Sunway REIT’s (SREIT) announced the disposal of 2 of its assets i.e. Sunway Medical Centre located at Bandar Sunway for RM430m to Sunway Medical Centre Sdn Bhd. We understand that these assets were acquired by the Trustee for Sunway REIT on 31 December 2012 for RM310m. They currently have carrying value of RM370m. As such, the Group is expected to recognise a gross gain on disposal of RM60m. The proceeds, we understand, will be redeployed for yield accretive investments as part of the Group’s plan towards Transcend 2027 targets (which among others include growing its portfolio size to RM14-15bn from RM9bn currently) in the next 12 months. However, if it could not identify suitable assets, it will instead utilise the proceeds to repay its borrowings, which will reduce its gearing from 37.2% to 34.0%. The Group estimates the lower gearing would save financing cost to the tune of c.RM17m per annum. Pending the completion of the deal which is expected by 1H23, we keep our earnings unchanged for now, though impact is likely to be minimal. Maintain Neutral with TP unchanged at RM1.55 as we believe the stock is fairly valued now given narrowing spreads due to expectation of more rate hikes.

• Property details. The assets are sitting on 2 parcels of leasehold lands. Currently, it has a 7-storey medical centre with a lower ground floor car park, an elevated car park and a convention centre known as “Sunway Medical Centre” (Tower A & B).
  The said assets were acquired by the Trustee for SREIT on 31 December 2012 for RM310m. The deal comes with a master lease agreement (MLA) for the lease of the assets for a 10-year term commenced on 31 December 2012, and due to expire on 30 December 2022. Under the MLA, SREIT has the option to extend the lease for a further 10-year term. With the execution of the SPA for the asset disposal, we understand that SREIT will still be receiving rental at the current annual lease rate pro-rated on a daily basis up to the completion date.

Source: PublicInvest Research - 30 Dec 2022