Sunway REIT's hotel earnings to remain subdued — Analysts
KUALA LUMPUR: Sunway Real Estate Investment Trust’s (Sunway REIT) hotel earnings should remain subdued, analysts opine, while also noting that retail recovery is imperative to Sunway REIT’s earnings recovery.
Affin Hwang Investment Bank Bhd (Affin Hwang Capital) recalled that given the surge in Covid-19 cases in Malaysia, five states including Penang, Selangor, Melaka, Johor and Sabah as well as federal territories were put under Movement Control Order (MCO), six states were put under Conditional MCO (CMCO) namely Pahang, Perak, Negeri Sembilan, Kedah, Terengganu and Kelantan, while Perlis and Sarawak were put under Rehabilitation MCO (RMCO) for a period of two weeks.
Though the research firm expected this to drag sentiment in the first half of current year 2021 (1HCY21), the availability and distribution of Covid-19 vaccines in the second quarter of CY21 (2QCY21) should lead to better sentiment in 2HCY21 and sequentially to a faster-paced earnings recovery.
“We expect the tourism outlook in 2021 to remain weak due to the expected prolonged restriction in cross-border, inter-state and inter-district travel, which leads us to believe occupancy will remain below 40 per cent throughout 2021,” Affin Hwang Capital said.
The research firm recalled that Sunway REIT has an international; local occupants split of 60:40.
“We also expect hotels to report lower average daily room rates (ADR) due to the promotional activities conducted to encourage staycations.
“Elsewhere, contributions from event / corporate bookings should also remain subdued in 2021, though we do expect some recovery in 2H21 from expected easement in standard operating procedures (SOPs) on large group gatherings.
Overall, Affin Hwang Capital opined that the weak conditions should lead to three hotels, namely Sunway Putra Hotel, Sunway Hotel Georgetown and Sunway Clio Hotel, to only contribute the minimum guaranteed rent in 2021.
“Meanwhile, Sunway Resort, Sunway Pyramid and Sunway Hotel Seberang Jaya, which made up 28 per cent, 19 per cent and four per cent of its FY2020 total hotel revenue respectively, are now no longer under the minimum lease guarantee.
“Though this arrangement is lucrative in a period of strong tourism activities, it backfires in times of economic downturn.
“This, coupled with Sunway Resort undergoing a refurbishment exercise for a period of 12 to 24 months, to be reopened in phases, should further dampen contributions from the hotel segment.”
On another note, Affin Hwang Capital gathered that given that the retail segment makes up 74 per cent and 72 per cent of total revenue and net property income (NPI) in 2019 respectively, another round of MCO or CMCO or RMCO and interstate or inter-district travel restrictions should slow down Sunway REIT’s path to earnings recovery in 2021 despite more retailers being allowed to operate during the duration.
Nonetheless, the research firm was still of the opinion that 2021 will be a year of two halves.
“While 1HCY21 should still see weak contribution from the malls attributable to expected higher rental assistance given to tenants affected during the MCO period, as they are not allowed to operate (such as fashion and optical outlets, hair dressers, beauty salons, karaoke and cinema), 2H21 should see a faster pick-up in earnings following the distribution of Covid-19 vaccines and expected easement of SOPs on large gatherings.
“The MCO affected areas includes Sunway Pyramid, Sunway Putra Mall and Sunway Carnival.”
However, should there be prolonged movement restrictions caused by a continuous high number of Covid-19 cases, Affin Hwang Capital expected further earnings misses.
Elsewhere, the research firm expected rental rebates to continue, given at a case-by-case basis throughout 2021.
“Nevertheless, despite the lingering weakness in the retail segment, we observed strong occupancy in Sunway REIT’s retail assets.
“As of September 2020, average occupancy remained high at 94 per cent with a notable 45 per cent increase in Sunway Clio Mall due to commencement of new tenants. At this juncture, we are not overly concerned of risk of premature lease termination in Sunway REIT’s assets given its stellar track record and prominent locations.”
As for the maiden contribution from the yield-accretive acquisition of Sunway Pinnacle, Affin Hwang Capital highlighted that this should provide an earnings boost to Sunway REIT in 2021.
The research firm further highlighted that other office rentals should remain relatively stable in the immediate term.
“While we are slightly concerned about the possibility of tenants downsizing their workspaces due to the workfrom-home trend which has gained traction due to the ongoing pandemic, we do not foresee this to pose a material impact to Sunway REIT’s earnings in the immediate term.
“Only Sunway Putra Tower reported slightly lower yoy occupancy as of September 2020 while others reported an increase or full occupancy.”
While the risk of tenants downsizing their workspace area remains, Affin Hwang Capital believed the possibility of tenants exiting the office asset completely remains low as the research firm believed small and medium enterprises (SMEs) and large corporations would still opt to have a dedicated workspace for their employees once the pandemic is over to ensure operational efficiency.
“Nonetheless, we expect this work-from-home trend to put a lid on any increase in office rental, but it should not have a material implication to the sector within the current or next tenancy cycle.
“Elsewhere, Sunway University, Medical Centre and Sunway REIT Industrial’s earnings contribution should remain stable as it is not directly impacted by the pandemic.”
We expect the tourism outlook in 2021 to remain weak due to the expected prolonged restriction in cross-border, inter-state and inter-district travel, which leads us to believe occupancy will remain below 40 per cent throughout 2021,
Affin Hwang Capital