M-REITs - Bargain hunts emerge

Maintain NEUTRAL on M-REITs. M-REIT 2013 operational performance will remain intact for 2013 for SUNREIT, CMMT and AXREIT. We can also look forward to acquisitions as both SUNREIT and AXREIT have expressed that they will continue their asset injection exercise given strong pipelines from their sponsors or third party opportunities. We expect M-REITs valuations to remain as lofty for the most part of 2013, particularly higher level of uncertainty when running up to GE while KLCC Stapled REIT will lend support.  There were some profit-taking activities over the last couple of months, especially observed with CMMT as  it recorded the highest YTD returns of 38% in Oct-12 (before profit taking). So we upgrade CMMT to OUTPERFORM from MARKET PERFORM with unchanged TP of RM1.80, as it has emerged as a bargain pick. We reiterate MARKET PERFORM on SUNREIT (TP: RM1.51) and AXREIT (TP: RM3.08) until more yield accretive acquisitions or share price corrections take place. We are in the midst of reviewing our KLCCP CALL/TP with an upside bias. 

3QCY12 within. M-REITs under coverage have met expectations and enjoyed operational sound performances. Retail REITs (SUNREIT, CMMT) have achieved 6%-8% organic growth whilst SUNREIT’s hospitality registered 5%-6%. Rental reversions for AXREIT were mostly positive while it maintained a healthy average occupancy rate of 93% vs. Klang Valley’s average of 78%. Over the quarter, SUNREIT and AXREIT embarked on acquisitions and have proposed placements to help fund the acquisitions; however, AXREIT has also disposed its second asset (Kayangan Depot) as the asset has reached maturity. Over the quarter, investors have started to crystallize profits since CMMT, SunREIT and AXREIT given their retunrs of >29% vs. FBMKLCI’s 11.7%. As a result, average M-REIT yields under our coverage have expanded slightly by 0.1ppt to 5.5% since our last sector report (9/10/2012).

M-REIT operational performance intact for 2013. SunREIT and CMMT are owners of landmark retail assets, which will likely be resilient next year, in light of our moderate single-digit growth Consumer-Retail outlook. AXREIT is targeting to acquire RM350m worth of assets next year, and it appears its emphasis is moving towards the evergreen industrial space (logistics/warehousing business) which will help mitigate against weaknesses in its office segment; however, AXREIT does enjoy quality tenants implying they are likely to enjoy higher tenant retention rates. Sunway REIT will also complete their acquisition of Sunway Medical Center for RM310m while they still have RM2.7b worth of sponsor’s assets as a pipeline. M-REITs under our coverage will be undertaking continuous AEIs to boost organic growth; 1) AXREIT’s refurbishment of Infinite Centre and revamping of Wisma Bintang into Axis Business Campus, with expected completion in 3Q13; 2) CMMT’s refurbishment of Sungai Wang commencing Dec-12; 3) SunREIT’s revamping of SHSJ, Sunway Putra Mall, Sunway Pyramid maintenance works and carpark linkage from SRH to Menara Sunway. 

Expecting M-REIT valuations to remain lofty for most of 2013, particularly running up to GE where investors will continue to prefer defensive picks. Furthermore, upcoming KLCC Stapled REIT will lend strength to the yield compression play as it will be the largest listed M-REIT, which may set the trends for other potential M-REITs. We reiterate our view that the 10-yr MGS will fall to 3.3% from FY12E’s 3.5% and that M-REITs  continues to demand current record low spreads (refer to 9/10/12 M-REIT report); this has already been reflected in TPs for SunREIT (TP: RM1.51), CMMT (TP: RM1.80) and AXREIT (TP: RM3.08) based on target FY13E gross yield targets of 5.2%, 4.7% and 5.7%, respectively. We previously had MARKET PERFORM calls on all three MREITs, but since CMMT was the sharpest to correct as it achieved the highest 2012 YTD gains in Oct-12 of 38% (before profit taking) vs. AXREIT and SUNREIT highest 2012 YTD gains of 22% and 24%, respectively. As a result, we upgrade CMMT to OUTPERFORM with unchanged TP of RM1.80 as a ‘bargain buy’ pick. We continue to maintain MARKET PERFORM on SUNREIT (TP: RM1.51) and AXREIT (TP: RM3.08) until more yield accretive acquisitions or share price corrections take place. We are in the midst of reviewing our KLCCP CALL/TP with an upside bias (currently OP; TP: RM5.90); we understand that the long-term lease renewals for Petronas Twin Towers were flat for the first initial term, which  would result in a downward FY13E earnings adjustments; having said that, it appears the market is favoring the stapled-REIT structure as implied yields are trending towards the sizeable retail M-REIT yields.   

Source: Kenanga