Sunway REIT organised a site tour on its newly acquired education assets. We are assured with the secured long term tenancy and the sound nature of the business. Sunway REIT reiterated that when acquiring assets, they will undertake a combination of both debt and equity (via perpetual notes), and that the perpetual notes will only be issued for acquiring yield accretive assets. Moving forward, with an increase to 25% of permissible asset allocation in other segment, Sunway REIT is keen on looking into industrials, data centres, logistic and warehouses as well as potential overseas diversification. We maintain our forecast; reiterate our HOLD call with unchanged TP of RM1.84.

Sunway REIT organised a site tour and briefing in conjunction with its completed acquisition of education assets.

Completion of acquisition. To recap, Sunway REIT completed the acquisition in April 2019 for RM550m. The properties include South Building (5-storey academic block with a lower ground level), North Building (6-storey academic block with a lower ground level), New University Block (13-storey academic block with a 2-storey basement car park), hostel (4 blocks of 5-storey walk up hostel apartment) and sports facilities, comprising a football field, basketball court, netball court and tennis court. The rental is approximately RM34.2m per year. The assets are being leased on a triple net lease basis to Sunway Education Group for 30 years with an option to renew a second term of 30 years, followed by a third term of up to 31st March 2097.

Education assets. Sunway University currently has 7 universities under its umbrella, housing approximately 8,000 students. We feel that with the education assets on board, Sunway REIT obtains another secure tenant being that it is on master lease, apart from Sunway Medical and Sunway Industrial. In addition, education is a sound business and Sunway University is a reputable university which is ranked among the top 2% of universities in Asia.

Perpetual bonds. Sunway REIT previously established a perpetual bond of RM10bn, which they have utilised RM340m to fund the education assets. Management reiterated that they will only be utilising the perpetual bonds to fund future acquisitions, as there will be more debt headroom made available with the increase in equity. Gearing currently stands at 38.4% (3QFY19), slowly nearing its loan covenant of 45%. Also, Sunway REIT undertakes a dynamic review process of the overall capital structure to ensure the appropriate funding ratio is optimised. Management shared that for any given acquisition, it will be done via a combination of perpetual bonds (classified as equity) and debt. They also reassured that the perpetual bonds will only be issued to acquire yield accretive assets.

Strategic Direction 2025. Sunway REIT has expanded their permissible asset allocation threshold from 15% to 25% of TAV into “Services” and “Industrial and Others” segment. To date, they are close to reaching their FY20 goal of RM10bn in property value. Moving forward, Sunway REIT is targeting to achieve property value of RM13-15bn by FY25 through continuously growing its core portfolio whilst expanding into emerging sub-sectors such as industrials, data centres, logistic and warehouses as well as potential overseas diversification.

Forecast. We maintain our forecasts as we have already factored in the acquisition.

Maintain HOLD, TP: RM1.84. We maintain HOLD with TP RM1.84, based on 5.5% targeted yield, derived from 2 years historical average yield spread of Sunway REIT and 10 year MGS.

Source: Hong Leong Investment Bank Research - 15 May 2019