At 5pm yesterday, property developer MRCB rose nine sen to RM1.25.
KUALA LUMPUR: CIMB Equities Research sees MRCB-Quill REIT exposed to the office oversupply issue, especially for its assets in Kuala Lumpur, but it thinks the group’s built-to-suit Cyberjaya assets should still be able to support earnings.
It had on Monday retained its hold call at RM1.35 as it thinks estimated dividend yields of 6.9%-7.1% should compensate for the stock’s exposure to the office oversupply issue.
“Key upside risk is better rental reversion rates, especially for its KL assets; non-renewal of its expiring leases is a key downside risk,” it said.
Last Friday, MQREIT recorded 4Q17 revenue/core net profit growth of 18%/26% year-on-year to RM46mil/RM23mil.
This translated to a cumulative core net profit of RM89mil (+40% year-on-year), forming 100% of both CIMB Research and Bloomberg consensus full-year expectations.
FY17 core net profit excludes a change in fair value of investment properties amounting to RM19mil, which mainly came from revaluation losses of Platinum Sentral.
FY17 dividend per unit (DPU) amounted to 8.39 sen (+0.1% year-on-year), in line with expectations.
CIMB Research said MQREIT’s FY17 revenue/NPI growth of 33%/32% year-on-year arose from new contribution from Menara Shell since December 2016 and positive rental reversions at Quill Buildings 2 and 3 in Cyberjaya as well as Wisma Technip in KL.
The new asset led to higher property expenses (+32% year-on-year), but NPI margins only saw a 0.5%-pt decline to 77.9%.
Coupled with higher interest income (+51% year-on-year) which offset higher interest expense, manager’s fee and trustee’s fee, MQREIT’s FY17 core earnings managed to chalk up a 40% year-on-year increase.
MQREIT chalked up a renewal rate of 80% for the 316k sq ft of net lettable area that was up for renewal in FY17. Rental reversions ranged from flat to low single-digits, in line with CIMB Research’s expectation.
“MQREIT will continue to focus on retaining the current tenants, especially for its KL assets, but we think this could be at the expense of reversionary rates.
“The REIT’s strategy for tenant retention is to offer incentives, i.e.: rent-free periods. The group will also focus on locking in longer tenancy periods, whenever possible,” it said.
CIMB Research said the REIT’s lease profile is well spread out (28%, 15% and 17% of its net lettable area due for renewal in 2018F, 2019F and 2020F, respectively). The bulk of leases expiring in 2018F will come from Platinum Sentral.
“Active negotiations for renewal of certain leases due in FY18 have commenced, with renewals from most tenants that are due in 1Q18. We gather that negotiations for renewals have been tough, especially for its KL offices.
“A potential asset for acquisition is Menara Celcom, Petaling Jaya (from its sponsor, MRCB). We gather from media reports that construction of the building is slated for completion in early-2018.
“Based on our understanding, MRCB has already inked a build-to-lease agreement of 15 years with Celcom for the property upon completion.
“Typically, due diligence and feasibility studies prior to an acquisition proposal can take c.9 months; hence, we do not expect it to happen any time before FY19F,” it said.
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