Sunway REIT is one of the more obvious choices when it comes to real estate investment trusts (REITs) for investors on the local bourse, considering its size and liquidity. It is currently the largest REIT in terms of assets under management — which totalled more than RM4.5 billion at end-March 2012 — and a close second to Pavilion REIT in terms of market capitalisation.
Investors in the trust since its IPO, in July 2010, would have fared well. Its unit price has risen from the retail IPO price of 88 sen to the current RM1.25 while distributed income totalled some 12.2 sen during this period. That translates into gains of nearly 56% in less than two years — pretty smart returns when taking into account its relatively defensive profile.
Such defensive characteristics may well continue to attract investors given the prevailing cautious sentiment amid domestic and external uncertainties. We estimate Sunway REIT’s income distribution to total roughly 7.42 sen per unit for the financial year ending June 2012. That would earn unitholders a fairly attractive gross yield of 5.9% at the current price.
Retail and hospitality-centric portfolio of assets
Sunway REIT’s portfolio of assets is a mix of retail, hospitality and commercial but is unique in that most are located within close proximity and hence provide synergistic benefits to the whole.
For instance, a good chunk of its assets — roughly three quarters the value of its total investment properties — are located in Bandar Sunway, an 800-acre (320ha) integrated township in the Klang Valley, where development is still ongoing. Complete with a theme park, university and campus as well as private medical centre, the Sunway Pyramid Shopping Mall, Sunway Pyramid Hotel & Spa and Pyramid Tower Hotel benefit from both local and tourist traffic generated by the township. Similarly, Menara Sunway is current fully occupied and enjoyed positive rental reversion for leases renewed so far this year.
Refurbishment to enhance value of Sunway Putra Place
The trust’s first acquisition, since listing, of the Sunway Putra Place is premised on a similar concept. The clutch of properties, which include a shopping mall, hotel and office tower, was purchased in a public auction last year for some RM514 million — and is currently valued at a combined RM576 million.
Sunway REIT plans to undertake major refurbishment for the mall — works are slated to begin in 2013 and are estimated to take 15-18 months to complete — costing some RM200 million.
Once completed, the mall will have an additional net lettable area of some 115,000 sq ft, or more than 20% increase from the existing total, and will be repositioned to target the mid to mid-upper level income shoppers. With improved layout and tenant mix, the mall is expected to generate better rentals. That would, in turn, attract more traffic, thus benefiting also business at the hotel and office tower. The trust also expects higher valuations for the properties once the asset enhancements are completed.
Estimated 6%-6.2% yields for FY13-FY14
The refurbishment would, however, mean a loss of rental income from the mall during the estimated 18-month duration. Sunway Putra Mall contributed roughly RM25 million in turnover in the first nine months of FY12.
As such, we estimate income available for distribution to be somewhat flattish in FY13 from the current financial year — positive rental reversions from the other properties are expected to more or less offset the rental income loss — before ticking slightly higher in FY14. Earnings, however, should register much stronger growth in FY15 when the mall reopens.
This is, of course, barring any new acquisitions. During its IPO, Sunway REIT revealed the intention to grow and possibly double its assets within the next five to seven years. Some RM2.6 billion of properties were identified for potential acquisition, primarily from Sunway City, one of the largest property developers in the country.
Some completed pipeline assets include Sunway University, Monash University and Sunway Campus, Sunway Giza Shopping Mall and Sunway Medical Centre while others like The Pinnacle and Sunway Pyramid 3 are currently under construction. The trust’s gearing now stands at about 36%.
As mentioned above, income distribution is estimated to total roughly 7.42 sen per unit for FY12, up from 6.58 sen in FY11, boosted by first-time contributions from Sunway Putra Place.
Going forward, income distribution is forecast to be flattish at 7.44 sen in FY13 before improving to about 7.79 sen per unit in FY14. Based on our estimates, unitholders will earn yields of roughly 6% and 6.2% for the two years respectively.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, May 11, 2012.
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