Sunway REIT’s ideal funding is a combination of current facilities and perpetual bonds

KUCHING: Analyst Kenanga Investment Bank Bhd (Kenanga Research) believes that that Sunway Real Estate Investment Trust’s (Sunway REIT) funding structure is ideal, stemming from its combination of existing borrowing facilities and perpetual bonds.

In a company update, the analysts came to this conclusion based on their analysis on the recent proposed acquisition of Sunway’s Education assets which was estimated at RM550 million in Dec 2018, and an assumption that the REIT’s perpetual bonds cost of debt is at 6 per cent.

“The combination of funding methods is anticipated to ensure Sunway REIT’s high gearing of 0.39 times at manageable levels of 0.40 times, and to keep the acquisition distribution per Unit (DPU) accretive.

“Cash calls via placements or rights issue are not suitable as they might be DPU decretive at current levels, while funding the acquisition fully via existing borrowing facilities would strain gearing levels to 0.43 times despite being DPU accretive,” Kenanga Research explained.

The REIT itself seems to be in agreement with the research arm regarding its funding options as just last week, Sunway REIT had announced their plans to established a RM10 billion perpetual note programme where the net proceeds from this issuance exercise will be utilised for financing investment activities which include: acquisitions, capital expenditure or AEIS, refinancing existing and future borrowings, and working capital requirements.

While the financing rates and issuance amounts have not been determined at this juncture, Kenanga Research reports that Sunway REIT is expecting the first issuance by 4QFY19.

“Sunway REIT is the first REIT to embark on Perpetual Bonds for financing, joining the ranks of developers like SP Setia, Mahsing as well as Boustead. These perpetual bonds usually carry a circa six per cent coupon rate with a step-up rate past year 5,” they reported.

However, the research arm added by pointing out that equity shareholders of the REIT should be more cautious in the event that the RM10 billion perpetual bond program is maxed out.

“In the hypothetical maximum case scenario, if Sunway REIT fully utilises the RM10 billion perpetual bond programme, the risk for equity holders lies in a situation of declining revenues.

“Assuming a 5 per cent decline in revenue on the back of the high perpetual bond cost, equity holders would feel the pinch as DPU could decrease by 16 per cent.

“Therefore, it is imperative that Sunway REIT maintains its revenue on an upward trajectory whilst managing cost,” Kenanga Research explained.

With both pros and cons of the proposed funding considered, Kenanga Research is maintaining its FY19 and FY20 estimated core net profits for Sunway REIT at RM300 and RM312 million for now, as we are still waiting for finalised details of its proposed RM10 billion perpetual bond issuance.

“We are long- term positive on the perpetual bond only if it is utilised in combination with existing borrowing facilities that is DPU accretive, as it helps manage Sunway REIT’s gearing levels.

“We also lower our 10-year MGS target to 3.90 per cent from 4.20 per cent in line with our adjustment across the sector,” it added.

Kenanga Research maintained its market perform call on the stock with an increased target price of RM1.85 per share from RM1.65.

The analysts came to this conclusion based on their analysis on the recent proposed acquisition of Sunway’s Education assets which was estimated at RM550 million in Dec 2018, and an assumption that the REIT’s perpetual bonds cost of debt is at 6 per cent.