RAM Ratings reaffirms ratings of Axis REIT Sukuk's RM155 million Second Sukuk Issue

Published on 19 August 2015

RAM Ratings has reaffirmed the respective AAA, AA1, AA2 and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB) RM155 million Class A, B, C and D Sukuk under its Second Sukuk Issue (collectively the Second Sukuk) with a stable outlook.
The ratings are premised on collateral support generated by the assessed capital value of the transaction’s underlying portfolio – 4 office buildings in Petaling Jaya (the Properties) – which is secured by a 3rd party legal charge over the Properties. Credit support is reflected by the respective loan-to-value (LTV) and stressed debt-service coverage ratios of the relevant sukuk, based on our assessment of the Properties’ sustainable value. The ratings are also underscored by structural features that enhance the liquidity and security of the transaction. Under the trigger mechanisms of the transaction, ARSB and Axis Real Estate Investment Trust (Axis REIT) are required to register minimum finance service coverage ratios (FSCRs) of 1.50 times. For FY Dec 2014, the FSCRs of both entities stood at 4.67 times and 4.06 times respectively, well above the covenanted ratio.
During the review period, the transaction’s net property income (NPI) came in 7.0% lower y-o-y at RM29.9 million. This resulted from vacancies at the Properties due to refurbishments and the non-renewal of a tenant’s lease respectively. Nonetheless, the lower-than-expected occupancy rates were moderated by the higher-than-assumed average rental rates (ARRs) of the Properties. The higher-than-assumed ARRs reflect the competitive edge of the Properties – they are strategically located fronting a major highway and within close proximity of public transportation, they are well managed and maintained through periodic asset enhancements, and enjoy competitive rental rates against the market. On this note, the Portfolio’s NPI remained in line with our sustainable cashflow assumption of RM29.8 million.
The ratings are moderated primarily by the Portfolio’s exposure to the soft office market – underpinned by the large incoming supply expected in the next 2-3 years and subdued demand from key tenant sectors – which could exert pressure on rental reversions moving forward. Caution exercised by businesses ahead of the implementation of the GST resulted in a longer-than-expected delay in the recovery of the Portfolio’s occupancy rate, which had fallen to 72.1% as at end-March 2015 (end-March 2014: 85.7%). The Portfolio’s lumpy lease-maturity profile and relatively high tenant concentration further moderate the ratings.
Despite the Portfolio’s lower occupancy rate, we have maintained a stable outlook on the transaction, given that the REIT manager is in discussion with existing and prospective tenants to take up vacancies at more robust rental rates than that agreed by previous tenants. We do not expect the office market’s supply overhang to significantly affect the Properties in view of their competitive edge, but rental pressures will remain as new supply comes in. We take comfort in the REIT manager’s strong track record of lease management, tenant retention and proactiveness in maintaining the Portfolio’s relevance through periodic asset enhancements. Even assuming a longer occupancy-recovery period and slow ARR growth, our sensitivity analysis indicates that the Portfolio’s performance will be in line with our projection of sustainable cashflow. Nevertheless, we will continue to monitor its performance on a quarterly basis.
ARSB is a special-purpose vehicle set up by Axis REIT as a funding conduit for its Perpetual Islamic MTN Programme of up to RM3 billion. The Second Sukuk had been issued via a commercial real estate-backed transaction involving the Properties, with a combined latest market value of RM401.8 million (2013: RM384.6 million).

Media contact
Chin Jin Han
(03) 7628 1168
jinhan@ram.com.my