REITs’earnings largely in line for 2Q17, decline in MGS to provide boon
KUALA LUMPUR: Earnings for the second quarter of current year 2017 (2QCY17) by real estate investment trust (REIT) players have largely come in line with analysts’ expectations.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), most of the REITs under its coverage reported average earnings for the recently concluded 2QCY17 earnings reporting season.
Among the seven REITs under its coverage, only Pavilion REIT’s earnings came in below expectations due to higher than expected property operating expenses incurred.
Meanwhile, Sunway REIT registered highest earnings growth among seven REITs under the research arm’s coverage where its cumulative earnings grew 7.2 per cent year on year (y-o-y), mainly supported by the higher earnings contribution from Sunway Pyramid, Sunway Carnival, and Sunway Putra Mall.
“Overall, earnings of REITs were mixed in 2QCY17 whereby three REITs reported earnings growth while four REITs recorded lower earnings,” the research arm said in a sector outlook.
MIDF Research highlighted that REITs are on acquisition trail with a few asset acquisitions which were announced recently.
“Firstly, Axis REIT had on July 24, 2017 announced that it is acquiring a pipe-coating factory in Kuantan for RM155 million at net yield of seven per cent.
“Secondly, Pavilion REIT had on July 27, 2017 that is injecting Elite Pavilion Mall which is an extension of Pavilion KL shopping mall (net lettable are (NLA): 242,000 square feet) for RM580 million at gross acquisition yield of 6.4 per cent.
“Lastly, Sunway REIT had on August 3, 2017 announced the acquisition of Sunway Clio from Sunway Bhd for RM340 million at yield of six per cent.”
The research arm was positive on the asset acquisitions as the asset acquisitions are estimated to be yield accretive.
On the easing Malaysian Government Securities (MGS) yield, MIDF Research noted that the 10-year MGS yield fell below 3.9 per cent in September from approximately four per cent in July due to flight to safety.
“Currently, 10-year MGS yield is hovering at 3.86 per cent, close to its five-year mean of 3.8 per cent,” the research arm said.
MIDF Research viewed the declining MGS yield to be positive to REITs as spread between yield of REITs and MGS yield widened, making REITs a more attractive yield asset.
It noted that further decline in MGS yield would provide catalyst to REITs. At this juncture, the research arm kept its MGS yield assumption at four per cent.
All in, MIDF Research maintained ‘neutral’ on REITs sector with top pick being Sunway REIT. MIDF Research’s top pick for the sector was Sunway REIT due to its positive earnings outlook.
“We believe its retail division – Sunway Pyramid, Sunway Carnival, Sunway Putra Mall – will continue to spur earnings growth going forward,” the research arm said.