The REIT's office segment underperformed this quarter, with negative prospects ahead. What will the REIT manager do in the short term and long term with the underperforming office segment?
26/8/2013 – The manager of Sunway REIT says it is committed to distribute 100% of its distributable net income for FY2014.
It expects sustained or minimal impact to DPU for FY2014 despite the loss of income from Sunway Putra Mall.
This is because it expects organic growth from the existing assets of the REIT's portfolio to prop up its income.
But its office segment has been underperforming – which has not received much coverage in the media.
The REIT announced earnings for Q4 FY13 earlier in August:
Revenue: +1% to RM 103.9 mln
Profit: +15% to RM 55.5 mln
One-off gains/losses: RM 173.5 mln vs RM 230.2 mln (unrealised profit from fair value gain on investment properties)
Cash flow from operations: RM 297.5 mln vs RM 277.9 mln
DPU: 2.02 sen per share vs 1.89 sen per share (FY13 DPU of 8.3 sen vs 7.5 sen in FY12)
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Question 1. What will the REIT manager do with the underperforming office segment?
What jumped out in the earnings report is not how well the REIT's retail properties did, but how badly its office segment performed.
Its office segment's net property income declined 7% year-on-year to RM 28.5 mln for FY13 mainly due to lower occupancy rate of Sunway Tower, which achieved 83% this year against 94% in FY12.
Sunway Putra Tower also achieved lower occupancy at 78% against 85% in FY12.
The only positive point in the office segment was higher gross revenue from Menara Sunway due to completion of its asset enhancement initiative.
The REIT manager said the overall office market is in for challenging times due to oversupply.
The office segment, although making up only 9% of the REIT's net property income in FY13, is already a drag on the earnings of the REIT, and will continue to be one.
RHB has already downgraded Axis REIT and Quill Capita to SELL due to the less positive prospects for the office sub-segment.
What is the REIT manager's plan in the short term and long term with the underperforming office segment?
Management reply: Sunway REIT owns 3 office assets in the portfolio, namely Menara Sunway in Bandar Sunway, Sunway Tower and Sunway Putra Tower in Kuala Lumpur.
Menara Sunway is strategically located in the masterplanned township of Sunway Resort City. Menara Sunway has a captive market and houses the companies within the Sunway Group and several large corporations. Menara Sunway is operating at occupancy of 98.1% as at 30 June 2013. Menara Sunway has enjoyed high occupancy since IPO.
Sunway Putra Tower will be undergoing refurbishment to upgrade and reposition the asset to be in line with the proposed refurbishment of the 3-in-1 mixed use Sunway Putra Place. Upon completion of the refurbishment, the asset manager hopes to maintain the occupancy and rental rates to improve from the current sub-par rental rates.
For Sunway Tower, the asset manager is actively marketing the product which includes competitive pricing to attract prospects to the building. We have tenancy retention programme in place to ensure continuity of tenancy by providing good service.
Question 2. Is management looking at assets outside its acquisition pipeline?
Management has guided that it will acquire one more asset by the end of this year.
The asset acquisition environment is challenging as there are few yield accretive assets, with an absence of acquisitions among M-REITs (except for Sunway REIT's buy of Sunway Medical Centre) in the first half of this year.
Sunway REIT CFO Wai Sow Fun said in October that REIT manager was looking at buying third party assets in key growth areas such as Klang Valley, Penang, Johor and Sabah.
We know the next acquisition cannot be a big one, as the REIT expects to spend RM 500 mln on capex over the next two to three years.
There is also a possibility of buying distressed assets, which will provide stronger turnaround prospects.
Can the REIT manager confirm whether its next acquisition will be a third party asset, or part of its acquisition pipeline?
Management reply: As part of our management policy, we are unable to disclose such information until official announcement is released. It is a continuous process to look for acquisition opportunities, be it third party assets or pipeline assets as long as our investment criteria are met.
Question 3. What is management's contingency plan if Ranhill Worley Parsons vacates Sunway Putra Tower?
The REIT might take a knock to its FY14 results as it might not be able to secure Ranhill Worley Parsons as a tenant for Sunway Putra Tower.
Ranhill Worley Parsons would make up 84% of gross rent.
Suppose the deal with Ranhill Worley Parsons falls through, what is the contingency plan to replace the main tenant?
Management reply: It is too preliminary to speculate that Ranhill Worley Parsons’ tenancy will be terminated. Therefore, the question of contingent plan does not arise at this juncture.
Also, to what extent are the negative effects to the REIT if it loses Ranhill Worley Parsons as a tenant?
Management reply: Ranhill Worley Parsons contributes 84% to Sunway Tower’s gross rental income. In worst case scenario, loss of income contribution from Ranhill Worley Parsons will not have a material impact to Sunway REIT’s portfolio.
Question 4. Will Parkson come back to Sunway Putra Mall?
According to the media presentation to investors for this quarter, Parkson Corporation is the second top tenant, accounting for 2.3% of its top 10 tenants in terms of gross rental income (with Ranhill Worley Parsons taking the top spot at 4.6%).
The percentage was 5.5% in the previous quarter, and Parkson occupied the top spot then.
That's because Sunway Putra Mall closed in May for a major refurbishment, which management told us then would take approximately 22 months and all tenancies including Parkson had been terminated.
Naturally, it's some time until the mall will reopen.
But when they do, we'd like to know whether Parkson will be among the tenants moving back in.
Management reply: Under the marketing plan, the asset manager will be introducing interesting retail concepts and new tenancy mix to be in line with the overall branding of the mall. Marketing of Sunway Putra Mall will commence towards the end of this calendar year. The ultimate outcome is dependent on negotiations between landlord and prospective tenants.
We thank management for its responses.
Key financial ratios
The ticks and crosses below indicate whether the stock meets the following value investing criteria.
Price-book: 1.13x - "Price is what you pay, value is what you get" - Are you getting more than you pay for?
Yield: 6.10% - Does the stock pay a risk premium over fixed deposit rates?
Cashflow: RM 294.5 mln - "Profit is opinion, cash is fact" - Is the company generating cash?
Total cash & equivalents: RM 58.5 mln - Does the company have cash?
Management: Sunway REIT was not ranked in the top 100 companies by Minority Shareholder Watchdog Group.
34.40% - Sunway City Sdn Bhd
10.88% - Permodalan Nasional Berhad (PNB)
10.42% - Employees Provident Fund (EPF)
6.50% - Capital Research Global Investors
Analyst survey by Reuters
Consensus call: HOLD
Price target: RM 1.52
Publish date: 26/08/13