Sunway REIT an ongoing asset growth story — AllianceDBS Research

0

KUCHING: Sunway Real Estate Investment Trust (Sunway REIT) is an ongoing asset growth story in AllianceDBS Research Sdn Bhd’s (AllianceDBS Research) view, with Sunway Pyramid being a key earnings driver and growth of Sunway Resort City to accelerate performance going forward, among others.

According to AllianceDBS Research, despite a diversified portfolio of 14 assets, Sunway REIT derives the bulk of its income (circa 60 per cent net property income) from its crown jewel, the 1.6 million square feet (sq ft) net lettable area (NLA) Sunway Pyramid retail asset.

“Located in the Sunway Resort City township, the Egyptian-themed mall is one of the better performing properties in its portfolio,” the research house said.

AllianceDBS Research noted that the property sees strong visitation from locals and tourists, and enjoys sustained high occupancy rates of 98 to 99 per cent.  It further noted that the property also enjoys robust rental reversions of 11 to 12 per cent per annum.

As a result of the strong recurring footfall and connectivity, the research house expected such trends to continue against the modest retail market outlook. AllianceDBS Research remained positive on the outlook for Sunway Resort City township.

The research house said that the township is already registering strong visitations, of 40 million per annum (estimate by the group).

“And, visitations will leap with the completion of the BRT-Sunway Line – a six-kilometre (km) elevated bus rapid transit path that will connect seven key public transport stations.

“In addition, ongoing developments at Sunway Pyramid Phase 3 – an integrated retail and hotel project by the Sunway Group – will improve the township’s appeal to locals and tourists,” it said.

AllianceDBS Research noted that Sunway REIT is expected to benefit from the ongoing rejuvenation of the township.  The research house further noted that apart from Sunway Pyramid, the REIT has four other assets – Sunway Resort, Hotel & Spa, Pyramid Tower hotel; Menara Sunway office tower, and Sunway Medical Centre.

“All these properties are expected to perform strongly on the back of a growing population and higher visitations,” it added.

AllianceDBS Research remained excited on non-organic growth prospects originating from the sponsor. The research house noted that within the Sunway Resort City, completed assets include the Sunway University Campus (with a recently completed new block), the Pinnacle office tower (90 per cent occupied, with access to Menara Sunway via a link bridge), and the Monash University Campus.

“Outside of the township, there is the 97,000 sq ft NLA Sunway Giza Mall,” it said.

It added that assets under development include Phase 3 of the Pyramid which will house 63,000 sq ft of retail NLA and 440 hotel rooms, and Sunway VeloCity mall with 880,000 sq ft NLA in Kuala Lumpur.

According to AllianceDBS Research, Sunway REIT derives circa 18 per cent and circa eight per cent of its NPI from its hospitality and office assets, respectively.

The research house noted a marked drop in office occupancy starting second quarter of financial year 2015 (2QFY15), after the anchor tenants moved out of Sunway Tower and Putra Tower, to 50 per cent and 30 per cent, respectively.

“The manager is looking to re-lease the vacant space, but that might not be easy given the weak outlook for office space in Kuala Lumpur.

“Occupancies were also weaker at all its hospitality assets in 3QFY15 on the back of weak consumer sentiment,” the research house said.

Meanwhile, AllianceDBS Research noted that Sunway REIT’s borrowings comprise mostly several tranches of its fixed-rate seven-year commercial papers, with maturities ranging from late 2017 to 2018.

“Overall, about 90 per cent of its borrowings are on fixed rates and the average maturity period is 1.9 years,” it said.

Sunway REIT’s average cost of debt is about 3.9 per cent, but the research house anticipated this will inch up to 4.1 per cent in FY16 as existing debt will be renewed at higher rates.

On the balance sheet, AllianceDBS Research said that Sunway REIT has historically kept total debt/total assets ratio at 33 to 35 per cent, which is a comfortable level.

This leaves room to gear up for acquisition opportunities, but the research house believed any deals are likely to be funded by a mixture of debt and equity, given the manager’s track record of conservative gearing levels.

It noted that at present, of Sunway REIT’s RM2.1 billion borrowings, RM1.4 billion is from a commercial paper facility that will expire in four tranches between October 2017 and April 2018.

“The rest are on a monthly rollover basis,” it said.

It also noted that about half of Sunway REIT’s manager fees are paid in units.

As for share price drivers, AllianceDBS Research said that on acquisition newsflow, one of Sunway REIT’s appeal is the availability of asset acquisition pipeline of completed investment properties from sponsor Sunway Bhd.

“Confirmation of injections at accretive yields will be key re-rating signals for the stock,” it said.

On yield spread, AllianceDBS Research noted that a REIT’s attractiveness depends on its distribution yield relative to other fixed-income assets.

“A common benchmark is the REIT’s yield spread over the indicative 10-year Malaysian Government Security yield, which is currently stabilising near the four per cent level,” the research house said.

As for the key risks, AllianceDBS Research noted that the weak consumer sentiment and GST effective April 1 2015 have resulted in a slower retail sector, especially in the discretionary space.

“If the weakness is extended, it might hurt tenant sales performance and their capacity to stomach higher reversions going forward.

“Weak sentiment could also potentially affect hospitality assets, as tourism and visitations have continued to slow down since early 2014,” the research house said.

It further noted that vacancy risk is rising, as Sunway REIT saw anchor tenants move out of two of its office towers (Sunway Tower and Sunway Putra Tower), which resulted in occupancy rates dropping to 30 to 50 per cent, respectively.

“Given the oversupply of office space in Kuala Lumpur, it would be challenging to secure new leases for the vacated space in the near term,” the research house said.

All in, AllianceDBS Research had a ‘buy’ recommendation for Sunway REIT.