RAM Ratings has reaffirmed the enhanced P1(s) rating of SunREIT Capital Berhad’s (the Issuer) Up To RM1.6 billion Nominal Value CP Programme.

Published on 08 July 2014

RAM Ratings has reaffirmed the enhanced P1(s) rating of SunREIT Capital Berhad’s (the Issuer) Up To RM1.6 billion Nominal Value CP Programme. The suffix “s” denotes the rating enhancement that has been accorded after due consideration of the collateral for the CP Programme, as well as the full underwriting commitment from Public Bank Berhad. Based on the latest valuation of the pledged collateral (equivalent to 87% of the REIT’s last appraised portfolio value), the CP holders will have an asset-to-debt cover of 2.85 times – well above the minimum security cover of 1.67 times. The rating is also notched up from the credit profile of Sunway Real Estate Investment Trust (Sunway REIT).
SunREIT is a special-purpose vehicle set up by Sunway REIT as a funding conduit for the CP Programme. Listed on the Main Market of Bursa Malaysia, Sunway REIT is currently the second largest Malaysian REIT in terms of total assets (RM5.4 billion as at 31 March 2014). SunREIT’s earnings and cashflow are expected to remain solid in the near term, underpinned by its key assets’ track record of resilient performance, the minimum guaranteed rental income from its hospitality assets and the triple net lease from its recent acquisition of Sunway Medical Centre. Additional rental income from Sunway Putra Place – once the refurbishment is completed – is envisaged to bolster the REIT’s earnings.
The retail segment remains the largest income generator for Sunway REIT, contributing 66% of the REIT’s net property income (NPI) in 9M FY Jun 2014 (FY Jun 2013: 66%). Sunway Pyramid – the REIT’s crown jewel – accounts for 59% of the REIT’s NPI in 9M FY Jun 2014 and makes up 52% of its portfolio’s market value based on the last appraised value as at 30 June 2013. Despite the REIT’s significant reliance on a single asset, its diversified tenant mix minimises concentration risk to some extent. Additionally, we believe there is limited downside risk from non-renewal of leases, based on Sunway Pyramid’s stellar operating track record as an established suburban mall.
Notably, the timely rental reversions for Sunway Pyramid and Sunway Carnival have resulted in higher average rental rates and helped offset the temporary loss of income caused by the cessation of Sunway Putra Mall’s operations. That said, Sunway REIT is still exposed to the vagaries of the hospitality and office sectors. While we are cautious about the weakness of the office sector, the REIT’s portfolio exposure to this segment only constituted 9% of its NPI for 9M FY Jun 2014. In the near term, we expect the REIT’s current portfolio line-up (including Sunway Putra Place) to support its financial performance.
From the outset, Sunway REIT had outlined its plans to enlarge its asset base from RM5.18 billion to RM7 billion over the next 2-4 years. Part of the REIT’s target for any acquisition is to ensure that the new asset will be yield-accretive, i.e. potential yields must be higher than its estimated annualised distribution yield of 6.2% for FY Jun 2014. While the REIT’s leverage ratio of 32% allows headroom for debt-financed acquisitions of up to RM1.9 billion at the regulatory ceiling of 50%, we do not envisage Sunway REIT to gear up aggressively. Taking into account the cost for the asset-enhancement initiatives, the REIT’s gearing ratio is expected to stay moderate at about 0.60 times while its operating cashflow debt coverage of between 0.14 and 0.17 times over the next 3 years is deemed adequate.

Media contact
Lee Sook Wei
(603) 7628 1017
sookwei@ram.com.my