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Malaysian REITs earnings to improve in H2 of 2017, says CIMB Research

CIMB Equities Research expects earnings of Malaysian real estate investment trusts (MREITs) under its coverage to improve in the second half of 2017 over the January-June period.

It said on Tuesday the improvement would be supported by mid-single-digit rental reversions from retail assets in prominent locations (Suria KLCC, Mid Valley, The Gardens Mall and Sunway Pyramid) as well as stronger tenant sales boosted by year-end holidays.

The year-on-year improvement would be supported by contribution from newly-added assets by MRCB-Quill REIT (Menara Shell in December 2016), Axis REIT (Scomi Facility @ Rawang in August 2016) and additional net lettable area in KLCCSS’s Menara Dayabumi.

Overall, CIMB Research maintained its Neutral stance on the sector as it thinks the sector still lacks catalysts while the downsides are largely priced in.

“Our call is supported by average CY17-18F dividend yields of 5.2% to 5.4%, at a discount to historical yields of 6% to 7%. While the oversupply of office and retail space still appears to loom over the sector, we think high quality assets with continuous asset enhancement initiatives could be resilient in CY17F,” it said.

Commenting on the second quarter ended June 30, 2017 (2QCY17) results of all MREITs under its coverage, it said they were within expectations.

MREITs recorded average core net profit growth of 7.0% on-year and average dividend per unit (DPU) growth of 0.9% on-year in 2QCY17.

This can mostly be attributed to new contribution from Menara Shell for MRCB-Quill REIT (acquired in Dec 2016) and positive portfolio rental reversions for all MREITs except CapitaLand Malaysia Mall Trust (CMMT).

Excluding MRCB-Quill REIT, average 2QCY17 core net profit rose by a modest 1% on-year.

It pointed out MREITs under its coverage sustained retail occupancy rates in 2QCY17, except KLCCP Stapled Securities (KLCCSS), which is undergoing a tenant relocation exercise.

Retail portfolio rental reversions remained in positive territory except for CMMT, which was dragged by negative rental reversions for its Klang Valley assets.

Tenant sales growth was encouraging, especially for major malls in prominent areas (KLCC, Sunway Pyramid, Mid Valley Megamall, The Gardens).

As for offices, the focus shifted to tenant retention for short-term leases. The  2QCY17 office occupancy rates were broadly unchanged on-year, except for KLCCSS’s Menara Exxon-Mobil (now fully occupied) and Sunway REIT, which showed recovery due to a better showing by Menara Sunway and Sunway Putra Tower.

Office rental reversions hovered in low- to mid-single-digit territory. MREITs with shorter-term lease contracts located in less prominent areas have adopted a more defensive tenant retention strategy.

The 2QCY17 hotel segment earnings were supported by growth in F&B revenue, especially for Sunway Resort Hotel & Spa and Mandarin Oriental Kuala Lumpur on the back of a pick-up in meeting and function activities.

Improving occupancy per available room for hotels in Sunway REIT’s portfolio has come at the expense of average daily room rates, which were lower on-year in 2QCY17.

– The Star

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