A cold email to Sunway REIT Investor Relations Manager, Ms Crystal Teh Lay Ling end of last year was another shot in the dark in my attempt to reach out to various REIT Managers. There’s always this gap between what REIT investment really is and what retail investors know about M-REIT. Running a REIT educational course at REITMethod.com, and being an avid REIT investor myself, I aim play a part to deliver proper awareness to this often overlooked underdogs in KLSE – REITs. My gratitude to Ms Teh for coordinating the interview below with Dato’ Jeffrey Ng. I am really impressed by the investor relations aspect of SunREIT.
LCF: Elaborate on the resiliency of Sunway REIT regardless of economic cycle with its diversified, sponsor-backed assets portfolio?
Dato’ Jeffrey Ng: Sunway REIT is essentially a retail-focused REIT with 67% of its portfolio is in retail asset measured by assets value. The other sub-sectors that Sunway REIT operates in are hospitality, office and others (healthcare) (as shown in chart 1)
Chart 1: Portfolio of Sunway REIT by Asset Size (included acquisition of SMC)
Source: Sunway REIT
Inevitably, the three sectors where Sunway REIT’s properties are operating in are susceptible to economic cycles. The sensitivities of the performance of these assets to economic cycles may vary from one sub-sector to another. In our view, brandname, management’s skills, credibility and track record as well as market positioning do contribute to the level of resiliency of the assets.
Assets located within the captive market of Sunway Resort City (“SRC”) enjoy higher level of resiliency benefitting from the vibrancy of the township and cross-synergy amongst the assets and various activities (residential, retail, commercial, hospitality, education, healthcare, leisure) within the township. For eg. The flagship asset, Sunway Pyramid Shopping Mall has enjoyed CAGR rental growth of 6.3% for the last 12 years supported by high occupancy rate.
On 9 October 2012, Sunway REIT announced the proposed acquisition of Sunway Medical Center (“SMC”) and obtained unitholders approval on 18 December 2012. The acquisition is expected to be completed by end December 2012.
Through the acquisition of SMC, Sunway REIT is adding yet another quality asset into the portfolio. More importantly, SMC is a leading private healthcare center that is located within the township of SRC alongside with 4 other Sunway REIT’s assets.
The inclusion of SMC will increase the total assets under management for Sunway REIT from RM4.63 billion to RM4.95 billion and diversify the income stream of Sunway REIT. In addition, Sunway REIT has entered into a masterlease arrangement with the hospital operator for an initial term of 10 years with the option to renew for another 10 years on a pre-agreed initial rental of RM19 million for the first year and annual incremental rental of 3.5% for the remaining 9 years of the initial term. Under the masterlease structure, Sunway REIT enjoys certainty in income stream with a guaranteed incremental rental reversion. By virtue of the long-term lease structure, the weighted average lease expiry is expected to increase from 2.09 years (as at 31 October 2012) to 2.56 years.
LCF: How does Sunway REIT uniquely position itself among other new players in retail focused M-REIT sector, such as Pavilion REIT and IGB REIT?
Dato’ Jeffrey Ng: At the REIT level comparison, Sunway REIT is retail focused REIT with 63% of the portfolio in the retail segment measured by assets size. The retail exposure for Pavilion REIT is as high as 96% of its asset value (as at 31 December 2012) whilst IGB REIT is a pure retail REIT.
Sunway REIT primarily differentiates itself through the level of diversification of its assets portfolio. The portfolio does not only enjoy the robust growth from the retail sub-sector but also income from other sub-sectors such as hospitality, office and healthcare.
The strength of Sunway REIT lies in the core assets located in vibrant townships masterplanned and developed by our Sponsor. For example, in Sunway Resort City (“SRC”), our various assets in these townships enjoy the cross-synergistic benefits. The township factor is definitely another unique differentiating feature of Sunway REIT.
LCF: Share prices of retail M-REITS have been surging as of late, compressing yields. Comment on this trend and whether retail REIT like Sunway REIT is still a viable choice for retail investors given the fact it is overvalued now?
