Sunway REIT is one of the largest diversified REIT in Malaysia. As of 30 June 2021, it has 18 properties under management. Sunway REIT is listed in Bursa Malaysia on 8 July 2010. Back then this REIT only has 8 properties in its portfolio.
At the time of writing, Sunway REIT is trading at RM1.43 per unit. This is lower than its net asset value (“NAV”) of RM1.48 per unit. As a general rule-of-thumb, REITs are undervalued if it trades below NAV. But there is always a reason why it is trading at such valuation. For Sunway REIT or any other REITs in Malaysia, it is the implementation of MCO.
Nevertheless, the government are slowly reopening the economy as more people are getting vaccinated. However, the covid cases are still increasing. That’s why REITs’ prices remain low as investors view the possibility of “U-turn” in their reopening decision.
I view this as an opportunity to start picking up some good REITs. But is Sunway REIT a good REIT? Here are 5 key insights you should know about this REIT:
#1: DIVERSIFIED REIT
Sunway REIT’s rental income comes from 5 sectors – Retail, Hotel, Office, Services & Industrial. While it is a diversified REIT, its retail segment still is the biggest revenue contributor. So, it is not very well diversified.
One thing to note is the REIT’s lease agreement structure. For its retail & hotel segment, the lease agreement is linked to the tenant’s revenue. The more revenue generated, the higher the rental income. This explains why the drop in rental income during MCO for its retail & hotel segment. While the rest of its properties are on a fixed rental agreement.
Nevertheless, I’m certain that it will recover back to pre-covid level as the economy slowly reopens. Sunway REIT still has a healthy occupancy level for its retail segment as of 30 June 2021.
#2: STRONG SUPPORT FROM SPONSOR
A strong REIT sponsor can provide growth opportunities by injecting new assets into the REIT. This is what happens to Sunway REIT. Their sponsor is Sunway Berhad. Since IPO, they have been injecting new assets into the REIT at a very attractive yield.
The most recent one being “ the Pinnacle Sunway ”. It has a property yield of 6.2% at the time of acquisition in November 2020. This is higher than its total portfolio yield of 5.2% based on its 2019 earnings report.
I believe these yield-accretive property injection from Sunway Berhad will continue moving forward. This is because of the Sponsor’s business model which is to “Build, Own & Operate”. According to the Sponsor’s 2019 Annual Report , approx. 50% to 60% of developments are owned by the Sponsor. In doing so, it allows the Sponsor to generate recurring income.
In addition, the REIT’s current gearing is at 36.9%. There are still room for acquisition via debt. Some potential assets identified in the REIT’s recent presentation are Sunway Velocity Office, Sunway Velocity Mall & Sunway Giza Mall.
#3: PLANS TO FOCUS ON SERVICES & INDUSTRIAL
In 2020, the REIT came up with a roadmap called “Transcend 2025”. In it, the REIT aims to grow its total asset value (“TAV”) to RM13 – RM15 bil by 2025. It also aims to increase its services and industrial asset value to 15% – 25% of TAV. This means we will see more acquisition of industrial assets moving forward.
In my view, the plan is good. Industrial properties are booming due to growth in e-commerce. As such, companies require more warehouses to act as distribution centre. It is a growing industry. But all these are just plan.
Looking at the Sponsor’s current development projects, it is all commercial and residential. I don’t expect the Sponsor will be able to inject industrial asset anytime soon. This means the acquisition will be from external party. So, I don’t want to get my hopes too high on this for now.
#4: POTENTIAL INCREASE IN BORROWING COST
One of REITs’ major concern is the increase in key interest rate (a.k.a. OPR) by BNM. This is because it will lead to increase cost of debt for REITs. For Sunway REIT, it has approx. 62% of its borrowings under floating rate. So, any increase in interest rate will definitely affect this REIT.
At the time of writing, OPR is at 1.75%. But as economy reopens, there will be influx of demand and shortage of supply. This means inflation will creep up. By then, BNM might increase the OPR to slow down the inflation.
Nevertheless, Sunway REIT cost of debt is still considered low – at only 2.86% as of 30 June 2021. This is lower than its peer, KLCC which is at 4.3% as of 30 June 2021.
According to BNM, Malaysia’s headline inflation in 2Q 2021 increased to 4.1%. It expects this to average between 2% – 3% for the whole 2021. As such, I believe the key interest rate will remain low for now. But knowing the market will overreact, this is definitely an area to look out for.
#5: REDUCED DISTRIBUTION
Since 3Q 2021, Sunway REIT has changed its distribution frequency from quarterly to semi-annual basis. This is part of its capital management to tide through these hard times. The distribution also has been reduced due to poor financial performance.
Again, I believe it will eventually recover back to pre-covid levels. This is because the Sponsor owns 40.9% stake in Sunway REIT. They would want to reap the rewards out of it.
MY INSIGHTS
In a nutshell, it is a good REIT with track record of increasing distribution prior to pandemic. I like its management capital allocation behaviour. They carry out refurbishment activities on its hotel properties during bad times. This allows them to be ready for when tourism industry recovers.
But it’s not very well-diversified because big part of revenue still comes from retail. I think it will stay like this for many more years to come due to its sponsor’s residential and commercial-focused developments.
If you would like to receive more analysis on REITs like this, do subscribe to this website. You can also check out some of my articles on company’s key insights or browse through my how-to guide here on investing.
DISCLAIMER: The above-mentioned stock is NOT a recommendation to buy or sell but merely for education purpose. You should do your own due diligence on this company before making any investment decision. The author is not liable for your profit or losses made out of your decision to buy or sell.
The author has vested interest in the abovementioned stock. As such, his view might be biased.
