Malaysia's Sunway Reit starts IPO marketing

Sunway Real Estate Investment Trust, a Malaysian owner and operator of shopping malls and other commercial real estate, has started pre-marketing for an initial public offering that seeks to raise about $500 million. If successful, it will be the largest Reit in Malaysia in terms of asset value and the largest IPO in Malaysia this year.

While stockmarkets around the world remain volatile and quick to react to every bit of bad news, sources say this is not a bad time to launch a Reit, given the defensive qualities of the sector, including steady dividends and the fact that they are only allowed to own finished income-yielding properties. Within the Asia-Pacific region, Malaysia is also viewed as a low beta country.

"Put together, based on historical data, a low beta sector in a low beta country suggests that Sunway Reit will provide a good place to hide during times of volatility," notes one syndicate research report.

However, the report also lists reasons other than just a "place to hide" for buying the new Reit, including: a diversified asset portfolio and tenant base; a tried and tested management; a proven track record -- it remained profitable and was even able to raise rents during the latest financial crisis; robust organic growth from existing assets as well as a potential pipeline of assets from its sponsor for future growth; and the fact that it works as a proxy for Malaysia's mass retail market. According to Business Monitor International, retail sales are expected to grow at a compound annual growth rate of close to 15% in 2006-2013.

It will also be the most liquid Reit in Malaysia, according to the report, which is another key consideration for large funds at times of uncertainty. They don't want to be forced into holding something because any attempt to sell in size will have a significant negative impact on the price.

"At last, Malaysia will have a large, liquid Reit. We estimate Sunway Reit's free-float will be 73% of the entire current Reit sector added together," the report says.

Sunway Reit, which is being spun off from Sunway City, one of Malaysia's largest property developers, will sell 61.7% of its share capital in the form of approximately 1.65 billion new units. In case of strong demand there is also an overallotment option of 87.1 million units, or 5.3% of the base deal, although those units will all be secondary. Of the base deal, 91.9% will be targeted at institutional investors, while the remaining 8.1% will be offered to retail investors in Malaysia.

And the trust is off to a good start. When it started pre-marketing on Monday this week, it told investors that it already had commitments from three cornerstone investors to buy about 20% of the institutional tranche (at least 308 million units). This should help attract other investors as well, particularly since the cornerstones are the bluest of blue-chips when it comes to investments. For international investors, the most well-known will be the Government of Singapore Investment Corp (GIC), but domestic investors will be just as familiar with the other two: Malaysian pension funds Employees Provident Fund (EPF) and Permodalan Nasional Berhad (PNB). GIC has agreed to a six-month lock-up, but the other two are free to sell their units as and when they please.

The price range won't be set until closer to the start of the formal roadshow in a couple of weeks, but based on the expected earnings, it is estimated that the Reit will pay a yield of about 6%-7%. This compares with a weighted average gross forward yield of about 8.6% for other Malaysian Reits, although the other trusts all have much smaller market capitalisations and are also very illiquid, meaning they may not be the best comparisons, one source says.

In Singapore, the directly comparable Reits are trading at an average yield of about 6.1%, according to a source. Including the entire Reit universe, Singapore Reits trade at a yield of about 7.7%.

Sunway Reit has committed to pay out at least 100% of its distributable earnings for the fiscal years to June 2011 and June 2012, and intends to distribute at least 90% thereafter.

Sunway Reit currently owns eight properties, split between the retail, hospitality and office sectors. Based on analyst estimates it will have a total asset value of about M$3.7 billion ($1.1 billion). Its largest asset is the Sunway Pyramid Shopping Mall, which accounts for 62% of the asset value.

The formal roadshow and bookbuilding will kick-off in the week of June 14 and the pricing is expected the following week. The roadshow will visit Asia and Europe, but there will be no marketing to onshore US investors.

Credit Suisse and RHB are joint sponsors, global coordinators, and bookrunners and are joined at the bookrunner level by CIMB, HSBC, J.P. Morgan and Maybank.

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