The collateral properties under the issuance are Sentral Buildings 1, 2 and 3 (formerly known as Quill Buildings 1, 4 and 3) in Cyberjaya, Selangor, as well as Lotus’s Penang on Penang Island. The LTV ratios are derived from the valuation of the properties based on a stabilised net operating income (NOI) of RM23.6 million. The stabilised NOI is the five-year average NOI comprising historical NOI for 2022 and 2023, and projected NOI for 2024-2026 for each property to arrive at the collateral properties’ aggregate value of RM265.1 million under MARC Ratings’ income capitalisation approach. This represents a 24.5% discount from the properties’ aggregate market value of RM351.0 million as ascertained by independent valuers as at December 31, 2023.

The buildings’ occupancy remained unchanged with the same customer profile and structure from end-December 2022. Lotus’s Penang is tenanted by hypermarket owner Lotus’s Stores (Malaysia) Sdn Bhd (Lotus’s Malaysia), accounting for 47.1% of total net lettable area (NLA). Sentral Buildings 1 and 2 are tenanted by DHL Asia Pacific Information Services Sdn Bhd (DHL), accounting for 32.8% while Sentral Building 3 is tenanted by companies under the BMW Group (BMW), accounting for 9.1% and Huawei Technologies (Malaysia) (Huawei), accounting for 4.6%. 

The collateral properties remain exposed to high tenant concentration risk, as reflected in the tenancy composition. Sentral Buildings 1 and 2 as well as Lotus’s Penang are fully occupied with single tenants for each building, while Sentral Building 3 has an occupancy rate of 68% as at end-December 2023. The collateral properties do not face immediate renewal risk as the tenancy for DHL and BMW will only be due in July 2025, while that of Huawei will be expiring in January 2027. For Lotus’s Malaysia, the tenancy expires in August 2032. 

MARC Ratings views concentration and renewal risks to be mitigated by the longstanding tenancy relationships of more than 11 years each, the purpose-built nature of the buildings (Sentral Buildings 1, 2 and 3) catering to the tenants’ requirements, and the limited availability of Grade A Multimedia Super Corridor (MSC)-status office buildings near Cyberjaya. The rating agency draws comfort from the expertise of Kinabalu Capital’s parent Sentral REIT and demonstrated track record of the REIT Manager, Sentral REIT Management Sdn Bhd (SRM), to mitigate these risks. 

For 2023, total revenue stood marginally higher at RM29.0 million (2022: RM28.2 million), recording NOI of RM23.7 million. The NOI is expected to remain stable in the near term. Going forward, rental revenue may be supported by an increased occupancy level in Sentral Building 3, though this has not been accounted for in the NOI projections. 

Debt service coverage ratio (DSCR) and security cover ratio (SCR) stood at 5.03x and 2.70x as at end-2023 (2022: 6.28x; 2.66x), which remain within the DSCR and SCR covenants of 1.50x and 1.90x under the programme. 

The stable outlook assumes that the collateral properties will maintain their operational and financial performance in line with the projections that will remain supportive of the LTV ratios for the rating bands.  

Rating trajectory 

The ratings may come under pressure if tenancies are terminated or not renewed, or if tenancies are renewed at rental rates that are not supportive of the NOI to maintain the LTV ratios at current thresholds.