Sunway REIT has proposed to acquire 6 Giant hypermarkets/retail complex from EPF for a total cash consideration of RM520m. We are mildly positive on the deal as it is yield accretive with an expected NPI yield of 8.0% (vs FY22 NPI portfolio of 5.4%). These new properties will more than adequately fill up the rental void arising from the impending disposal of its medical buildings. Although Giant has ceased operations in USJ, we are not overly concerned about the possible termination of the lease agreement, as the tenant will need to pay rent for the remaining unexpired term of the lease agreement. Post completion of the ongoing medical buildings disposal and this acquisition exercise, our forecasted FY23f/FY24f EPU will be adjusted by -2.0%/+3.1% with gearing slightly increase to 38.6%. Maintain our forecast and TP of RM1.87, pending completion of the exercise.

NEWSBREAK

Sunway REIT entered into a conditional sale and purchase agreement with Kwasa Properties Sdn Bhd, a wholly owned subsidiary of EPF for the proposed acquisition of 6 properties for a total cash consideration of RM520m. The 6 assets are hypermarkets/retail complex (including car park bays) that are currently being rented by Giant on a triple-net master lease agreement with a combined weighted average lease expiry of 5.6 years. The properties are scattered across 6 different locations – 5 of which are in Selangor, namely Kinrara, Putra Heights, USJ, Klang, and Ulu Kelang, while the remaining one is situated in Plentong, Johor.

The properties in totality commands a gross floor area of 2.4m sqft with net property income (NPI) of RM42.1m (based on FY22).

As per the announcement, 90% of the consideration will be fulfilled by existing debt facilities while the remaining 10% will be satisfied via internally generated funds.

HLIB’s VIEW

Mildly positive. Based on an NPI of RM42.1m and RM520m purchase consideration, the six properties in its entirety are fetching an attractive NPI yield of 8.0%. This deal is yield accretive when stacked against SunREIT’s FY22 NPI portfolio yield of about 5.4%. Recall that SunREIT’s medical buildings are due to for disposal in 1H23 for a cash consideration of RM430m, these new properties will more than adequately fill up the rental void (FY22: RM26.4m) arising from the disposal. Management has asserted that these hypermarkets are defensive in nature relative to the conventional shopping malls (reflected by the performance of Ipoh TF Value Mart during the pandemic) and hence, provide more stable income streams. However, we are a tad bit cautious on the deal as it will enlarge its portfolio exposure into the competitive retail sector as compared to the services (education and healthcare) and industrial sector. That said, we are still overall mildly positive on the overall deal as the downside risk is compensated by a more attractive yield.

USJ Property. We note that the tenant has ceased operations in USJ Property despite the lease is still active (expiring in 2028). However, we are not overly concerned about possible termination of the lease agreement as the tenant will have to pay rent for the remaining unexpired term of the lease agreement. In the event of lease cessation, management is confident in replacing it with another tenant, potentially another hypermarket operator.

EPU impact. With the assumption that (1) the acquisitions are to be completed in 4Q23, (2) medical buildings are to be disposed in 2Q23, (3) net increase of RM90m borrowings arising from the proceeds shortfall from the disposal against the proposed acquisitions and (4) minimal changes in property opex due to master lease arrangement, our forecasted EPU for FY23f/FY24f will be adjusted by -2.0%/+3.1% based on our calculations. Our TP would then be adjusted upward to RM1.93.

Gearing. After the factoring in the ongoing disposal and acquisition exercises as well as the net changes in borrowings, gearing is expected to slightly increase from 37.6% to 38.6% (FY22).

Forecast. We maintain our forecast pending the completion of the aforementioned corporate exercises.

Maintain BUY; TP: RM1.87. Our TP is based on FY24 DPU on targeted yield of 5.3%, derived from -1SD below 5-year historical average yield spread between Sunway REIT and MAG10YR in view of its diversified portfolio and robust track record. Reaffirm BUY.

Source: Hong Leong Investment Bank Research - 17 Mar 2023