Dato’ Jeffrey Ng: Admittedly, unit prices of M-REITs have surged of late resulting in distribution yields compression. We reckon the demand for M-REITs especially the Top-4 in terms of market capitalization (IGB REIT, Pavilion REIT, Sunway REIT and CMMT) was driven by numerous underlying factors as stated below. The average distribution yields for M-REITs have been compressed from 7.1% in 2011 to 6.2% in 2012. Similarly, the top 4 retail REITs (by market capitalisation) were trading at distribution yields of 5.7% in 2011 (excluding IGB REIT as it has not been listed in 2011) and has been compressed to the 5% mark in 2012.
We are of the view that there are factors supporting investors’ interest in M-REITs. Amongst the factors are:
- Growing prominence of M-REITs in the region.
- Equity market uncertainties due to global uncertainties
- Low interest rate environment where there is yields differential between M-REITs and risk free investment (FD & MGS). This is more apparent for foreign investors that compare the yield differential between M-REITs and Fed Rate.
- Introduction of Private Retirement Scheme (“PRS”) may lead to portfolio monies sourcing for high yielding investments.
The interest may potentially surprise us on the upside more so if M-REITs are able to demonstrate growth, organically or by way of acquisition, thus strengthening their income base.
With our growth strategies put in place, Sunway REIT is determined to grow its assets portfolio and income stream through active acquisitions, asset enhancements and capital management initiatives.
LCF: With regards to #3 above, seemingly the only option now is increase DPU to maintain or increase yield. If so, what are the strategies employed by property manager to achieve this going forward?
Dato’ Jeffrey Ng: Distribution yield is a function of DPU and unit price. Improving yields essentially refer to increase in DPU assuming unit price remains unchanged. Increase in DPU can be achieved through organic, inorganic growth and proactive capital management.
Organic growth is achieved through asset enhancement initiatives and asset management initiatives (eg. Rental reversion, conversion of common areas into lettable area, space reconfiguration, planned and ongoing refurbishments, etc). Inorganic growth refers to acquisition growth leading to new income stream. We believe that growth by acquisition definitely offer higher growth as opposed to merely relying on organic growth which in turn translates into higher DPU growth to unitholders.
The prevailing accommodative interest rate environment presents M-REITs the opportunities to enjoy a period of lower cost of debt. REITs may exploit such opportunity to restructure their existing loans to reflect the prevailing low interest rate regime. The lowering of cost of debt will results in savings in interest expense where the savings will flow directly into the distributable income to unitholders and enhance the DPU.
LCF: What is Sunway REIT’s strategy in managing borrowings? As in, what determines the percentage of fixed and floating rate mix?
Dato’ Jeffrey Ng: Sunway REIT adopts a proactive stance in capital management. We have proactively embarked on a capital management initiative in 2012 to restructure our existing loans, thus lowering its average cost of debt from 4.45% (as at 30 June 2012) to 3.78% as at (31 October 2012). The savings in interest expense flows directly into distributable income for unitholders.
The fixed versus floating rate ratio for Sunway REIT stood at 45:55. It is our strategy to allow half of the debt on floating basis to exploit the low interest rate regime. Should there be any interest rate cut in 2013, the floating rate portion will be able to take advantage of the drop in interest rate. On the contrary, when the interest rate trend moves up, the management will lock in the rate through interest rate swap and switch the floating portion into fixed rate.
LCF: What is the current sentiment of local and foreign institutional investors in SUNREIT? As in, are the buying / holding / selling?
Dato’ Jeffrey Ng: From our numerous investors meetings we’ve had over the last 2-3 months arising from our corporate exercise for the acquisition of SMC and the placement of new units, investors are showing strong interest in Sunway REIT. This is further affirmed by the overwhelming support from the unitholders who voted in favour for the various resolutions. Besides voting in favour of the resolutions, investors have indicated keen interest in participating in the placement exercise. Ultimately, the acid test will be during the bookbuilding and pricing exercise.
In addition, we have and are still enjoying foreign institutional investors’ request for management meetings and site visits.