AXIS Real Estate Investment Trust (Axis REIT) is anticipating a better year ahead, as the assets it is acquiring are expected to yield at least 7%.
Besides, the refurbishment of its existing assets would also bring higher rents.
Axis REIT has proposed to acquire an industrial facility in Nusajaya from Yongnam Engineering Sdn Bhd for RM153.5 million cash, and three assets in Shah Alam from its promoters for RM280.5 million cash.
The acquisitions will increase Axis REIT’s net leasable area (NLA) to 6.23 million sq ft by the first quarter of next year, from 5.33 million sq ft as at June 30, 2014.
“You will see property income jump next year as we collect more rental revenue from the new assets. The rental revenue from the Nusajaya facility is about RM12 million per annum for the next three years,” says Datuk Stewart LaBrooy, CEO of Axis REIT Managers Bhd (ARMB), the management company of Axis REIT.
RHB Trustees Bhd, the trustee for Axis REIT, on Oct 3 entered into a sales and purchase agreement (SPA) with Yongnam for the purchase of the industrial facility built on a 10.9ha site within the Southern Industrial and Logistics Clusters (SiLC).
As part of the deal, Yongnam will lease back the property from Axis REIT for 15 years, with rental reversions every three years. Both Yongnam and Axis REIT will endeavour to complete the deal by March 31, 2015.
According to LaBrooy, only 16.2% of the trust’s NLA is up for rental reversion next year, compared with 34.3% this year. The growth will come mainly from the new assets to be acquired in Shah Alam, Nusajaya and Seberang Perai.
Axis REIT’s net property income for the first half of financial year ending Dec 31, 2014 was flat at RM59.03 million, compared with RM59.76 million previously. The absence of earnings growth is because the trust had lost rental income from Axis Business Campus in Petaling Jaya, which underwent a major asset enhancement initiative (AEI), since 2013.
It also had to reduce rent by 17.54% at Axis Steel Centre in Port Klang to retain its tenant Konsortium Logistik Bhd. According to Axis REIT’s website, revenue from Axis Steel Centre in 2013 was RM7.07 million.
“The tenant was having difficulties at that point in time. It was actually growing quite rapidly but it needed some incentive to stay on. But out of this discount, we are creating the possibility of doing more business with the company at other sites.
“It is expanding, so it is looking for more space. Our promoters are looking to build new facilities for it to lease. Sometimes, you have to give back a little to get more from it. It is part of our leasing strategy,” LaBrooy tells The Edge in an exclusive interview.
On the Yongnam deal, the Singapore-based construction and engineering company is going to pay RM969,313 per month in rent for the first three years. This gives Axis REIT a decent annual rental yield of 7.6%.
Besides the SiLC property acquisition, Axis REIT has also entered into an SPA with its promoters Tew Peng Hwee and Datuk Abas Carl Gunnar Abdullah for the acquisition of Axis Shah Alam DC2, Axis Shah Alam DC3 and Axis MRO Hub.
DC3 Buildings A and B are currently occupied by Konsortium Logistik, with the tenancies expiring in 2016 with the option to renew them for another five years. DC3 Building C is occupied by LF Logistics Services (M) Sdn Bhd, with the tenancy expiring in 2020 with the option to renew it for another six years.
DC2 will be leased back to Able Heights (M) Sdn Bhd, a company 75%-owned by Tew, for three years. The Shah Alam properties to be acquired will give Axis REIT an annual net yield before Islamic finance cost of 7%.
Axis REIT, through RHB Trustees, has also signed a letter of offer for the purchase of an industrial facility in Seberang Perai for RM38 million. The trust says due diligence is being carried out.
“Last year, we didn’t make any acquisitions because the expectations of asset owners were unreasonable. We don’t buy for the sake of buying, we only do so when we have good opportunities to enhance our portfolio.
“We think the market is coming back, so it will give us more acquisition possibilities,” says LaBrooy.
Apart from acquisitions, Axis REIT is renovating and refurbishing its properties to enhance their value. The AEI on Axis Business Campus is expected to give Axis REIT RM7.6 million in property income or a projected gross yield of 13%.
Axis REIT is also undertaking a RM10 million AEI on Axis Business Park Block C in Section 13, Petaling Jaya. Once the refurbishment is completed — targeted for January 2015 — the asset will give the trust RM7.2 million in property income or a projected gross yield of 12.76%, according to Axis REIT.
The Annex, a double-storey showroom linked to a single-storey warehouse located in the industrial and commercial area of Section 19, Petaling Jaya, is also up for a RM30 million AEI.
The redeveloped The Annex will give an estimated gross property income of RM4.5 million or a projected gross yield of 10.6%. The AEI is slated to begin in 2016, says LaBrooy.
As the trust expands its assets through debts, its gearing ratio is creeping up. According to CIMB Research’s analyst Faisal Syed Ahmad, the acquisition of the Yongnam asset will push up Axis REIT’s gearing to 38.6%.
“As we are a shariah-compliant REIT, we try to keep our gearing level at around a third. That is really our sweet spot, although we do go beyond that when we make acquisitions. But we will bring it back down through placements.
“We never want to get anywhere close to the 50% level allowed for a REIT, because once you get there, you’ll get comfortable. You’ll never want to bring it down. And even if you bring it down from the 50% level, your yield will drop,” explains LaBrooy.
To reduce its borrowings, Axis REIT will undertake a placement of 83.58 million units by April next year to refinance the acquisition of the Shah Alam assets. The exercise will increase Axis
REIT’s issued fund size to 547.28 million units and reduce its gearing to around 34%.
With the expanded fund size, Axis REIT will be worth about RM2 billion, based on last Thursday’s closing price of RM3.65 per unit. It will be the largest industrial REIT in Malaysia and the sixth largest overall after the big-cap retail REITs.
Axis REIT’s unit price has risen 30.56% since Jan 1 to last Thursday’s close of RM3.65, giving the trust a market capitalisation of RM1.69 billion. The stock is traded at 15.02 times financial year 2013 ended Dec 31 earnings per share of 24.3 sen, with a gross yield of 5.81%.
This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.