Market Confidence Drives REIT To Expand Asset Portfolio

Earnings of REIT in 1QCY24 were in line with expectations as all six REIT under the coverage of MIDF reported earnings that fell within expectations. Four REIT namely Axis REIT, Pavilion REIT, KLCCP Stapled Group and IGB REIT reported growth in earnings. REIT with highest growth was Axis REIT which reported 25.8% yoy earnings growth as earnings were buoyed by Bukit Raja Distribution Centre 2, lower property operating expenditure and lower provision for doubtful debts.

Meanwhile, Pavilion REIT recorded double digit earnings growth of 18.7%yoy in 1QFY24 due to contribution from Pavilion Bukit Jalil and higher rental income from Pavilion KL Mall. As for KLCCP Stapled Group and IGB REIT, earnings growth was stable at 4% yoy due to organic growth of positive rental reversion. Rental income from Mid Valley Megamall, The Gardens Mall and Suria KLCC remains stable due to high occupancy rate, high shopper footfall and growth in tenant sales.

Two REIT reported earnings decline. Al-`Aqar Healthcare REIT recorded lower earnings (-5%yoy) due to lower rental income from Australia division which offset the higher income from healthcare assets in Malaysia. Looking forward, the said it expects earnings growth of Al-‘Aqar to be driven mainly by organic growth of lease renewal whereby five healthcare assets due for master lease renewal in FY24 and one healthcare asset due for lease renewal in FY25. Meanwhile, Sunway REIT reported lower earnings (-9.8%yoy) partly due to loss of income from Sunway Medical Centre and lower rental from Sunway Pyramid Mall as AEON moved out from the mall.

Nevertheless,MIDF said it sees an improving earnings outlook for Sunway REIT as earnings from Sunway Pyramid should normalise from FY25 onwards with reconfiguration exercise of Sunway Pyramid completing in FY24. Besides, rental contribution from six hypermarkets that were acquired in April 2024 should lift earnings in 2HFY24.

REIT are expanding asset portfolio as prospect for real estate in Malaysia is improving. Notably, Axis REIT acquired three industrial assets in Bukit Raja in February and April 2024 to strengthen its presence in Bukit Raja which is a growing industrial area with accessibility to major highways. Besides, Axis REIT also announced the acquisition of two automobile service centres from Cycle & Carriage Bintang Berhad. MIDF views the active acquisition of Axis REIT indicates stable prospect of industrial assets in Malaysia which was supported by healthy demand for warehouse and industrial space. Meanwhile, REIT is also active in retail asset acquisition recently amid improving backdrop for retail industry. Notably, Sunway REIT announced acquisition of 163 Retail Park in Mont Kira for RM215m early this year. Similarly, KLCCP Stapled Group is acquiring the remaining 40% equity stake in Suria KLCC for RM1.95b.

On the other hand, KIP REIT recently announced the acquisition of DPulze Shopping Centre in Cyberjaya for RM320m. In a nutshell, the house sees that the active acquisition of REIT implies the positive outlook for industrial assets and retail assets in Malaysia.

MIDF said it continues to see a positive outlook for REIT, led by retail and industrial sub-segments. Retail industry is expected to return to organic growth of positive rental reversion as retail industry recovered to pre-pandemic level. Meanwhile, performance of industrial asset is expected to remain stable while rental rate is expected to grow due to
healthy demand for industrial asset.

The house also said the hotel industry will continue to recover in 2HCY24 as tourist arrivals are expected to increase as Malaysia is offering visa-free entry to travelers from several countries which will boost tourism industry of Malaysia.

Top picks for the sector are Sunway REIT (BUY; TP: RM1.70) and Axis REIT (BUY; TP: RM2.02). MIDF said it remains positive for Sunway REIT as contribution from its retail division should remain stable in the long term on the back of positive rental reversion. Besides, the outlook for the hotel division is also improving with expectation of higher tourist arrivals. Meanwhile, we like Axis REIT for its exposure to industrial assets which is underpinned by healthy demand for industrial space. Its active acquisition will also spur earnings growth in the long term

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