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.

Published on 05 July 2016

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 is premised on Sunway Real Estate Investment Trust’s (Sunway REIT or the REIT) resilient earnings, underpinned by its stable of established and diverse assets, extensive tenant base and the management’s asset-enhancement initiatives. These factors help moderate the REIT’s geographical- and asset-concentration risks; the majority of Sunway REIT’s assets are located in Bandar Sunway and have been the key drivers (over 75%) of the REIT’s top line and net property income (NPI), generating a consistent implied NPI yield of 5.2% in 9M fiscal 2015 and 2016. 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 2015, Sunway REIT’s portfolio yield declined from 5.81% to 5.47%, mainly due to the weaker office and hotel segments as well as disruptions to the income flows from Sunway Putra Mall (SPM) and Sunway Putra Hotel during their refurbishment. Nonetheless, the REIT’s annualised portfolio yield recovered to 5.9% in 9M fiscal 2016, with contributions from SPM and healthier NPI for all hotels except Sunway Hotel Seberang Jaya. The core retail segment maintained a 10.6% y-o-y top-line growth in fiscal 2015 and 15.7% in 9M fiscal 2016, with stable NPI margins of 70%-71%. As retail sales are pressured by weak consumer sentiment, however, we expect lower rental reversion rates, along with potentially higher rental rebates and longer rent-free periods, which will in turn affect top-line growth and slightly compress margins in the near term.

The REIT’s office assets, mainly Sunway Putra Tower and Sunway Tower, continued to suffer from significant voids in occupancy and low lease-renewal rates, although they accounted for only 3.7% of the portfolio’s total NPI in 9M fiscal 2016. The REIT’s overall lease maturities remained well spread out, with a respective 3.8%, 22.0%, 12.7% and 52.4% of the total net lettable area expiring in fiscal 2016, 2017, 2018 and after 2018 - thereby providing some degree of sustainability to the REIT's earnings.

Sunway REIT’s RM2.16 billion debt load remains at an elevated level and higher than those of its peers, although its leverage and debt-to-revenue ratios had eased slightly to a respective 0.33 and 4.23 times as at end-March 2016 (end-March 2015: 0.35 and 4.63 times). Weaker contributions from the office segment and higher financing cost had also weakened the REIT’s fixed-charge cover to 3.97 times (end-March 2015: 4.60 times), although its operating cashflow debt coverage held steady at 0.16 times. With its portfolio value getting closer to its RM7 billion target by fiscal 2017 and a lower-than-expected capex (RM130 million), its leverage ratio should remain below 0.40 times. Nonetheless, the REIT may post slightly weaker debt-protection metrics in the near term given its potentially flatter top-line growth.

The annual rollover rate of the REIT’s debt maturities had deteriorated to 62.31% as at end-March 2016 (end-March 2015: 47.52%), with 35.7% of its RM2.16 billion debt load comprising the CPs issued under the Programme and the remaining debts falling due within the next 2 years. 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, RM461 million of available unencumbered assets and an undrawn amount of RM328 million under the CP Programme (based on current underwritten limit).

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 by assets (RM6.38 billion as at end-March 2016). The issue rating remains solely supported by the creditworthiness of Sunway REIT, notwithstanding the available collateral and underwriting for the CP Programme. We note that 86% of the REIT’s assets are pledged to the CP Programme, providing an asset-to-debt cover of 2.64 times to the total issued CPs and pari-passu debt load of RM2.06 billion as at 31 March 2016.

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