Friday, January 31, 2014

M-REIT - Less excitement ahead (CIMB)

REIT - Less excitement ahead

We expect REITs' 2014 share-price performances to be subdued, weighed down by rising interest rates, a lack of asset injections and a potentially stronger performance of the broader market. Due to various macro and fundamental headwinds facing REITs in 2014, we remain Neutral on this asset class. Although on average, REITs offer higher yields than the average yields for the FBM KLCI of 3.4-3.7%, we believe their share-price upside will be capped by likely rising interest rates later in the year. We prefer property developers.

Due to various macro and fundamental headwinds facing REITs in 2014, we remain Neutral on this asset class. Although on average, REITs offer higher yields than the average yields for the FBM KLCI of 3.4-3.7%, we believe their share-price upside will be capped by likely rising interest rates later in the year. We prefer property developers.

First up, then down in 2013
Malaysian REITs did relatively well in early 2013, before the general election in May. They advanced more than the FBM KLCI in early 2013, from the weakest gainer, IGB REIT, which outperformed the index by slightly more than 1%, to Axis REIT, which significantly outperformed the index by more than 18%. After the election, REITs underperformed the broader FBM KLCI as the index provided returns of 10.2% while REITs declined by 10.5-22.7%. We took this as an indication that the market was no longer hungry for yields and was looking for more growth and value that other sectors such as oil & gas, construction and property could offer.

Narrowing yield spreads
We believe that their weak performance could also be attributed to a steady rise in yields for 10-year Malaysian Government Securities (MGS), which reached a high of 4.13% in Aug. This narrowed their spread over REIT yields, to a low of 50-100bp, below the average 200-230bp in the last 2 years.

Lack of asset injections
A lack of asset injections also weighed on REITs' performance, as there were no catalysts to spur interest in them. Although there were negotiations for asset acquisitions such as Axis REIT's various targets, no actual transactions occurred in 2013, which was disappointing.

5.1 REITs to focus on improving DPU for the longer term
Based on our discussions with the various management of the REITs, one of the key emphasis moving forward is to continue to enhance their existing assets, through Asset Enhancement Initiatives (AEI) as to be able to increase their rentals. The REITS would continue to search for suitable assets to be injected although from our discussions, it seems the market for acquisitions remain challenging, especially with higher dividend yields as the REITs would have to inject a property with a cap rate of more than 6% to allow for the acquisition to be DPU accretive. While the recent spate of price increases such as electricity and property assessment hikes does provide management with points to ponder, these incremental costs are likely to be passed on to the tenants.

5.2 Axis REIT
We maintain our Hold rating for Axis REIT. Although we expect additional dividends from gains on the disposal of Axis Plaza in 2014, loss of rental income from this asset will have a longer-term impact. Further, a lack of asset injections in 2013 implies an unexciting earnings outlook for 2014. Axis was negotiating to acquire six properties in 2013, with a combined value of RM380m-400m. None came to fruition, mainly due to steep property valuations. Earnings growth is thus expected to come from rental reversions, barring any new acquisitions. As at 9M13, Axis REIT had renegotiated reversions for 663.1k sf of its NLA (12.1% of its total), with an average rental reversion rate of 8.1%

5.3 CMMT
Ongoing MRT construction work around the Sg. Wang shopping mall has affected shopper traffic and rental reversions. As rental rates declined 3% in Sg. Wang's 9M13 rental reversions, we are expecting flat NPI in FY14. Shopper traffic in the mall should remain weak as long as the construction work lasts. Sg. Wang accounts for 20-22% of CMMT's revenue. Some 43.6% of CMMT's gross rental income will be up for reversion in 2014, which we believe is an opportunity for it to increase NPI. We expect rental reversions from The Mines and East Coast Mall to drive its NPI, given the bleak outlook for Sg. Wang.

Around 53% of The Gardens Mall's net lettable area (NLA) was up for rental renewal in 2013. The renewals largely involved its anchor tenants which were mostly on 3-year leases. The rental reversions are estimated to account for 15-18% of IGB REIT's total income, which should support its earnings growth in 2014. Given a lack of asset injections, we believe there are no exciting catalysts in the medium term. IGB's development in Johor, Southkey Mall, will only be ready in 2016-17, while other asset injections seem unlikely at this juncture.

As KLCCP's REIT structure only came into effect in mid-2Q13, its earnings in 2013 should still reflect the tax rates of its previous corporate structure. 2014 will be KLCCP’s first full year of operation as a stapled structure and its tax rates should trend lower, owing to the REIT portion of its stapled securities. About 90% of its earnings should stem from the REIT, which is tax-exempted. Thus, FY14 tax rates should be significantly lower than the statutory tax rate of 11-12%. Although KLCCP's balance sheet remains healthy with a net gearing of less than 10%, we believe new asset injections will be hard to come by. This is due to the current stalemate between buyers and sellers, resulting in a lack of transactions.

5.6 Pavilion REIT
In 2013, 67% of Pavilion’s NLA was up for rental reversions. The reversions were completed at rental rates of 10-15%. We expect overall reversions for 2013 to support its NPI growth in 2014, given a lack of acquisitions in 2013. Completion of asset enhancement at one of Pavilion's acquisition targets, Farenheit88, is expected in 2015. The mall is expected to be acquired sometime in 2014, although due to the AEI, the acquisition could be delayed by 1-2 years.

5.7 Sunway REIT
Sunway REIT is currently refurbishing Sunway Putra Place. AEI for all three components (mall, offices and hotel) will be carried out simultaneously. The refurbishment of Sunway Putra Place will cost some RM460m and is slated for completion in early 2015. This is negative for Sunway REIT’s net property income (NPI) in the short term due to a loss of revenue from Sunway Putra Place. On a brighter note, the AEI should boost Sunway Putra Place's NPI by 170-208% from 2016 onwards. Around 67% of the RM460m AEI budget for Sunway Putra Place will be used to revamp Sunway Putra Mall. This includes a new front facade and additional NLA of 76k sf. The internal layout of the mall will also be improved to improve shopper circulation.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 16/01/14

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