believe that REITs will look into greenfield or brownfield development as another way of adding value to their portfolios on top of outright purchases of completed assets.

Revised REITs guidelines by Malaysia’s Securities Commission that took effect on April 9, 2018 could be one of the reasons to spur the participation of REITs in development projects going forward. 

Recall that the revised guidelines since the previous version released on Dec 28, 2012, now allow for REITs to undertake property development activities that cap the investment value at 15% of the REIT’s total asset value. 

We believe that this revision provides an additional option for REITs to seek yield accretive investments on top of purchasing and refurbishing properties.
We retain most of our assumptions as most of the earnings for REITs under our coverage are in line (with expectations). 

That said, we have increased our target price (TP) for Pavilion REIT from RM1.40 to RM1.60 as we assumed higher rental income going forward. We have also increase the TP for Sunway REIT from RM1.90 to RM1.93 as we roll over our base year. 

We maintain our calls for REITs under our coverage except for IGB REIT from “buy” to “neutral” due to the limited upside since the recovery in unit price. However, TP for IGB REIT is unchanged.

Current 10-year Malaysian Government Securities (MGS) yield climbs a little compared to the average of 4.0% in the previous quarter but is still considered accommodative. 

The spread of 1.35 percentage points between the average dividend yield of REITs under our coverage and the MGS yield is unexciting at the moment.
Maintain “neutral” on REIT sector due to the lack of near-term catalysts. 

Our top pick for the sector is Sunway REIT (Buy; TP: RM1.93) due to its positive earnings outlook. We believe its retail division will continue to spur earnings growth going forward while the office segment may rebound from its previous low. 

We also have a “buy” call on AmanahRaya REIT (TP: 94 sen) for its diversified asset base with exposure to education property and attractive dividend yield of 6.5%. — MIDF Research, Sept 12

This article first appeared in The Edge Financial Daily, on Sept 13, 2018.

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