ANALYSTS are generally positive on the full-year financial performance of Sunway REIT (SunREIT) after it posted fourth quarter results for its financial year ending 2019 with buy and hold calls from several of them.
SunREIT is proposing a distribution per unit (DPU) of 2.28 sen, representing an increase of 6.0% year-on-year (y-o-y.)
The total proposed DPU in FY2019 amounted to 9.59 sen, marginally higher than FY2018. Based on the unit price of RM1.87 as at 30 June 2019, Sunway REIT’s distribution yield stood at 5.1% with a corresponding total return of 10.7%, its manager Sunway REIT Management Sdn Bhd said in a statement on Thursday.
The generally positive tone on SunREIT from a slew of analyst reports follows the recent economic downtrend which has pushed the Malaysian Government Securities (MGS) yield to 3.6%.
The dividend from Malaysian REITs are generally compared with the 10-year MGS yields, and REITs are offering a higher yield comparatively.
AllianceDBS Research says it likes SunREIT for its prime assets and acquisition pipeline from its sponsor and major shareholder Sunway Bhd. CGS-CIMB Research is positive about its retail and office segments. Both these segments shone for financial year 2019 financial results, despite the over supply in office and retail mall space. CGC-CIMB says its asset acquisitions for financial year 2020 remain “at an exploratory stage” for now.
The positive tone from analysts on the performance of SunREIT is pretty much a reflection of the sign of today’s times, which has been rather volatile as a result of the US-China failing trade talks and dovish stand of central banks around the world who have been cutting interest rates.
The Malaysia REIT Index has a year’s high of 1, 016.52 on Aug 6, 2019 according to Bloomberg. It was at a low of 906.40 on Dec 24, 2018. Year to date, the REIT Index is up 84.57 points, or 9.14%, to 924.87.
The interest in REITs is expected to rise going forward.
SunREIT plans to increase its asset base to RM10bil by financial year 2020 from the current RM7.8bil currently. The management also plans to boost contribution from assets apart from retail and offices to diversify its earnings best. this is in the wake of its new mandate to increase the Others segment to make up 25% of total asset value from 15% previously, says AllianceDBS Research in its report.
The stock currently provides a 5.3% dividend yield, which is decent compared with the lower fixed deposit rates offered by commercial banks.
But as with any investment instruments, there are always risks. AllianceDBS says SunREIT key risks are its pace of acquisition. Because its yields are on par with larger Malaysian REITS (MREITs) peers, the draw is the potential to secure a steady stead of acquisitions.
“Any significant delays could cap its share price appreciation, ” AllianceDBS says. Weak consumer sentiment may effective retail and hospitality sectors, in the form of lower retail spending, rental reversions and local tourist visits.
The oversupply in office space could be challenging if it has to refill vacancies and rental rates may see negative growth, AllianceDBS says.
Its property value rose by 10.5% from RM7.28bil as at June 30, 2018 to RM8.05bil as at June 30, 2019. This rise was primarily due to acquisition which amounted to RM550mil, and a fair value gain of RM108mil. Diversified REIT
Although it is a mixed REIT, retail contributes 70.62% of its net property income (NPI) after deducting outgoings (or RM310.5mil) versus office space’s contribution of 4.9% of total NPI of RM439.7mil for the year ended 30 June 2019.
For some years now, REIT manager Sunway REIT Management Sdn Bhd has said that it would like to grow its asset base to RM10bil.
A press release on its latest fourth quarter financial results from manager Sunway REIT Management Sdn Bhd says the growth to RM10bil is due it buying Sunway university and college campus. The acquisition was completed on April 15.
SunREIT’s sponsor and major shareholder is Sunway Bhd has a large pipeline of potential assets for injection into SunREIT.
Sunway Giza and Sunway Velocity are not among its portfolio pf assets today and there was this perspective that both malls may one day be injected into the REIT. This would expand its retail portion further, which may or may not be a good thing due to issues in the retail scene today.
In an email, Sunway REIT Management Sdn Bhd CEO Datuk Jeffrey Ng says the retail dominance in its diversified REIT was by virtue of Sunway Pyramid Mall being the largest income contributor to the retail segment and SunREIT’s asset portfolio.
Sunway Pyramid continues to remain a major revenue contributor, contributing 54% of SunREIT’s net property income. Sunway Pyramid’s occupancy is between 98% to 99%.
