Real Estate Investment Trust (REIT)
Maintain neutral: Latest quarterly results for real estate investment trusts (REITs) were in line with expectations. In our universe of six REIT stocks, only KLCC’s earnings came in above expectations, while the rest reported earnings which were within expectations. Note that KLCC’s operating expenses unexpectedly declined by 3% year-on-year (y-o-y) to RM160 million possibly due to cost-saving measures implemented, particularly within the hotel division.
The remaining five REIT stocks with earnings that matched expectations are Axis REIT, CapitaMalls Malaysia Trust (CMMT), IGB REIT, Pavilion REIT and Sunway REIT.
Overall, the average distribution per unit (DPU) for six REIT stocks under our coverage grew by 4.7% y-o-y. IGB REIT registered the strongest DPU growth of 11% y-o-y. The superior DPU growth was in line with an 8% reduction in operating expenses due to lower utilities and reimbursement costs.
We expect Malaysian Government Securities (MGS) yields to continue being volatile in the near term due to global economic and interest rate uncertainties. This is likely to impact the stability of the spreads between REIT and MGS yields.
Note that the standard deviation (SD) for MGS 10-year yield has increased to 0.16 for the period from April 7 to Oct 6, 2015.
This is higher than its SD of 0.13 in the prior six months. On interest rates, our economist expects Bank Negara Malaysia to maintain its overnight policy rate at 3.25% for the rest of the year. This should keep financing costs stable for all REIT players.
We believe the sluggish consumer sentiment will persist with a cautious approach, given the weak ringgit and the implementation of the goods and services tax. This could affect REITs with exposure to shopping malls (IGB REIT, KLCC, CMMT, Pavilion REIT and Sunway REIT) as the rental reversion growth corresponds with the tenants’ business revenue.
REITs with office exposure (Axis REIT and Sunway REIT) may face increased competition due to an influx of new office space. We remain “neutral” on the sector with top picks: IGB REIT (Buy; TP: RM1.46) and CMMT (Buy; TP: RM1.66).
We like IGB REIT due to its dividend growth of 11% y-o-y in the first half of FY15 ending Dec 31 (1HFY15) being higher than the peers’ average of 3.4%, its strong ability to contain expenses, and a minimal risk to interest rate increase as 98% of its loans are in fixed rate. Our “buy” call on CMMT is premised on our view that the market has under appreciated the earnings contribution from the acquisition of Tropicana City Mall, its net dividend yield at 5.8% is the highest among peers (sector average: 5.2%) and a potential recovery in Sungei Wang Plaza’s occupancy rate after the completion of the mass rapid transit construction. — MIDF Research, Oct 6
This article first appeared in The Edge Financial Daily, on Oct 7, 2015.