Published on 02 Oct 2019.
RAM Ratings has reaffirmed the respective AAA, AA1, AA2 and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB or the Issuer) RM110.0 mil of Class A, Class B, Class C and Class D sukuk (collectively, the First Sukuk) under its First Sukuk Issue; all the ratings have a stable outlook. The First Sukuk is backed by a portfolio of three industrial and industrial-office mixed properties and one retail property, i.e. Axis Steel Centre (ASC), Axis Vista, Bukit Raja Distribution Centre and Tesco Bukit Indah. The combined portfolio was last valued at RM337.3 mil, an increase of 3.2% from RM326.8 mil a year ago.
The reaffirmation of the ratings is premised on our expectation that the portfolio’s adjusted capital value will stay intact, supported by the strategic location of the properties and a healthy demand for industrial properties, given the shortage of new developments at prime locations in Klang Valley. Furthermore, the underlying portfolio’s longer than average weighted lease maturities and fixed long-term leases provide the transaction with a steady and predictable cashflow stream. As at end-March 2019, the underlying portfolio’s weighted-average remaining lease expiry period had almost doubled to 14.2 years (as at end-May 2018: 8.0 years). This followed the conversion of Northport (M) Berhad’s – the sole lessee for ASC – lease term to 26 years and 5 months from 3 years previously, subsequent to ASC being accorded free commercial zone status in May 2019.
In 2018, the portfolio’s net property income of RM21.0 mil, up from RM20.3 mil a year earlier (excluding one-off reimbursement from tenant for reinstatement works), was stable and in line with our sustainable cashflow assumption. RAM’s adjusted portfolio value remains at RM217.3 mil – the resultant cumulative loan-to-value ratios of 43.7%, 46.0%, 48.3% and 50.6% and debt service coverage ratios of 2.5 times, 2.4 times, 2.2 times and 2.1 times are still commensurate with the respective ratings of the Class A to Class D sukuk.
The ratings are, however, moderated by significant sector and tenant concentration risks, as three of the four properties are industrial properties and/or single-tenanted. Notably, the portfolio’s high exposure to the logistics sector (55.9% of portfolio’s monthly rental income) renders the transaction susceptible to the cyclicality of the sector and changes in related business sectors. The transaction is also vulnerable to loss of income from prolonged vacancies as a result of non-renewal or early termination of a tenancy, or a significant rental rate downtrend, which would warrant a reassessment of our sustainable cashflow assumption or adjusted capital value. Nonetheless, we take comfort in the knowledge that the portfolio is backed by strong and credible tenants.
The Issuer’s finance service coverage ratio (FSCR) for the First Sukuk stood at 4.08 times as at end-December 2018 – well above the required 1.50 times. Axis REIT’s FSCR of 3.48 times as at the same date also comfortably exceeded 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 RM3.0 billion (the Sukuk Programme).
Tan Han Nee
(603) 3385 2529
(603) 3385 2577
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Ratings on Axis REIT Sukuk Berhad (First Sukuk)