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13 things to know about Sunway REIT before you invest

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Listed on 8 July 2010, Sunway REIT owns a diverse portfolio of real estate comprising retail malls, office buildings, hotels, an industrial building, and a hospital. As at 30 June 2018, its real estate portfolio is valued at RM7.28 billion, a 110% increase from its initial size of RM3.46 billion when it debuted in 2010.

In this article, I’ll bring an update on its latest financial results, its future plans to sustain growth and evaluate its investment potential at its current unit price with a few valuation metrics. Here are 13 things you need to know about Sunway REIT before you invest.

Segmental results

1. Gross revenue from retail properties increased 3.6% year-on-year to RM416.5 million in 2018. It was mainly contributed by stable performances from its main assets — Sunway Pyramid and Sunway Carnival — and the relaunch of Sunway Putra Mall in 2016 after a major refurbishment undertaken in 2014 and 2015.

Source: Sunway REIT annual reports

2. Gross revenue from hospitality properties increased 28.2% year-on-year to RM82.6 million in 2018. This was contributed by the relaunch of Sunway Pyramid Hotel in 2018 after it closed for refurbishment in mid-2016, an improvement in occupancy rates at Sunway Putra Hotel and Sunway Hotel Georgetown, and the addition of Sunway Clio Hotel in 2018.

Source: Sunway REIT annual reports

3. Gross revenue from office properties increased 6.3% year-on-year to RM33.5 million in 2018. This was due to a recovery in occupancy rates at Sunway Putra Tower in 2018 and a stable performance from Menara Sunway. Gross revenue from this segment has remained depressed since 2016 as it has been affected by prolonged vacancies at Sunway Tower. To date, Sunway Tower only has a 19.0% occupancy rate and remains largely unoccupied. Fortunately for Sunway REIT, its office segment has seen improvement — occupancy rates at Menara Sunway, Wisma Sunway, and Sunway Putra Tower all increased in Q1 2019 — offsetting the poor results from Sunway Tower.

Source: Sunway REIT annual reports

4. Gross revenue from medical properties increased 3.5% year-on-year to RM22.7 million in 2018. This is due to an annual rental uplift of 3.5% structured into its 10-year master lease agreement at Sunway Medical Centre. This agreement has the option to be renewed for another 10 years after it expires in December 2022.

Source: Sunway REIT annual reports

5. In August 2017, Sunway REIT completed the acquisition of Sunway REIT Industrial – Shah Alam 1 for RM91.5 million. The property generated RM5.1 million in gross revenue in 2018 from DCH Contract Manufacturing, the master lessee. The master lease agreement, which expires 31 December 2034, has an initial annual rent of RM5.6 million that is subjected to review every three years. The next review is in January 2019 where the rent increment is the greater of prevailing fair market value and CPI adjustment, with an increment cap of 10%.

Group results

6. Sunway REIT’s gross revenue increased 7.2% year-on-year to RM560.4 million in 2018. This was due to increasing revenues from all five segments in 2018. Net property income increased 8.0% to RM419.9 million and distributable income rose 4.2% to RM282.4 million. Distribution per unit (DPU) increased 4.1% to 9.57 sen — its upward trend over the last six years.

Source: Sunway REIT annual reports
Source: Sunway REIT annual reports

7. Gearing ratio as at 30 September 2018 remained stable at 38.6%. Sunway REIT has a weighted average cost of debt of 4.03% and 54% of its borrowings are at fixed interest rates. Hence, Sunway REIT may incur higher interest costs in the event of a quick hike in interest rates.

Growth drivers

Sunway REIT aims
to expand its portfolio to RM10 billion by 2020; it is RM2.72 billion short of
its target as we move into 2019. In the near term, the board has revealed a
couple of initiatives to propel Sunway REIT closer towards its target in 2020:

8. Construction of a brand new nine-storey retail space at Sunway Carnival started Q3 2018. It is estimated to cost around RM353 million and completed by Q2 2021. As at Q1 2019, Sunway REIT has already incurred RM34.1 million on this project.

9. Refurbishment of the grand ballroom and meeting rooms at Sunway Resort Hotel & Spa commenced in July 2018. It is estimated to cost about RM50.5 million and reopened by the end of Q2 2019.

10. In December 2018, Sunway REIT announced the proposed acquisition of a handful of education properties — collectively known as Sunway University — from its sponsor, Sunway Bhd, for RM550 million. The acquisition comprises the South and North Building, a new university block, and a hostel all located within the Sunway City Cluster, an 800-acre integrated development. The properties would be collectively leased to subsidiaries within the Sunway Group including Sunway Destiny, Sunway Education Group, and other relevant companies under a lease agreement of 30 years with an option to renew for another 30 years upon expiry. The acquisition increases Sunway REIT’s income visibility as it raises the weighted average lease of expiry (WALE) from 1.99 years (as at 30 June 2018) to 4.39 years. The value of the portfolio would grow from RM7.28 billion to RM7.84 billion upon the completion of this acquisition.

Major challenge

11. As mentioned above, Sunway is RM2.7 billion away from its RM10 billion portfolio target. From the latest CEO’s statement, he shared that it is increasingly hard to find yield-accretive properties due to the challenging property market. Thus, Sunway REIT is in the progress of formalising its ‘Strategic Objectives 2025’ with new targets for the medium term. The board will reveal more at greater length in the next annual report.

Valuation

As at 10 January 2019, Sunway REIT is trading at RM1.72 per unit.

12. Dividend yield: In 2018, Sunway REIT declared a gross DPU of 9.57 sen. Hence, its current gross dividend yield is 5.50% — the same as its five-year average. According to regulations, income distributions from REITs are subjected to 10% withholding tax. Hence, net DPU works out to be 8.61 sen for individual investors and net dividend yield is 4.95%. (View the latest dividend yield for M-REITs here.)

13. P/B ratio: As at Q1 2019, Sunway REIT has net assets of RM1.46 per unit. Hence, its current P/B ratio is 1.19, marginally below its five-year average of 1.20.

The fifth perspective

In 2018, Sunway
REIT saw sustained growth in revenue, distributable income, and DPU. Its financial
resilience contributed to Sunway REIT’s relatively stable unit price movements
throughout 2018 compared to other M-REITs which suffered greater fall in unit
prices.

So what should unitholders expect in 2019? From the CEO’s statement, growth is expected from its retail, hotel, and medical segments. Securing new tenants at Sunway Putra Tower and Wisma Sunway would also contribute positively to Sunway REIT. This would offset the ongoing asset enhancement initiatives at Sunway Carnival and Sunway Resort Hotel & Spa. Moving forward, the board strives to maintain its DPU for 2019.

Interested in Malaysian REITs? Check out Pavilion REIT, the largest retail REIT in Malaysia.

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