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

Published on 30 Aug 2017.

RAM Ratings has reaffirmed the P1 rating of SunREIT Capital Berhad’s (SunREIT Cap or the Issuer) CP Programme of up to RM1.6 billion in nominal value. SunREIT Cap is the financing conduit of Sunway Real Estate Investment Trust (Sunway REIT or the REIT), and has no operations of its own. The issue rating is supported by the creditworthiness of the REIT, despite the available collateral and underwriting for the CP Programme.

The reaffirmation of the P1 rating reflects our view that the REIT’s portfolio of assets will continue to perform satisfactorily despite the challenging business environment. During the period under review, the REIT’s performance was within expectations, underpinned by its quality and diverse assets as well as the management’s asset-enhancement initiatives. These factors help moderate the geographical- and asset-concentration risks – a respective 72% and 78% of Sunway REIT’s assets (based on market value as at 30 June 2016) and net property income (NPI) (based on 9M FY Jun 2017 figures) are derived from assets within Sunway City. The REIT also benefits from an active sponsor with strong asset expansion and redevelopment initiatives, which may provide a better asset pipeline and sustainable yields.

In fiscal 2016, Sunway REIT’s portfolio yield improved to 5.81% (fiscal 2015: 5.47%), mainly driven by its core retail segment, which posted a 15.1% y-o-y top-line growth, with a stable NPI margin of 70%-71%. As the retail segment remains pressured by weak consumer sentiment and keen competition, we expect rental reversion to moderate. Nonetheless, we envisage that the REIT’s retail segment will remain its key growth driver and help maintain its resilient cashflow.  

In 9M fiscal 2017, the performance of the REIT’s hospitality segment was affected by cashflow disruptions from refurbishment works. This was, however, partially moderated by improved occupancy rates due to the management’s ongoing marketing and pricing strategies amid the competitive landscape.  On the other hand, some of the REIT’s office assets suffered from low occupancy rates following the departure of major tenants. We expect a longer recovery period before any significant pick-up in the occupancy levels of these office assets given the current oversupply and soft demand. That said, we do not expect this to significantly affect the REIT’s performance as the office segment only accounted for 4.2% of the REIT’s total NPI in 9M fiscal 2017. 

Sunway REIT’s debt level remained elevated at RM2.32 billion as at end-March 2017, with respective leverage and debt-to-revenue ratios of 0.35 and 4.46 times (end-March 2016: 0.33 and 4.23 times). In spite of the higher debt level, its fixed-charge cover improved from 3.95 to 4.00 times, supported by its healthier operating profit before depreciation, interest and tax. Given the management’s plans for its upcoming development next to Sunway Carnival Shopping Mall, we envisage its debt-protection metrics to weaken over the next few years as the development project may introduce some cashflow volatility. Nonetheless, we expect its liquidity profile to remain commensurate with its P1 rating. 

As at end-March 2017, the annual rollover rate of the REIT’s debt maturities had declined to 91.39% (end-March 2016: 62.31%), with 82.8% or RM1.92 billion of its debts maturing within a year. However, we derive comfort from the knowledge that refinancing risk is moderated by the REIT’s proven ability to access various forms of capital – an undrawn RM220 million (based on the current underwritten limit) or RM720 million (based on the total CP limit) under the CP Programme, as well as RM89 million of available unencumbered assets. 

Listed on the Main Market of Bursa Malaysia, Sunway REIT is the second-largest Malaysian REIT by assets (RM6.69 billion as at end-June 2017). We note that 99% of the REIT’s assets (based on market value as at end-June 2017) are pledged to the CP Programme, providing an asset-to-debt cover of 2.72 times to the total issued CPs and pari passu debt load of RM2.17 billion as at end-March 2017.

 

Analytical contact
Evelyn Quek
(603) 7628 1095
huijiun@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my