Real Estate Investment Trusts (REITs) experienced commendable earnings growth in the second quarter of 2024 (2QCY24), with strong performance from key retail and industrial sectors. Earnings were generally in line with expectations, apart from a slight miss by Al-`Aqar Healthcare REIT, which faced higher-than-expected trust expenses. Axis REIT led the sector with a 10% year-on-year (yoy) earnings increase, bolstered by contributions from the Bukit Raja Distribution Centre 2 and newly acquired assets. Sunway REIT also posted a solid 9.3% yoy earnings growth, driven by its retail, hotel, and office divisions.

MIDF Stock Broking House maintain a POSITIVE outlook on REITs, with the stock broking company reiterating its BUY calls on Sunway REIT (target price RM1.81) and Pavilion REIT (target price RM1.60).

The House expect earnings prospects for REITs to remain favourable in the second half of 2024 (2HCY24), supported by the robust outlook for both retail and industrial segments in Malaysia. Sunway REIT is expected to perform well as the reconfiguration of Sunway Pyramid Mall nears completion, and the retail industry continues to benefit from strong shopper footfall. Meanwhile, Pavilion REIT's earnings are set to remain encouraging, with positive rental reversions from Pavilion Mall KL and contributions from Pavilion Bukit Jalil Mall. Additionally, industrial REITs are poised to capitalise on the growing demand for industrial space in Malaysia, further boosting their earnings potential.

Earnings performance across the sector in 2QCY24 varied. Sunway REIT recorded a 1.6% decline in half-year earnings due to higher financing costs, while Al-`Aqar Healthcare REIT faced a slight earnings drop in 1HCY24, primarily due to higher expenses and lower rental income from its Australian properties. Despite these challenges, Axis REIT and Pavilion REIT posted strong double-digit earnings growth, driven by asset acquisitions and higher foot traffic in major retail centres such as Pavilion KL Mall and Intermark Mall.

REITs are actively expanding their asset portfolios, with several major acquisitions announced in recent months. Sunway REIT acquired Kluang Mall in Johor for RM158 million, aiming to strengthen its retail asset base in the region. Axis REIT also announced the acquisition of two industrial properties in Pulau Indah for RM158.6 million, while KIP REIT made moves to acquire a hypermarket in Gerik, Perak, and four industrial properties across Malaysia for a combined RM98.3 million. AME REIT followed suit, purchasing four industrial properties in Johor for RM120 million. These acquisitions are expected to drive future earnings growth across the sector.

With an average distribution yield of 5.1%, REITs remain an attractive investment option. Sunway REIT is anticipated to benefit from increased tourist arrivals, boosting its hotel division, while Pavilion REIT continues to see positive rental reversion prospects at its flagship malls. Both REITs remain top picks, with their strong earnings outlook beyond 2025 expected to be driven by the completion of key reconfiguration projects and continued high demand in the retail and industrial sectors.