News

• Sunway REIT has entered into sale and purchase agreements for acquisition of Sunway Hotel Georgetown and Wisma Sunway Property for a total purchase consideration of RM134m from Sunway .

• Sunway Hotel Georgetown is a 16-storey, 250 rooms 4 star hotel with vacant land used as car park.

• Wisma Sunway is an office building with 382 car park bays located in Seksyen 9 Shah Alam and net lettable area of 171,544 sq ft.

• The proposed acquisition for Sunway Hotel Georgetown is expected to be completed by 3QFY15 while Wisma Sunway is by 1QFY16.

Highlights

• We are neutral to slightly positive on the news given Sunway Hotel Georgetown currently contributed RM3.3m at EBITDA level YTD September 2014 while Wisma Sunway contributed RM3.0m, which is about 1.0% and 0.8% of our full year f orecast of net property income for FY2016.

• The capitalization rate of 4.5% for Sunway Hotel Georgetown and 5.0% for Wisma Sunway is slightly lower than portfolio’s current yield of 5. 8%. However we are not overly concerned as both properties have already underwent refurbishment exercise to enhance their values. In addition, we also believe that the acquisitions will provide long term income contribution as Sunway Hotel Georgetown has 10 years tenure with renewal option for another 10 years while Wisma Sunway is on 99 years leasehold expiring on 29 August 2094.

• We gathered that contribution from Sunway Georgetown Hotel will be from guaranteed rent (Year 1 and 2 – RM4.4m and Year 3 to 10 – RM3.3m) or variable rent (20% gross operating revenue + 70% net operating profit), whichever higher.

• The acquisitions will be fully funded by existing debt facility and there will be marginal increase in gearing ratio from 32.0% to 33.5%.

• We favour the acquisition as this will enable Sunway REIT to grow the size of its asset and maintain its position as the largest real estate investment trust in Malaysia (by asset value) and sustain investors’ interest in Sunway REIT.

Risks

• Highly reliant on Sunway Pyramid; and
• I ntensifying competition for assets and tenants.

Forecasts

• Unchanged, pending completion of the deal .

Rating

HOLD , TP: RM1.48

Positives

• Has the largest acquisition pipeline amongstM-REITs; strong backing from Sponsor; well -diversified across various segments with low tenant concentration; and synergy with Sponsor’s townships.

Negatives

• Still heavily reliant on Bandar Sunway, which willtake time to change; persistent weakness in the office segment due to oversupply of new office space.

Valuation

• We maintain HOLD on the stock with TP of RM1.48. Targeted yield remains at 6.4% based on historical average yield spread of Sunway REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 9 Dec 2014