SunREIT to generate solid earnings and cash flow in near term, says RAM

KUALA LUMPUR: SunREIT Capital Bhd, the second-largest Malaysian real estate investment trust (REIT) by assets, is expected to generate solid earnings and cash flow in the near term, underpinned by its key assets’ resilient track record, minimum guaranteed rental income from its hospitality assets and the triple net lease from its recent acquisition of the Sunway Medical Centre, said RAM Rating Services Bhd in a statement.

“The retail segment remains the largest income generator for SunREIT, contributing to 66% of the REIT’s net property income (NPI) in 9MFY14 (nine-month period ended March 31, 2014).

“Sunway Pyramid — the REIT’s crown jewel — accounted for 59% of its NPI in 9MFY14 and also made up 52% of its portfolio’s market value based on the last appraised value as at June 30, 2014.”

RAM said the timely rental reversions for Sunway Pyramid and Sunway Carnival had resulted in higher average rental rates and these helped offset the temporary loss of income caused by the cessation of Sunway Putra Mall’s operations.

SunREIT is a special-purpose vehicle set up by Sunway REIT as a funding conduit to undertake a fundraising exercise on a secured basis.

RAM noted that although Sunway REIT is still exposed to the vagaries of the hospitality and office sectors, the REIT’s portfolio exposure to this segment only constituted 9% of its NPI for 9MFY14.

“In the near term, despite SunREIT’s significant reliance on a single asset, its diversified tenant mix minimises concentration risk to some extent. Additional rental income from Sunway Putra Place (acquired by SunREIT in 2011 for RM522 million) is also anticipated to bolster SunREIT’s earnings once its refurbishment is completed,” said the ratings agency.

The agency said it expects the REIT’s current portfolio line-up, including Sunway Putra Place, to support its financial performance.

On the acquisition front, RAM said the REIT’s leverage ratio of 32% allows room for debt-financed acquisitions of up to RM1.9 billion at the regulatory ceiling of 50%, but it does not envisage SunREIT to gear up aggressively.

Instead, it expects its gearing ratio to stay moderate at about 0.6 times.

Meanwhile, RAM also reaffirmed SunREIT’s enhanced rating of P1(s) for its RM1.6 billion nominal value commercial paper (CP) programme. The rating enhancement was accorded after considering the collateral for the CP programme, as well as the full underwriting commitment from Public Bank Bhd.

Based on the latest valuation of the pledged collateral, which is equivalent to 87% of the REIT’s last appraised portfolio value, the CP holders will have an asset-to-debt ratio cover of 2.85 times, which exceeds the minimum security cover of 1.67 times. Sunway REIT’s credit profile was also taken into consideration for the rating.

This article first appeared in The Edge Financial Daily, on July 9, 2014.