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

Published on 12 August 2015

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, 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 perpetual Islamic MTN Programme of up to RM3 billion (the Sukuk Programme). The First Sukuk – the first issuance under the Sukuk Programme – is backed by a portfolio of 3 industrial and industrial-office mixed properties and 1 retail property (the Secured Properties).
The ratings remain supported by commensurate loan-to-value (LTV) ratios and stressed debt-service coverage ratios (DSCRs), based on our assessed sustainable value of the Secured Properties and structural support for the transaction. We expect the actual net property income (NPI) of these assets to continue meeting its sustainable level, despite a rental adjustment in 2014. While portfolio NPI of RM20.1 million in 2014 was lower y-o-y, it remains close to our assumed NPI of RM20 million. In 1Q 2015, the average portfolio occupancy rate stood at 100% (2014: 98.7%).
While portfolio value increased to RM311 million as at end-March 2015 from RM291.8 million a year earlier (primarily a result of an upward revaluation of the Axis Vista property following the local council’s decision to rezone it from an industrial to a limited commercial zone), we have maintained our initial assumptions and assumed a portfolio adjusted value of RM217.3 million. This is supported by expected rental revisions for the respective properties, the portfolio’s longer-than-average lease terms, and our view  that supply of comparable assets in Selangor is currently limited. Consequently, the discount to market value of the portfolio is larger at 30.1% from 25.5% previously.
The ratings are, however, moderated by limited asset diversity and significant tenant-concentration risk, as 3 out of the 4 Secured Properties are single tenanted, with 2 of the properties contributing close to 60% of gross rental revenue. These twin factors expose the transaction to the cyclicality of the industrial-property segment and the risk of significant income loss should any of the tenants’ relocation result in protracted vacancies. Nonetheless, the fixed long-term tenancies are expected to provide cashflow visibility over the medium term. For FY December 2014, the collective NPI of the 2 Secured Properties with fixed long-term tenancies amounted to almost 2.50 times of the transaction's profit obligations.
To further ensure adequate servicing of ongoing profit obligations, the transaction imposes minimum performance covenants on ARSB (as the Issuer) and Axis REIT (as the third-party security provider). We note that the finance service coverage ratios of the 2 entities remained a healthy 3.99 times and 4.06 times, respectively, in fiscal 2014; a breach of the required threshold of 1.5 times will amount to a Trigger Event, prompting the exercise of the Redemption Undertaking – a right granted to the Issuer to require the REIT Trustee to redeem the First Sukuk upon the occurrence of such an event – or in a worst-case scenario, the sale of the Secured Properties to meet principal redemption payments by the legal maturity of the First Sukuk.

Media contact
Daniel Wong
603 – 7628 1172
danielwong@ram.com.my