RAM Ratings reaffirms ratings of Axis REIT’s RM110 million First Sukuk

Published on 25 June 2013

RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad’s (“ARSB” or “the Issuer”) RM110 million Class A to Class D Sukuk under its First Sukuk Issue (collectively referred to as, “the First Sukuk”); all the ratings have a stable outlook.

ARSB is a special-purpose vehicle set up by Axis Real Estate Investment Trust (“Axis REIT”) as a funding conduit for its 15-year Islamic Medium-Term Notes Programme of up to RM300 million (“Sukuk Programme”). Supported by a portfolio of 3 industrial and industrial-office mixed properties and 1 retail property (“the Properties”), the First Sukuk represents the initial issuance under the Sukuk Programme using the Islamic principle of Murabahah.

The ratings reflect our view on the quality of the Properties, which is deemed strong given their strategic locations with good access to major highways and ports.  Located in the Klang Valley and Johor Bahru, the Properties are fully occupied by established tenants that are bound by standard- to long-lease terms. This is reflected by the steady increase in their net property income (“NPI”) in 2012, which is in line with our assumptions. In this regard, RAM has maintained the Properties’ adjusted valuation, which result in loan-to-value ratios of 43.7%, 46.0%, 48.3% and 50.6% and debt service coverage ratios of 2.1 times, 2.0 times, 1.9 times and 1.8 times; these correspond with the respective ratings of the Class A to Class D Sukuk.

The ratings are also supported by the transaction features, including the various designated accounts to control cash inflows and outflows, trigger mechanisms to kick-start recovery through early disposal of the Properties in order to redeem outstanding sukuk by their legal maturity, and a 12-month periodic profit payment reserve for liquidity purposes. As part of the trigger mechanisms, the transaction also imposes minimum performance covenants at the levels of both ARSB and Axis REIT. For FY Dec 2012, the finance service coverage ratios of both entities came up to a healthy 4.04 times and 3.84 times, respectively.

The above strengths are moderated by significant tenant-concentration risk as 3 out of the 4 Properties are occupied by single tenants, and account for a respective 90% and 88% of their combined net lettable area (“NLA”) and market value. There is also limited asset diversity; industrial properties constitute a respective 80% and 70% of the Properties’ total NLA and market value. The risk of income loss is material should any of the tenants choose to exit or not renew its existing tenancy agreement. That said, almost 60% of the portfolio’s sustainable NPI is backed by fixed long-term leases; the expected cashflow from the lengthy leases will amply cover the profit obligations under the transaction should there be any temporary void arising from near-term lease maturities, i.e. for Axis Vista and Axis Steel Centre. Nonetheless, we expect the property manager’s tenant-retention strategies as well as the Properties’ affordable rental rates and strong property profile to minimise the non-renewal risk of the expiring leases, or the possible time lag in finding replacement tenants. The fact that the tenants are established corporations also provides us some degree of comfort with respect to consistent and timely payment of their lease obligations.

Media contact

Tan Han Nee

603 – 7628 1023

hannee@ram.com.my