Maybank IB: Limited growth prospects for REITs


MAYBANK Investment Bank Bhd (Maybank IB) is expecting limited growth prospects for real estate investment trusts (REITs) in the future due to lack of pipeline of deals and organic growth opportunities.

Its analyst Nur Farah Syifaa’ stated that the lower interest rate environment partially cushioned selected Malaysian real estate investment trusts’ (M-REITs) bottom lines via reduced finance costs on their floating rate debts.

She added that as at September 2021, M-REITs under the bank’s coverage had exposure to floating rate debt of 46% (as a share of total debt), with the average financing costs ranging between 2.8% and 4.4%.

“We believe a lower interest-rate environment would increase M-REITs’ appetite for asset acquisitions. However, the pipeline for sizeable acquisitions remains dry for now, while organic growth could be challenged by the adverse impacts of the pandemic,” she wrote in a recent note on the segment.

Nevertheless, Maybank IB maintained a ‘Neutral’ stance on the sector.

Nur Farah noted that M-REITs sector offers average net distribution per unit (DPU) yields of 4.1% and 5.3% respectively for the financial year 2021 (FY21) and FY22E.

“M-REITs’ third quarter (3QCY21) results were mostly below expectations, with average core net profit declining -15% YoY and despite growing 5.5% quarter-on-quarter (QoQ).

“Earnings at retail and hospitality assets remain weak due to movement restrictions. This, however, was partly cushioned by longterm office tenants and industrial properties leases,” she said.

Nur Farah further added that earnings for the 3Q were dragged by higher provision for rental assistance, softer occupancy rates (selected properties) and drop in non-rental income, namely car park and advertising.

She added that earnings continue to be supported by the long-term leases in the office and industrial segments.

The occupancy rates for malls under coverage fell 1.9 basis points (bps) to 84.2% due to non-renewal of tenancy contracts.

As such, Maybank IB is expecting an earnings recovery in the 4Q as the economy reopens and with easing of movement restrictions.

“We expect an earnings recovery for M-REITs from 4Q onwards, following the re-opening of the economy and easing of movement restrictions, as we expect lower rental support to tenants, increased footfalls at shopping malls and an improved outlook for domestic tourism.

“However, hospitality segments will still see weaker growth in the absence of foreign tourists due to continuing international border restrictions,” she added.

The analyst said M-REITs’ FY21 and FY22E net yield spread was decent at 59bps and 179bps, based on net DPU yields of 4.1% and 5.3% and the latest 10-year Malaysian Government Securities yield of 3.51%.

Maybank IB has a ‘Buy’ call on AXIS REIT which offers 5.3% net yield for calendar year 2022 estimates (CY22E) and Sentral REIT which offers 7.7%.

CapitaLand Malaysia Mall Trust’s (CMMT) also offers above-average net yield of 7.1% for CY22E but the investment bank is less sanguine on its near-term prospects due to high exposure to retail assets. Maybank IB has kept a “Hold” call on CMMT.