Published on 12 Feb 2020.
RAM Ratings has reaffirmed the P1(s) rating of SUNREIT Capital Berhad’s (SUNREIT Cap or the Issuer) RM3.0 bil Commercial Papers (CP) Programme (the Programme). The suffix (s) to the issue rating indicates that the enhanced rating is reflective of Sunway Real Estate Investment Trust’s (Sunway REIT or the REIT) credit profile, including the strong likelihood of recovery by way of crystallisation of securities pledged to the Programme in the event of default. As at end-September 2019, the CP holders had a collateral cover of 2.24 times, well above the 1.67 times required under RAM’s criteria for rating well-secured debt. The suffix also reflects the Issuer’s position as a wholly owned financing vehicle of Sunway REIT with no operation of its own, relying on inter-company payments to meet its obligations.
The rating reaffirmation is premised on the REIT’s resilient performance during the review period, despite oversupply concerns in the retail and office space segments. This is underpinned by its diversified portfolio of above-average and seasoned assets, with a favourable tenant mix and low tenant concentration, as well as the management’s keen asset enhancement initiatives. Sunway REIT’s diversified portfolio currently consists of retail assets, hospitality assets, office assets, healthcare asset, industrial asset and education asset. These factors help to moderate some degree of geographical concentration risk given that the majority of the REIT’s assets are located in Sunway City.
In FY Jun 2019, the REIT’s revenue and net property income (NPI) rose 3.55% and 4.77% y-o-y to RM580.30 mil and RM441.97 mil, respectively, due to improvements across all segments, albeit moderated by the disruption of earnings as a result of refurbishment work at Sunway Resort Hotel & Spa. Revenue and NPI in 3M FY Jun 2020 saw slightly higher y-o-y growth, mainly attributable to the new contribution from Sunway university & college campus.
The abovesaid strengths are moderated by Sunway REIT’s high debt level. As at end-September 2019, debts had risen to RM3.28 bil from RM2.91 bil a year earlier, owing to the acquisition of Sunway university & college campus. The acquisition was funded via borrowings and perpetual securities issued under the REIT’s Perpetual Note Programme (Perp). Given that the Perp qualifies for high equity credit in accordance with RAM’s Criteria of Equity Credit for Corporate Hybrid Securities, the REIT’s leverage and debt-to-revenue ratios stayed stable at 0.40 times and 5.27 times, respectively (end-September 2018: 0.39 times and 5.07 times). Higher finance costs as a result of added borrowings had weakened the REIT’s fixed charge coverage ratio to 3.07 times as at the same date (end-September 2018: 3.40 times). In view of Sunway REIT’s asset expansion target, we expect its debt level to stay elevated, although likely to be kept in check by the REIT’s internal leverage threshold of around 40%.
All the REIT’s outstanding debts are due within a year as they are short-term in nature. This, coupled with the growing portion of floating rate debt, further exposes it to liquidity risk and the risk of interest rate fluctuations. We, however, view these risks as manageable, considering the REIT’s proven ability to access various forms of capital, including the Programme which is underwritten by a financial institution for the duration of the facility.
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Ratings on SunREIT Capital Berhad