MARC has affirmed its ratings on MRCB Sentral Properties Sdn Bhd’s (MRCB Sentral) RM400 million Commercial Papers/Medium-Term Notes (CP/MTN) Programme at MARC-1(fg)/AAA(fg) with a stable outlook. The affirmed ratings and outlook are based on the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) which carries MARC’s financial strength rating of AAA/stable.

MRCB Sentral is a property investment and development company. Its major development is the Platinum Sentral project in KL Sentral which was completed in May 2012. Comprising a fully tenanted office component and 81%-occupied retail component, Platinum Sentral will be sold to Quill Capita Trust (QCT), a real estate investment trust (REIT), for RM750 million. MRCB Sentral will receive RM486 million by cash and the balance of RM264 million by way of 206.25 million QCT units which translate to 30% interest in the REIT. The sale is expected to be completed by 3Q2014. Upon receipt of the cash proceeds, MRCB Sentral will early redeem the outstanding RM380 million under the rated CP/MTN programme. To date, RM60 million CPs will be due on September 26, 2014 while RM320 million MTNs will mature on September 27, 2017.

Platinum Sentral comprises five blocks of low-rise office towers with net lettable area (NLA) of 445,377 sq ft and retail lots with NLA of 69,520 sq ft. MARC notes that while the average rental rate of RM8.70 psf at the office towers is higher than the industry average, the office component is exposed to concentration risk given that about 91% of the office NLA is occupied by only three tenants. However, concentration risk is largely mitigated by the tenant profile that consists of mainly government-linked corporations. MARC also views that the company’s status as a government-linked entity provides some degree of assurance in terms of tenancy. In addition, rental stability is supported by the locked-in periods of between three and 15 years for the office lease agreements with provisions for upward rental revisions every three years.

In respect of Platinum Sentral’s retail component which comprises only 14% of the total NLA, the  improved take-up rate to 81% as at end-February 2014 from 20% a year ago could be attributed to the lower average rental rate of RM4.64 psf (end-January 2013: RM6.00 psf). MRCB Sentral’s other investment properties, namely Menara MRCB, an office building, and Plaza Alam Sentral, a retail mall in Shah Alam, are expected to continue to generate stable rental income, albeit lower in aggregate compared to Platinum Sentral.

For financial year ending December 31, 2013 (FY2013), MRCB Sentral reported negative revenue of RM25.4 million due largely to the exclusion of rental revenue of RM48.6 million from Platinum Sentral after it was classified as a discontinuing operation, a RM22.1 million fair value reduction in receivables and a provision for liquidated ascertained damages (LAD). The fair value reduction relates to the extension of the credit period for three years for the sale of an office building acquired from a related company made in the prior year. In addition, MRCB Sentral made a provision for LAD of RM34.3 million due to the late delivery of some projects for which the company was the turnkey contractor. Nonetheless, on excluding these adjustments, MRCB Sentral would record revenue of RM79.4 million in FY2013 (FY2012: RM77.6 million). MARC also notes that the company’s combined cash flow from operations (CFO) from continuing and discontinuing operations of RM21.2 million was sufficient to fund its financing costs of RM20.7 million in FY2013.

As the ratings and outlook hinge on the guarantee provided by Danajamin, any changes to MRCB Sentral’s rating would be driven by an underlying change in Danajamin’s credit strength.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my;
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.