“As the sponsor continues to grow its investment property portfolio, SunREIT will continue to enjoy sizeable pipeline assets to continue to grow its asset portfolio, ” Ng says.
This would depend on the Sponsor’s readiness to dispose of these properties when they reach stabilised rental, occupancy and yield, he says in an email.
“These two properties are definitely good for SunREIT’s future acquisition as these are good quality properties which are strategically located near MRTs within a transit oriented developments (TOD), ” Ng says.
Although diversifying into emerging growth sectors such as healthcare, education, logistics and data centres would help to diversify risks, buying retail malls with growth potential is a “value add” for them, Ng says.
So they are “highly selective” and prefer malls located within integrated development with a growing population support.
He said they need to consider long-term rental growth prospects supported by healthy property yield, which need to be accretive.Expiring leases
On Sunway Pyramid’s leases expiring in 2020, Ng says occupancy is close to full.
Since its opening, Sunway Pyramid has been offering them double-digit rental reversion, says Ng. Despite today’s tough times, rental reversions are still growing, though at single-digit.
“The high concentration of tenancy renewal in a particular year has indeed reduced over time. At the point of (SunREIT) IPO, the concentration was as high as close to 60% and we have managed to reduce the concentration level. We expect the concentration to reduce further as we continue to re-jig the tenancy mix which will translate into a more spread-out lease maturity profile, ” Ng says.
Going forward, he says the strategy is to expand the contribution of services and industrial segments in view of the role played by the service and industrial segments today in the country’s overall economy. SunREIT’s purchase of Sunway university and college campus would expand its assets base and diversify its sources of revenue. Ng says the services segment comprises Sunway Medical Centre and Sunway University and college campus.
In its latest financial results issued on Aug 8, Ng says revenue for the service segment from Sunway Medical Centre (Tower A and B) and Sunway university and college campus doubled to RM13.2mil in the fourth quarter of financial year 2019 on the back of new income contribution from the educational facilities.
The industrial and others segment recorded a revenue and net property income of RM1.5mil in the fourth quarter following a rental reversion in January 2019.
All segments contributed to the improvement in financial performance which was partially offset by lower income contribution from the hotel segment.
performanceOn an annual basis, revenue rose by 3.5% year-on-year (y-o-y) to RM580.3mil with a corresponding 4.7% y-o-y improvement in net property income (NPI) to RM439.7mil.
The retail segment registered a resilient growth of 2.4% y-o-y in revenue to RM426.7mil with a corresponding annual improvement of 4.5% in NPI to RM310.5mil. Maybank Research says Sunway Carnival Mall sustained occupancy at 97% and recorded higher rental per sq foot (psf) while Sunway Putra Mall occupancy was stable at 90%, Maybank says.
The hotel segment faced a challenging year, reporting a revenue and NPI contraction of 4.9% y-o-y to RM78.6mil and 8.2% y-o-y to RM71.3mil, respectively. The refurbishment period of four months at Sunway Resort Hotel & Spa affected net property income. Maybank Research says soft market conditions, decline in Middle East tourist arrivals the the refurbishment of its grand ballroom and meeting rooms were completed in November 2018. This would sustain occupancy growth in the long term. Occupancy rate was at 65% for financial year 2019, compared with 74% for financial year 2018, Maybank says.
Its other hotels, namely Sunway Pyramid, Sunway Putra Hotel, Sunway Hotel Georgetown and Sunway Clio Property saw a drop in net property income.
The office segment registered an improvement of 14.8% y-o-y in revenue to RM38.4mil, underpinned by improved performance from Menara Sunway, Sunway Putra Tower and Wisma Sunway, on the back of renewal at higher average rate, commencement of new tenants and expansion from existing tenant, respectively. NPI jumped 22.3% y-o-y to RM21.4mil.
Revenue and NPI for the services segment soared by 35.4% y-o-y to RM30.7mil, mainly due to new income contribution from Sunway university & college campus. The industrial and others segment’s revenue and NPI rose by 14.6% y-o-y to RM5.9mil.
Maybank says changes in rental rates, occupancy rates, operating expenses and interest rates may lead to lower earnings for SunREIT.
Seventy-two percent of Sunway Pyramid’s net lettable area is due for lease in financial year 2020, while 55% of SunREIT’s borrowings are on floating rates.
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