AL-SALAM REIT ANNUAL REPORT 2017

44 AL-SALĀM REIT ANNUAL REPORT 2017 Al-Salām REIT’s current financing relates to Commodity Murabahah Revolving Credit-I (“CMRC-i”) dated 14 June 2017 where the facility amount is up to the aggregate principal limit of RM10 million from RHB Islamic Bank Berhad. To date, RM3.1 mil has been drawn down from the CMRC-i. The CMRC-i is secured against an investment property of RM15.3 mil. The average effective profit rate for the CMRC-i is 5.49%. Al-Salām REIT’s non-current financing is a Commodity Murabahah Term Financing-i (“CMTF-i”) dated 14 April 2015 amounting to RM350.0 million from RHB Islamic Bank Berhad and Maybank Islamic Berhad to part finance the acquisition of the investment properties of the Fund in 2015. The nominal value of the CMTF-i comprised Tranche 1 and Tranche 2, amounting to RM136.04 million and RM213.96 million, respectively. The CMTF-i profit is payable over a period of 60 months from the date of first disbursement with full repayment of principal sum on the 60th month. The effective profit rate for the CMTF-i will be based on COF + 1.35% per annum for the first 16 months, COF + 1.40% per annum for the next 8 months and COF + 1.50% per annum for the remaining duration of the CMTF-i. The COF is based on each respective Banks’ COF. The average effective profit rate for the CMTF-i is 4.99% (2016: 5.11%). Given that the CMTF-i is on a floating financing basis, the Manager is considering few options to mitigate the financing risk which include establishing fixed rate financing via Sukuk programme and/or profit rate swap. This capital management initiative will enable Al-SalāmREIT to enjoy a lower blended yield with fixed financing rate on longer tenure. The gearing of Al-Salām REIT as at 31 December 2017 is 35.5 %, leaving a debt headroom of approximately RM100 million to fund its capex plans and future acquisitions before reaching the statutory limit of 50%. The Manager aims to optimise Al-Salām REIT’s capital structure and cost of capital within the financing limits set out in the REIT Guidelines. In addition, the Manager intends to use a combination of debt and equity financing to fund future acquisitions and capital expenditure, determined based on the strategies described below. The Manager’s ongoing capital management strategy involves adopting and maintaining an appropriate gearing level and adopting an active financing rate management strategy to manage the risks associated with changes in financing rates. By doing so, the Manager intends to maximise Al-SalāmREIT’s Distributable Income while maintaining an appropriate level of risk associated with debt financing. The Manager intends to implement this strategy by; • diversifying sources of debt funding • maintaining a reasonable level of loan service capability • securing the most favourable terms of funding • managing its financial obligations • where appropriate, managing the exposures arising from adverse market financing rates • actively manage the range of maturities to reduce refinancing risk and optimize the cost of capital Al-Salām REIT’s financing currently comprises the following: CAPITAL MANAGEMENT Risk Acquisition & Investment Risk Competition Risk Tenancy Risk Financing Risk Liquidity Risk Business / Market Risk Tenant Concentration Risk Currency Risk Explanation Risk that assets to be acquired are not yield- accretive and mixed with problems which may affect the commercial potential. The properties under the portfolio may face increased competition from other existing properties as well as upcoming properties in the surrounding area. Risk that tenants might not be able to fulfil its rental obligation as well as non-renewal of expiring tenancies. Currently, the financing is on a floating basis and as such, Al-Salām REIT will be affected by any significant adverse movement in the interest rate in the mark. Risk that funds are inadequate to meet obligations. Risk that the properties face decline in revenue due to poor market condition, competition and geographical concen- tration. Risk that revenue of Al-Salām REIT is dependent on anchor tenants. Termination or non-renewal of tenancy by the anchor tenants will negatively impact the perfor- mance of the properties. Risk that Al-Salām REIT is exposed to foreign currency and exchange rate fluctuations. Mitigation Plan The Manager will ensure proper and reasonable care is in place for any acquisition of assets, which include undertaking thorough due financial, legal as well as building due diligence in ascertaining the viability of the assets to be acquir d. The Manager will undertake active asset management strategies by working together with the Property Manager, which include, amongst others, to maximize occupancy rate, rental rates a d et lettable area. The Manager together with the Property Manager will ensure that the rental c llection is in order and to negotiate early with the tenants of expiring tenancies. The Manager closely monitors the movement of general interest rate in the market. The Manager plans to embark on a sukuk programme and to have a fixed financing or a combination of fixed and floating financing. The Manager does not foresee that Al-Salām REIT will succumb into liquidity risk as the underlying tenants are able to provide long term stable income to the fund. The Manager is confident that given the strategic location of the asset under the portfolio primarily Komtar JBCC, the business and market risk is minimal. In addition, QSR Group being the major tenant of its assets is a leading player quick and service in the restaurant in Malaysia and operating in an economic resilient type of business. The major tenant of Al- Salām REIT properties is QSR Group. The Manager does not foresee any non-renewal of tenancies for QSR Group as the properties were owned and occupied by them prior to injection into Al-Salām REIT. Al-Salām REIT does not own any property abroad and as such is not subject to any fluctuation of exchange rate. 2017 20 6 RM RM Current: Commodity Murabahah Revolving Cre it-i 3,100,000 - Non-current: Commodity Murabahah Term Financing-i 350,000,000 350,000,000 Transaction costs (2,301, 33) (3,195,045) 347,698,967 346,804,955 Total Islamic Financi g 350,798,967 346,804,955 FY2017 FY2016 Total Borrowings (RM Mil) 350.8 346.8 Average Cost Of Debts (%) 4.99 5.11 Fixed/Floating Ratio 100% Floating 100% Floating Average Maturity Period (years) 2 3 Financing Service Cover ratio (times) 3.00 2.96 Gearing ratio (%) 35.5 35.5 Risk Acquisition & Investment Explanation Risk that assets to be acquired are ot yield- accretive and mixed with problems which Mitigation Plan The Manager will ensure proper and reasonable care is in place for any acquisition of assets, which include undertaking thorough due 2017 2016 RM RM Current: Commodity Murabahah Revolving Credit-i 3,100,000 - Non-current: Commodity Murabahah Term Financing-i 350,000,000 350,000,000 Transaction costs (2,301,033) (3,195,045) 347,698,967 346,804,955 Total Islamic Financing 350,798,967 346,804,955 FY2017 FY2016 T tal Borr wings (RM Mil) 350.8 346.8 Average Cost Of Debt (%) 4.99 5.11 Fixed/Floating Ratio 100% Floating 100% Floating Average Maturity Period (years) 2 3 Financing Service Cover ratio (times) 3.00 2.96 Gearing ratio (%) 35.5 35.5