RAM Ratings reaffirms P1 rating of Sunway REIT's debt facility, issued by financing conduit

Published on 07 July 2015

RAM Ratings has reaffirmed the P1 rating of SunREIT Capital Berhad’s (the Issuer) CP Programme of up to RM1.6 billion in nominal value. The reaffirmation reflects our view on the REIT’s improved credit strength and resilient performance, underpinned by the continually improving quality of its portfolio, diverse assets, extensive tenant base and the management’s asset-enhancement initiatives. These factors help moderate the REIT’s geographical and asset concentration; 74% of Sunway REIT’s assets are located in Bandar Sunway (based on the latest market valuation) and approximately half of its net property income in 9M fiscal 2015 is derived from Sunway Pyramid. Sunway REIT also benefits from an active sponsor with strong asset expansion and redevelopment initiatives, which provide a better asset pipeline and sustainable yields. 
In fiscal 2014 and 9M fiscal 2015, Sunway REIT’s annualised distribution yields remained largely stable at 5.8% and 5.7%, respectively (fiscal 2013: 5.4%), despite lower portfolio yields. The lower yields were mainly attributable to the waiver of the guaranteed minimum rental payment from Sunway Putra Hotel amid the disruptions from Sunway Putra Mall’s major redevelopment (concluded with its soft opening in May 2015), and loss of income from Sunway Putra Mall. The REIT’s office assets had also not been spared from the oversupply situation as 2 key tenants, which collectively accounted for 3.8% of the portfolio’s net rental in fiscal 2014, had either relocated or downsized. Nonetheless, this will likely be cushioned by a full year’s earnings contribution in fiscal 2016 from the recently acquired Wisma Sunway and Sunway Hotel Georgetown, as well as the refurbished Sunway Putra Mall, with an expected occupancy rate of 70%-80% by 4Q 2015. Coupled with the healthy weighted-average lease to expiry of 2.2 years as at end-March 2015, we remain positive on the REIT’s earnings visibility in the near term.
Meanwhile, credit concerns centre on Sunway REIT’s higher-than-average debt level and lumpy debt-maturity profile. Its leverage and debt-to-revenue ratios of a respective 0.35 and 4.63 times as at end-March 2015 are at the higher end of the appropriate range for its rating, and may rise further to fund organic growth and asset acquisition. However, potential post-refurbishment capital appreciation or an enlarged equity base from future share placements should help moderate its leverage. The REIT’s fixed-charge cover and operating cashflow debt cover of 4.60 and 0.15 times, respectively, in 9M fiscal 2015 (fiscal 2014: 4.65 and 0.17 times), should stay manageable in the near term.
The REIT’s debt-maturity profile is reflected by its fairly high annual rollover rate of 47.52% as at end-March 2015, with 34.4% of its RM2.09 billion debt load comprising the CPs issued under the Programme; the remaining debts will mature in fiscal 2018. That said, annual rollover risk for the CPs is mitigated by Public Investment Bank Berhad’s full underwriting commitment, subject to a rating floor of P3(s). Refinancing risk is moderated by the REIT's proven ability to access various forms of capital, RM451 million of available unencumbered assets and an undrawn amount of RM225 million under the CP Programme.
SunREIT Capital 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 the second-largest Malaysian REIT in terms of assets (RM5.65 billion as at 31 March 2015). We have removed the suffix ‘s’ from the issue rating, which indicates that the rating is solely supported by creditworthiness of Sunway Real Estate Investment Trust (Sunway REIT or the REIT), notwithstanding the available collateral and underwriting facility for the transaction. We note that 85% of the REIT’s assets is pledged to the CP Programme, providing an asset-to-debt cover of 2.48 times to the total issued CPs and pari-passu debt load of RM1.95 billion as at 31 March 2015.

Media contact
Tan Han Nee
(603) 7628 1023
hannee@ram.com.my