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RAM Ratings reaffirms P1(s) rating of debt facility issued by Sunway REIT’s financing conduit

Published on 22 Apr 2022.

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RAM Ratings has reaffirmed the P1(s) rating of SUNREIT Capital Berhad’s (the Issuer) RM3.0 bil Commercial Papers (CP) Programme. 

The reaffirmation is premised on Sunway Real Estate Investment Trust’s (Sunway REIT or the REIT) adequate credit metrics 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 under the CP Programme.

The suffix (s) to the issue rating incorporates the strong likelihood of recovery by way of liquidation of collaterals pledged to the CP Programme in the event of default. As at end-December 2021, the REIT’s combined asset valuation was 7% higher at RM8.49 bil. The CP Programme had a collateral cover of 2.30 times as at the same date, markedly above the 1.67 times required under RAM’s rating methodology for well-secured debt.

Sunway REIT’s diversified prime quality assets, favourable tenant profile and strong financial flexibility kept its financials in check. The REIT performed better than expected in CY 2021 amid a challenging operating environment, thanks to the rebound in its last quarter results and a full-year contribution from The Pinnacle Sunway. For the financial period ended 31 December 20211 , the average occupancy rates of the REIT’s retail and office segments improved to a respective 97% and 84% (FY Jun 2020: 95% and 78%) although at the expense of the rental reversion rate in the short term. 

Tenant support measures like rental rebates, more flexible lease terms, marketing incentives and third-party financing helped keep Sunway REIT’s tenancy renewal rate above 96%. Its overall portfolio weighted average lease expiry reduced to 4.36 years as at end-December 2021 (end-June 2020: 5.94 years) but is still longer than that of comparable retail-centric REITs.

The REIT’s earnings will likely recover gradually as consumers regain confidence in visiting malls and travel picks up as international borders reopen. Spending sentiment will stay cautious amid virus infections and inflationary pressure which remain a threat to the economy. The embattled hotel segment should perform better as the market recovers and Sunway Resort Hotel gradually reopens post renovation in the first half of 2022. Supported further by scheduled annual rental reversions of the REIT’s services and industrial & others segments, the slated opening of Sunway Carnival Shopping Mall in 2Q 2022 and other ongoing asset enhancement initiatives, Sunway REIT should be able to achieve 80%-90% of its pre-pandemic net property income for fiscal years 2022 and 2023, according to our sensitivity test.

Total adjusted debts stayed elevated at RM3.49 bil as at end-December 2021, although leverage was a milder 0.38 times (end-June 2020: RM3.53 bil and 0.42 times) given that the REIT’s last asset purchase and capital expenditure were largely funded by equity and available cash. The more favourable repayment terms of a revolving loan facility that made up 46% of the REIT’s borrowings as at end-December 2021 resulted in an improved debt maturity profile. While interest rate risk is still significant as almost two thirds of Sunway REIT’s debts are floating rate borrowings, these allow the REIT to benefit from interest rate adjustments. Stronger earnings and lower finance costs led to an improved fixed charge coverage ratio of 2.56 times in CY 2021 (CY 2020: 2.18 times). 

Sunway REIT benefits from its close linkage to its sponsor, Sunway Berhad, which has a healthy pipeline of properties that can be injected into the REIT to sustain its growth and yields. The REIT’s Transcend 2027 strategic roadmap envisages its asset value to increase to RM14 bil-15 bil by 2027. The REIT plans to raise the contribution of the services and industrial & others segments to 20%-30% of total property value (end-December 2021: 12%) and diversify into foreign real estate markets, which will constitute 10%-20% of total property value. This could lead to better asset yields and capital appreciation although leverage may be higher. We derive comfort from the REIT’s moderate risk appetite and believe it will remain guided by internal policies.

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1 As Sunway REIT has changed its financial year end from 30 June to 31 December, FY Dec 2021 is an 18-month period from 1 July 2020 to 31 December 2021.

 

Analytical contacts
Liew Kar Ling    
(603) 3385 2586
karling@ram.com.my

Tan Han Nee
(603) 3385 2529
hannee@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2022 by RAM Rating Services Berhad



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