Diversification pays off big for Sunway REIT
OVER the past year, Sunway Real Estate Investment Trust (Sunway REIT) has seen double-digit percentage growth in both its revenue and net property income, thanks to its diversified portfolio of assets which has proven to be highly resilient despite tough market conditions.
Between the start of its 2016 financial year on June 30, 2015 and June 20 this year, its investors have enjoyed market-beating returns on both ends of the REIT value proposition.
Not only has the stock price gained by 6.5% during this time, outperforming the FBMKLCI’s 4% decline, its distribution yields have remained at a solid 5.4%.
This translates to a combined return of 11.9% over the past year, which is all the more impressive given the sluggishness of equity markets globally and economies that were impacted by crude oil’s decline during the same period.
In an interview with StarBizWeek, Sunway REIT chief executive officer Datuk Jeffrey Ng Tiong Lip says that the gains were made despite the bearish sentiment that is still prevalent in the property market.
“We are in a declining part of the market cycle very much driven by the oversupply.
“Frankly, we do foresee greater volatility and short term disruptions in income for property assets in general. In my opinion, I do not see a recovery in the property market over the next one or two years,” he says.
Ng candidly admits that a substantial part of its office space properties have underperformed after the loss of two anchor tenants in Sunway Tower and Sunway Putra with a combined net lettable area (NLA) of 350,000 square feet.
“The office segment performance has not been very good because of the oversupply issue. The occupancy rates for our two Kuala Lumpur office assets dropped from 90% to as low as 25%.”
“But in our case, there was no impact and our numbers are still growing thanks to diversification. We will not allow one segment to damage the entire portfolio,” he explains.
The strength of Sunway REIT’s financial performance lies in its diversified stable of assets and some features that are unique to the REIT compared to its peers.
For example, the Bandar Sunway township offers tremendous inter-connectivity to encourage footfalls by visitors. A dedicated bus rapid transit (BRT) line and elevated pedestrian walkways allows for easy access to office and retail properties in the area.
Its properties in the vicinity of the area include its flagship Sunway Pyramid shopping mall, a five-star hotel, two office buildings and a medical centre.
“Additionally, the quality of the assets is the main reason behind the positive financial performance. More than 70% of our portfolio’s total asset value of RM6.4bil is located within Sunway Resort City, so the fact that we are a township-oriented REIT is also a major selling point,” he said.
For its cumulative nine months period up to March 31, 2016 (9MFY16), Sunway REIT’s gross revenue grew by 13.3% to RM383.43mil from RM338.52mil last year.
Its net property income also grew by 10.6% to RM283.68mil from RM256.41mil a year ago as rental income from the reopened Sunway Putra Mall more than offset the weak performance of its office space segment.
The total payout to investors for 9MFY16 amounted to RM207.66mil, or a distribution of 7.06 sen on a per unit basis.
While the REIT has not acquired external assets in recent years, Ng says that the company is actively looking for new prospects.
Similar to Sunway Medical Centre, which is a property classified under the ‘others’ segment, these assets would typically carry long leases with pre-determined rental reversion and offers a predictable income stream, he explains.
“Diversification has allowed us to look into acquiring non-traditional assets. These could be data centres or industrial properties, for example. Opportunities have been presented to us before but we are very selective,” he says.
Two assets under the Sunway group were injected into the REIT last year, namely the Sunway Hotel Georgetown and Wisma Sunway.
There are at least six cash flow generating assets that could be injected into Sunway REIT in the foreseeable future. Among them are two mixed-use developments, an office tower and even two university properties.
Aside from inorganic growth via new acquisitions, Sunway REIT is also continuing its asset enhancement initiatives (AEI) following the successful refurbishment of the Sunway Putra Mall.
Going forward, the company will spend RM123.9mil in capex for the refurbishment of Sunway Pyramid Hotel East. In addition, it is also preparing for a substantial AEI on the Sunway Carnival Shopping Mall in Penang with the construction of a new wing for the nine-storey building.
While AEIs typically involve huge capital investments on assets that will not generate income while they are undergoing refurbishment, Ng points out that this is necessary to ensure long term earnings growth.
“AEIs will generally suffer some gestation period.
“But we believe that in the medium to long term, when you ride out the volatility of the market cycles, as long as the quality of the asset grows, our rental income will catch up,” says Ng.