With so many uncertainty in the market, it is good we look at REIT.
Maintain Overweight. We believe M-REITs will continue garnering interest due to the uncertain investing climate where most investors would opt for defensive plays. We remain positive on the sector for its solid fundamentals and defensive yields averaging 6.8% (net). We see a further re-rating on M-REITs with the potential REIT-ing of Mid Valley Megamall and The Gardens Mall, making the sector more appealing to international investors.
Axis REIT is our top pick for the sector. Rising investability and attractiveness. M-REITs have outperformed S-REITs, particularly with the listing of Pavilion REIT on 8 Dec 2011, which has narrowed M-REIT-S-REIT yield gap to +29bps in mid-Dec’11(from 119bps in mid-Oct’11). The potential REIT-ing of Kris Assets’ (KRIS MK; Not Rated) RM2.8b Mid Valley Megamall and The Gardens Mall would further develop the breadth and depth of M-REITs, we believe. It was reported that KrisAssets’ major shareholder, IGB Corp (IGB MK; Not Rated; 76% stake) is hiring investment bankers to look
into structuring a REIT which they hope to launch by 1H12.
Lower refinancing risk; healthy balance sheets. Most M-REITs have gearing below 0.4x (well below the Securities Commission’s 0.5x cap). Post-private placements, Axis REIT and CMMT’s gearing would be around 0.24-0.3x. M-REITs also have low refinancing risks over the next 1 year due to active capital management (preference for long-term over short-term debt) after the 2008 Global Financial Crisis. Strong balance sheets provide room for expansion without equity fund raising.Ability to retain tenants is critical. Quill Capita has the highest percentage of leases up for renewal (38% of NLA) in 2012, followed by 32% for CMMT. While the office market continues to be threatened by excessive supply, Quill has thus far managed to retain its tenants with a 2-3% annual rate hike due to its active management and good relations with the existing tenants. As for CMMT, the bulk of the 32% relates to occupancy at The Mines. We understand that CMMT has received positive indications on renewals thus far.
Attractive yields. M-REITs trade at an average 6.8% 2012 net yield, which is attractive compared to the 3.7% yield on 10-year MGS. At our DCF-based target prices, M-REITs under our coverage would trade at implied yields of 6.3-7.8% (gross). We retain all stock calls except for CMMT (downgrade to Hold from Buy) whose share price has run ahead due to the spillover effects post listing of large-cap Pavilion REIT.