Period  2Q15/1H15

 Actual vs. Expectations  1H15 realised net income (RNI) of RM126.4m came in within expectations, making up 50.0% of consensus estimates and 51.0% of ours.

Dividends  2Q15 GDPU of 2.27 sen per unit (which includes a nontaxable portion of 0.37 sen). 1H15 GDPU of 4.55 sen is on track to meeting our expectation as it makes up 51.0% of our full-year GDPU estimate. The payout ratio of 100% is also within our expectation.

Key Results Highlights  QoQ, GRI was flat at RM113.8m. This was due to very minimal increase in the retail segment (+0.2%) which makes up 71.0% of revenue. In terms of other segment revenue, the hospitality segment increased (+2.7%) mainly due to SRHS’s better occupancy and SHSJ’s better ARR, but the office segment declined (-4.6%) due to lower occupancy at ST and MS, and ongoing weakness at SPT. NPI margins were flattish at 76.1%. Higher expenditure (+5.0%) and financing cost (+3.0%) from draw down of borrowings to fund AEI’s, and higher interest rates on floating rate borrowings, attributed to RNI coming off marginally by 1.0%.

 YoY-Ytd, RNI was up by 8% on the back of an 8.0% GRI growth. This was attributable to the retail segment (+12.0%) from positive rental reversions mainly from SP, SC, and SIH, while the hospitality segment improved slightly (+0.6%) from SRHS on MICE activities, and SHSJ on better occupancy post refurbishment. However, the office segment was down (-3.8%) mainly due to ST as main tenant Ranhill Worley Parsons is moving out progressively. This was sufficient to negate higher operating cost (+11.0%) arising from increased electricity rates and higher expenditure.

Outlook  Management expects to spend close to RM400.0m in FY15E mainly for the refurbishment of Sunway Putra and has spent up to RM132.1m so far mainly on Sunway Putra, car park linkages and annex building at SRHS and enhancement works at SMC.

 Management has completed the acquisition of Sunway Hotel Georgetown while the completion of the acquisition of Wisma Sunway is expected by 1Q16.

 The asset acquisition environment appears to be improving as our channel checks suggest that property sellers are becoming more realistic with asking cap rates, but management is only targeting assets that deliver 6.5%- 7.0% yields.

Change to Forecasts  We make no changes to our FY15-16E earnings.

Rating Maintain OUTPERFORM Valuation  We are upgrading our TP to RM1.68 (from RM1.57) based on a lower target gross yield spread of +1.9ppt (from +2.3ppt) as SUNREIT has a more superior earnings growth prospects than other sizeable retail MREITs under our coverage due to the maiden contributions of the revamped Sunway Putra (refer overleaf). This results in a target gross yield of 6.1% (net: 5.5%) on FY16E GDPS of 10.2 sen (NDPS: 9.2 sen) and a target 10-yr MGS of 4.20%.

 SUNREIT is our TOP PICK for 1Q15. We maintain our OP due to the strong GDPU growth in FY16E mainly due to Sunway Putra. SUNREIT is commanding potential 12.0% total returns at current levels.

Risks to Our Call  Bond yield expansion, earnings risks in hospitality division. 

Source: Kenanga