AmInvestment Bank Bhd (AmInvest) expects Malaysia’s real estate investment trusts (REITs) to recover strongly, buoyed by pent-up consumer demand once the government lifts the third Movement Control Order (MCO 3.0).
The view is based on the assumption that consumers tend to “revenge spend and gather” much like they did during the past MCOs, reported The Malaysian Reserve (TMR).
“We are cautious that the reimplementation of the lockdown with tighter SOPs will dampen earnings in the second quarter of the year (Q2 2021) as REITs are most likely to be pressured to give another round of rental support to tenants that are not allowed to operate during this period,” said AmInvest as quoted by TMR.
“However, we believe the market has priced in the impact of the latest movement restriction.”
The Bumiputera Retail Organisation revealed that retail sales at malls recovered by 75% to 80% of pre-COVID-19 levels when the previous MCO was eased towards the end of 2020 and early 2021, compared to 25% retail sales registered nationwide in 2020.
“We believe earnings visibility and associated risks of the REITs are more positive compared to last year, thanks to the wide rollout of vaccines both locally and globally,” added AmInvest.
With this, the bank maintained its “Overweight” recommendation on the sector, saying REITs under its coverage offer distribution yields of over 5% for the 2022 financial year and beyond during this low interest rate environment.
For the first quarter of 2021, the earning of YTL Hospitality came in above expectations, while that of Pavilion REIT and IGB REIT were within expectations. Sunway REIT’s earning, however, missed the bank’s expectations.
It slashed its fair value (FV) for Pavilion REIT from RM1.75 to RM1.59 and for IGB REIT from RM2.03 to RM1.89.
It also lowered its FV for YTL Hospitality from RM1.29 to RM1.11, while raising that for Sunway REIT from RM1.64 to RM1.81.
AmInvest rolled forward its base year to FY2023 for IGB REIT, Pavilion REIT and Sunway REIT, applying a target yield of 5%.
The investment bank applied a higher target yield of 7.5% for YTL Hospitality REIT, to reflect higher earnings risk from its overseas assets.
“Our top pick for the sector is Sunway REIT for its diversified investment portfolio (which includes retail malls, hotels, offices, its university and hospital) and the large pipeline of potential assets for future injections,” it said.
It noted that while retail sales declined 9.9% in Q1 2021, it was still better than expected. Hari Raya sales in Q2 2021 were also much better, registering only a 20% drop from pre-pandemic levels compared to the 60% contraction seen in 2020.
Retail REITs under its coverage also registered healthy occupancy rate at their anchor malls at above 90%. The REITs also maintained a healthy debt-to-asset ratio of 22% to 42% compared to the regulatory threshold of 60%.
Nonetheless, AmInvest does not rule out “potential acquisitions to materialise in the next 12 to 18 months for the REITs under our coverage with the emergence of yield-accretive assets, which will further drive the REITs’ medium-to long-term growth despite short-term earnings headwinds”.