Purchase of Sunway Clio a positive for Sunway REIT

Sunway Real Estate Investment Trust (Aug 4, RM1.71)

Maintain hold recommendation with an unchanged target price of RM1.70: Sunway Real Estate Investment Trust (Sunway REIT) has entered into sale and purchase agreements for the acquisition of Sunway Clio property for a total purchase consideration of RM340 million (subjected to valuation adjustment) from Sunway Bhd.

The property comprises a 19-storey, 401-room four-star hotel (Sunway Clio Hotel), 88,000 sq ft of three-storey retail lots (Sunway Pyramid West) and a multistorey car park.

The proposed acquisition of the property is expected to be completed by the fourth quarter of 2017.

We are positive on the news as the vendor will provide a guaranteed rental income of RM20.23 million for a period of four years post acquisition, which translates into a net yield of about 5.95% vis-à-vis its current yield of about 5.3%. Sunway Clio Hotel is new (1.5 years) and needs time to be mature. Moreover, any additional income on top of the guaranteed income will be retained by Sunway REIT, further enhancing the attractiveness of the acquisition.

After the expiry of the guaranteed rental period, rental contribution from the property will be based on the minimum rent (about RM8.23 million) or variable rent (20% gross operating revenue plus 70% net operating profit), whichever is higher.

In addition, the acquisition will provide long-term income contribution as the hotel lease has 10 years’ tenure with a renewal option for another 10 years.

Going forward, we believe the performance of the hotel will improve as the hotel matures and benefits from operating synergies with Sunway REIT’s other properties located within Sunway City.

The acquisition will be fully funded by existing debt facilities, and its net gearing ratio will increase from 34.7% to 37.9%.

Based on our estimates, the acquisition is expected to increase our financial year 2018 earnings per unit and distribution per unit forecasts by about 2%. — Hong Leong Investment Bank Research, Aug 4

This story first appeared in TheEdgeProperty.com pullout on Aug 7, 2017. Download TheEdgeProperty.com pullout here for free.