Published on 05 Sep 2017.
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 Second Sukuk is secured against 4 office buildings – Menara Axis (MA), Crystal Plaza (CP), Axis Business Park (ABP) and Quattro West (QW) (collectively, the Properties).
We have reaffirmed the ratings based on the underlying credit support available for the transaction, which remains intact in spite of revisions to the portfolio’s assumed sustainable cashflow and assessed stressed capital value of RM28.5 million and RM292.3 million, respectively (from RM29.8 million and RM305.4 million). The revisions are premised on our view that the portfolio is unlikely to improve to the levels we had previously assumed given various market challenges. The resultant cumulative loan-to-value ratios and debt service coverage ratios of the Class A to Class D Sukuk, however, remain commensurate with their corresponding ratings.
While there was an improvement in the portfolio’s net property income (NPI) in 2016, this has not been sustained and remains below our assumptions. The Properties’ NPI edged up 5% to RM28.1 million in 2016 (2015: RM26.7 million), underpinned by better average occupancy rates (AORs). Nonetheless, the figure is still below RAM’s assumed sustainable cashflow of RM29.8 million and failed to carry through to 1H 2017 due to a higher incidence of non-renewed leases; revenue dipped 2% y-o-y following a decline in its AOR to 75% (1H 2016: 78%). Moreover, earlier expectations of increased car-park revenue to boost NPI had failed to materialise amid competitive pressures. We expect the Properties’ NPI to be depressed in 2017 given the higher vacancies and persistent pressure on rental rates in order to maintain their competitiveness in a soft market.
The revised sustainable cashflow assumption reflects our expectation that it will take longer for the portfolio’s AOR to recover to its historical levels, besides continued pressure on rental rates. Given the market’s demand-supply imbalance and weak business sentiment, the revision also reflects high renewal risk for the Properties in 2019 (about 47% of their leases) and the pressure to maintain occupancy levels at competitive rental rates.
We are concerned about the prospects of ABP and QW. The AOR of ABP has been underperforming our assumptions, at below 70% over the last 3 years. Although some recovery may be possible, we do not expect it to reach the levels we had previously assumed. We believe this will also be true for QW, the AOR of which has fallen to 50% in recent months. Due to the ongoing construction of office buildings in the immediate vicinity, this property’s attractiveness to prospective tenants has waned, exacerbated by the availability of additional office space in recent years.
The REIT manager is in the midst of negotiations with prospective tenants to take up the vacant space in the Properties, which may hasten the return to earlier NPI levels if they are signed up earlier than expected. The resultant assessed stressed capital value will still be supportive of the transaction, at a 29% discount to the Properties’ latest market value of RM410.4 million.
The ratings are also underpinned by structural features that enhance the liquidity and security of the transactions, e.g. minimum finance service coverage ratio (FSCR) requirements at the levels of both the Issuer and the sponsor. These act as trigger mechanisms to accelerate recovery via proceeds from the disposal of the underlying portfolio. We note that the respective FSCRs of the Issuer vis-a-vis the Second Sukuk and Axis REIT remained healthy at 4.36 times and 5.67 times as at end-December 2016, i.e. above the covenanted 1.50 times.
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.
Analytical contact
Chin Jin Han
(603) 7628 1168
jinhan@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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