Axis REIT ADD, TP RM2.34, RM1.85 close
We see minimal negative risks affecting its rental income outlook, earnings, tenants, and assets for 2022F. Its portfolio occupancy rate remains above 90%. Axis REIT’s logistics/ industrial asset acquisition strategy is well ahead of its peers. FY22F dividend yield is 4.9%.
IGB REIT ADD, TP RM1.90, RM1.58 close
IGB REIT is benefitting earlier than most other retail mall operators from the expected retail recovery in 2022F. Its key advantage is its well-established flagship malls (Mid Valley Megamall and The Gardens Mall). Occupancy rates are healthy at over 90%. FY22F dividend yield is 4.9%.
Sentral REIT HOLD, TP RM0.955, RM0.865 close
Office space remains oversupplied in FY22F while tenants’ space reconfiguration remains an ongoing risk. Sentral REIT’s strategy is tenant retention, which may offer minimal growth for rental rates but this is offset by a high dividend yield of 7.0%.
Recovery expectations intact
- We expect MREITs to report weaker post-1H22 retail activity in the upcoming 3Q22F reporting season but this should be offset by still-high NPI margins.
- Our 15.6% sector core net profit growth forecast for FY22F is intact, driven by minimal rental assistance and supported by 5.3% dividend yield.
- Maintain sector Neutral rating; Axis REIT and IGB REIT are top picks.
Recovery expectations intact going in 2H; more cautious on office
Ahead of the upcoming 3QFY22 results period for M-REITs, our expectation of a gradual U-shaped recovery in the operating environment for retail and hospitality REITs is intact; we expect the effect of weaker retail activity had spilled over into M-REITs 3Q22F earnings. However, we have turned more cautious on the prospects for office REITs due to tenanted space reconfiguration risks, high rate of non-renewal of leases and the oversupplied state in the Klang Valley region (30% vacancy rate as at end-Jun 22). We remain upbeat on the industrial warehousing/logistics space given the strong pipeline of potential asset acquisitions and positive rental reversions.
Qoq revenue growth for retail assets in 3QFY22 likely to moderate
In line with Retail Group Malaysia’s (RGM) 3.4% yoy retail sales growth forecast for 3QFY22F (vs. a robust 25.7% yoy growth rate in 2QFY22 due to festivities and pent-up consumer spending – see Figure 7), we expect M-REITs under our coverage to report a flattish-to-single-digit qoq revenue growth in 3QFY22F for their retail assets (CLMT, KLCCP, IGB REIT, Sunway REIT, Pavilion REIT). While 1HFY22 core net profit growth was a robust 65% yoy on average for M-REITs under our coverage, we expect the growth rate to moderate hoh in 2HFY22F, but supported by recovering NPI margins due to diminishing rental assistance for retail tenants. A slight concern at this juncture is for office REITs – Sentral REIT’s 2HFY22F revenue and earnings could be more subdued hoh due to low occupancy rates and the absence of replacement tenants for selected tenancies that were not renewed in 1HFY22.
15.6% sector core net profit growth in FY22F; 5.3% dividend yield
We expect any negative impact from potentially weaker consumer spending (due to hikes in the overnight policy rate, OPR, and inflationary pressures) and limited tourist arrivals in 2HFY22F to be mitigated by improvement in NPI margins (due to minimal rental assistance). Our forecasts of 8.1% revenue growth and 15.6% core net profit growth for FY22F are fuelled by improvements in NPI margin from 66.1% in FY21 to 71-72% in FY22- 23F. We project 5.3% sector dividend yield in FY22F.
Likely an indirect beneficiary of Budget 2023
We do not anticipate any stimulus measures from Budget 2023 that will directly benefit MREITs. If at all, we believe M-REITs will indirectly benefit from potential initiatives/plans that will further boost recovery in the retail and hospitality/domestic tourism sectors, particularly in terms of: 1) sustaining retail mall footfall (remains on average 10-20% below pre pandemic level) and 2) sustaining the variable rent portion (5-15% of total rental income) derived from tenants’ retail sales, although this likely fell in 3Q22F vs. 1Q22 and 2Q22, and 3) potential further improvement in average hotel occupancy rates (c.40-50% currently). The higher 60% gearing limit for M-REITs, which was raised from 50% in CY20 as part of cashflow management assistance, will expire at end-CY22F; this is neutral for M-REITs as their current gearing levels of 29-37% are comfortably below the original 50% threshold.
Maintain sector Neutral; Axis REIT and IGB REIT as top picks
We keep our Neutral sector rating and our two top picks Axis REIT (growth in industrial/logistics assets via acquisitions) and IGB REIT (high occupancy rates for flagship malls). For dividend yield plays, CLMT and Sentral REIT offer highest dividend yields of 6.7-6.8%. Upside risks: positive rental reversion, increased occupancy rates and new asset acquisitions for retail REITs. Downside risk: weaker consumer sentiment.