SUNREIT has acquired an industrial asset in Shah Alam for RM91.5m from Champion Edge Sdn Bhd with a long- term lease of 18 years, which we deemed as neutral-to- mildly positive to earnings. As such, we increase our earnings marginally by <1% in FY17-18E. Maintain MARKET PERFORM but increase TP to RM1.68 (from RM1.61), on a slightly lower targeted gross yield of 5.7% (from 5.9%), closer to MREIT peers’ average yields of 5.5%.

First industrial asset for the portfolio. SUNREIT has acquired its first industrial asset, which consists of a factory, warehouse and office space with a long-term lease of 18 years until Dec 2034 (Initial Term) and a 5-year renewal to IDS Manufacturing Sdn Bhd. Rental reversions are every 3 years (next review in Jan 2019) with a minimal step up which is capped at 10% max. The acquisition is expected to be completed by 3Q17 upon the condition precedents being met.

Net yield of 6.1% decent considering the long-term lease. The assets gross yield and net yield is similar at 6.1% as it is a triple net lease (TNL) asset, implying that most costs are borne by the tenant. Although this is not as attractive as AXREIT’s recent industrial asset acquisitions of 7.0%-8.0%, we believe this will help to improve SUNREIT’s portfolio yield of 5.5% in FY16. Furthermore, the long lease term of 18 years provides income stability from guaranteed rental to SUNREIT in tough market conditions due to uncertainty in the office and hospitality segment. Location-wise, the asset is in close proximity to major highways, namely Federal Highway, Elite Highway and Shah Alam Expressway as well as to KLIA and Port Klang.

Neutral-to-mildly positive on the acquisition as the near-term impact is minimal. We are neutral-to-mildly positive on the acquisition as impact to earnings is minimal at 0.4-0.7% in FY17-18E. Post-acquisition, we expect SUNREIT’s gearing to inch up slightly to 0.35x (from 0.34x currently) as the acquisition is relatively small. This is below SC’s limit of 0.50x and SUNREIT’s internal gearing limit of 0.40x. All in, we are mildly positive on this acquisition despite it being yield neutral to shareholders as it provides earnings stability in the long run.

Slight adjustment in FY17-18E earnings by 0.4-0.7% to RM271- 291m. As such, we increase our FY17-18E average GDPS slightly to 9.6 sen (from 9.5 sen), implying gross yields of 5.3-5.7% in FY17- 18E.

Maintain MARKET PERFORM on a higher TP of RM1.68 (from RM1.61) based on a lower FY17-18E target gross yield of 5.7% (net: 5.2%). This is based on a lower spread of +1.50ppt (from +1.70ppt) to the 10-year MGS of 4.20% and slightly higher FY17-18E average GDPS of 9.6 sen (NDPS: 8.6 sen). We adjust our spread to be closer in line with MREIT peers (>RM1b market cap) average yields of 5.5%, but the marginally higher applied yield target vs. MREITs’ average yield is due to earnings fluctuations in SUNREIT’s office and hotel segment.

Source: Kenanga Research - 12 Jan 2017