MRCB-Quill REIT’s next catalyst just around the corner

MRCB-Quill Real Estate Investment Trust (REIT) (March 30, RM1.16)

Maintain buy with an unchanged target price of RM1.15: We understand that the acquisition of Menara Shell is still in progress, and injection into MRCB-Quill REIT (MQREIT) could take place in early 2017.

Based on our latest estimates, Menara Shell could raise financial year 2017 (FY17)/FY18 (ending Dec 31) net profit by +39/+38% to RM83.8 million/RM88.1 million (12-month contribution each) assuming: i) an average rate of return of about RM8 per sq ft; ii) a 100% occupancy rate; iii) a 75% net property margin; and iv) 40%:60% debt: equity funding with interest cost of 4.6%.

We also derive a FY17 net property yield of 6.5% — above our estimated funding cost of 5.9%. Our forecasts are unchanged pending the confirmation of the funding structure. We also note that Platinum Sentral, which will contribute about 41% of FY16 to FY18 revenue (before including Menara Shell), has remained 100% occupied as large tenants are on leases of six to 15 years.

MQREIT’s occupancy risks are also lowered by the renewals over the past 12 to 24 months, such as on: a) Quill Building 1-DHL1 (QB1-DHL1) and QB4-DHL2 (five-year leases); b) QB3-BMW (10-year); and c) QB2-HSBC (five-year). 

We estimate that gross gearing would remain high at 0.42 times by end-FY16 (unchanged from end-FY15’s), which could limit future sizeable acquisitions as MQREIT could only borrow up to about RM274 million (statutory limit: 0.5 times).

Nonetheless, we forecast that the purchase of Menara Shell via debt and new REIT unit issuance have marginal impact on gross gearing. — Maybank Investment Bank Research, March 30

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This article first appeared in The Edge Financial Daily, on March 31, 2016. Subscribe to The Edge Financial Daily here.