RAM Ratings has reaffirmed the ratings of Axis REIT Sukuk Berhad’s (ARSB) RM155 million Class A, Class B, Class C and Class D Sukuk under its Second Sukuk Issue (collectively, the Second Sukuk); the respective AAA, AA1, AA2 and AA3 ratings have a stable outlook.

Published on 30 August 2016

RAM Ratings has reaffirmed the ratings of Axis REIT Sukuk Berhad’s (ARSB) RM155 million Class A, Class B, Class C and Class D Sukuk under its Second Sukuk Issue (collectively, the Second Sukuk); the respective AAA, AA1, AA2 and AA3 ratings have a stable outlook.

The reaffirmation of the ratings, despite the transaction’s weaker-than-expected performance, is premised on the anticipated improvement in the net property income (NPI) from the transaction’s underlying portfolio (containing 4 office buildings in Petaling Jaya (the Properties)) over the medium term. The REIT Manager’s plans, if executed well, should improve the portfolio’s recovery prospects vis-à-vis its NPI performance in 2015, despite pressure on ARRs and a moderate recovery in occupancy levels. We have also considered the improvement in the Secured Properties’ overall occupancy to 80% as at end-June 2016 (from 74% in 2015), which may advance further in future. We also derive comfort from the REIT Manager’s track record in tenant management in order to fill up vacancies. Moreover, our assessed capital value for the portfolio represents only 75% of its market value (of RM405.2 million or RM491 psf). We note that comparable transactions have ranged between RM520 and RM856 psf. That said, we may review our assumptions if the transaction’s NPI recovery takes longer than expected, or if the portfolio’s capital values fall in line with the values of the broader office property sector as a result of keener competition and more incoming supply.

In fiscal 2015, the transaction’s NPI declined a further 11% y-o-y to RM26.69 million (2014: -7%), attributable to weaker revenue from the portfolio’s lower average occupancy rate (AOR) of 74% (2014: 82%). We note that this is related to a full year’s impact from vacancies and the non-renewal of a major tenant’s lease in early 2015, and slower than expected AOR recovery at Axis Business Park. Nevertheless, average rental rates were higher than assumed, reflecting the Properties’ attractiveness due to their strategic locations and periodic asset-enhancement initiatives. As at end-June 2016, the portfolio’s occupancy rate had improved to 80%, mainly on the back of space expansion by existing tenants.

The ratings reflect collateral support from the portfolio’s assessed capital value, which we have maintained; the resultant loan-to-value (LTV) ratios and stressed debt-service coverage ratios (DSCRs) of the relevant sukuk classes are still commensurate with their respective ratings. In line with the improvement in RAM’s assumed stressed refinancing rate of 8.5% (from 10.0%), the stressed DSCRs have increased substantially, albeit constrained by their respective LTV ratios. The ratings are also underpinned by structural features that enhance the liquidity and security of the transactions, e.g. minimum finance service coverage ratio requirements at the levels of both the issuer and the sponsor which act as trigger mechanisms to accelerate recovery via proceeds from the disposal of the underlying portfolio. We note that the respective finance service coverage ratios of the Issuer vis-a-vis the Second Sukuk and Axis REIT remained a healthy 4.17 times and 3.37 times (after adjusting for deposits related to acquisitions) as at end-2015.

On the other hand, the portfolio is exposed to the soft office market – a large supply of office space is expected to enter the market over the next 2 years. The Properties also face high tenant-concentration risk and lumpy lease-maturity profiles, with their top 5 tenants accounting for around half of their occupied net lettable area. We note that, as at end-December 2015, more than 40% of the portfolio’s leases would expire in 2016. However, more than 60% has been renewed, albeit mostly at flat rental rates - indicative of the currently unfavourable supply-demand dynamics.

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 latest combined market value of RM405.2 million (2015 review: RM401.8 million).

Analytical contact                                          Media contact
Chin Jin Han                                                 Padthma Subbiah
(603) 7628 1168                                           (603) 7628 1162
jinhan@ram.com.my                                    padthma@ram.com.my