KUALA LUMPUR (March 21): Share prices of Malaysian Real Estate Investment Trusts (REITs) fell this morning despite a positive market breadth, as cautious investors trimmed positions in a rising interest rate environment. At the time of writing, Sunway REIT lost as much as 3.8% or six sen to RM1.52, Pavilion REIT declined 2.9% or two sen to a low of RM1.34, while KLCC Property Holdings Bhd inched down 1% or seven sen to RM6.94 thus far. Industrial-centric Axis REIT slid one sen or 0.8% to a low of RM1.23, while YTL Hospitality REIT and Amanahraya REIT fell as much as 0.9% and 0.6% to RM1.08 and 84.5 sen thus far. MRCB-Quill REIT too was not spared as it slipped 0.95% or one sen lower to RM1.04 by mid-morning. A local analyst who declined to be named said some investors are being cautious as they are expecting higher interest rate and a weak distribution per unit (DPU) growth, which both work against REITs whose valuations were not cheap to begin with. “The rising yield, or lower asset prices, does not go well for REIT prices. Prices needed to fall so that the yield goes higher to attract buyers,” he said. Is this the right time to include some REITs into our portfolio? Or further downside expected in tandem with the increasing yield environment? What about current retail sentiment or oversupply of office space / slowdown in economic environment?

Taking into account of the above prevailing sentiments, one such listed M-REIT that caught my interest is Al-‘Aqar Healthcare REIT, which has a portfolio of 22 properties comprising 19 hospitals and 3 healthcare related properties in Malaysia and Australia. The resilient of the healthcare industry is expected to bode well for Al-`Aqar. The Manager expects Al-`Aqar to register a moderate growth for FY2018, supported by secured 100% tenancies and modest rental revision.

Nevertheless, some recent selling by a major shareholder as well as lower total revenue recorded for FY17 (due to disposal of a tower) have impacted on the REIT’s share price.

Al-‘Aqar Healthcare REIT has underperformed the M-REIT index / benchmark:

vs REIT.png

Although 10 Year MGS has since remained relatively flat since 2014, the distribution yield of Al-Aqar REIT has spiked up:

Yield Comparison.png

Although the r-square is relatively low, current distribution yield of Al-‘Aqar Healthcare REIT approximates the upper bound range of 6.55%.

Regression Results.png

Current yield differential (distribution yield of Al-Aqar REIT – 10Y MGS) of 2.55% is relatively way above the historical mean yield differential of 1.45%:

YieldDiff Normality Test.png

Based on the above simple desktop analysis, there could be some opportunistic yield play with Al-Aqar REIT.

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