Published on 10 Feb 2021.
RAM Ratings has reaffirmed the P1(s) rating of SUNREIT Capital Berhad’s (the Issuer) RM3.0 bil Commercial Papers (CP) Programme (the Programme). The reaffirmation of the issue rating underscores our view of Sunway REIT’s (the REIT) adequate credit profile, given that the Issuer – as the REIT’s wholly owned financing vehicle with no operations of its own – relies on inter-company payments from the REIT to meet its obligations. Apart from Sunway REIT’s support, the suffix (s) to the rating also reflects the strong likelihood of recovery by way of liquidating the collateral pledged to the Programme in the event of default. As at end-September 2020, the CP were backed by a collateral cover of 2.25 times – markedly above the 1.67 times required under RAM’s rating methodology for well-secured debts.
We expect Sunway REIT’s diversified prime quality assets, favourable tenant profile and strong financial flexibility to help it weather near-term stress on its operating performance inflicted by the Covid-19 pandemic. Sunway REIT also benefits from close linkage to its sponsor, Sunway Berhad, which has a healthy pipeline of properties that could be injected into the REIT to help buffer the impact of asset devaluation and weaker debt protection metrics.
Early lease termination at Sunway REIT’s retail assets was kept minimal owing to the portfolio’s low tenant concentration, manageable annual lease expiries, as well as various support and tenant retention measures. While rental rebates granted to the REIT’s retail and hospitality tenants and a slightly negative rental reversion rate led to a 30.8% y-o-y decline in its revenue in Jul-Sep 2020, the average occupancy rate of its retail assets stayed strong at 94%, unchanged from the previous corresponding period. Correspondingly, Sunway REIT’s NPI margin shrank to 64% for Jul-Sep 2020 (FY Jun 2019-FY Jun 2020: 75%-76%) and its pre-tax profit fell 60% y-o-y during the same period.
As at end-September 2020, Sunway REIT’s total debts rose slightly to RM3.53 bil from RM3.28 bil a year earlier, attributable to funds raised to refurbish Sunway Resort Hotel and to pay the deposit for the acquisition of The Pinnacle Sunway. Coupled with reduced earnings, its debt-to-revenue and fixed charge coverage ratios recorded at 8.22 times and 1.89 times, respectively. The weaker financial metrics are compensated by the REIT’s demonstrated ability to raise funds through a private share placement exercise in October last year despite the sluggish market sentiment.
Despite the REIT’s concentrated short-term debt profile, we view its rollover and refinancing risk as low, given its proven ability to access various sources of funding. This includes the CP Programme, which is underwritten by a financial institution for the tenure of the facility, and an unrated MTN Programme that is backed by a refinancing commitment from a financial institution. Although Sunway REIT may gear up in the near term to fund planned asset enhancement and expansion initiatives, we believe it would remain guided by its internal leverage threshold of around 0.40 times, as shown in the past.
While the extended Movement Control Order (MCO 2.0) allows all economy sectors to reopen, social distancing guidelines and fear of contagion will continue to deter recovery in footfalls at retail and hospitality properties, including those owned by the REIT. As a result, we envisage a delay in the recovery of its earnings and even potential increase in tenant dropouts. The extended targeted moratorium on loan repayments and the government’s latest PERMAI relief package may, however, relieve some of the pressures. Under our stress test where we assumed that the REIT would achieve only 60%-70% of its pre-pandemic net property income for the FY Jun 2021-FY Jun 2022 period, it is still expected to sustain credit metrics appropriate to support the issue rating.
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Ratings on SunREIT Capital Berhad