This article first appeared in The Edge Financial Daily on April 15, 2020
Axis Real Estate Investment Trust
(April 14, RM1.86)
Maintain buy with a higher target price (TP) of RM2.47: Axis Real Estate Investment Trust’s (Axis REIT) portfolio has increased by two to a total of 50 properties. More than 50% of Axis REIT’s tenants are still operating during the movement control order (MCO), and the warehouse logistics and hypermarkets are fully operating.
Besides, 20% of manufacturing facilities are still in operations.
Overall, Axis REIT remains relatively more stable and defensive amid the Covid-19 outbreak and MCO given its well-diversified portfolio, focusing on industrial properties, with considerable tenants offering essential services.
Further, 150 of 154 tenants do not have a force majeure clause, hence Covid-19 and the MCO should not materially impact Axis REIT’s bottom line. The management cited the most it can do as a landlord to help its tenants is a potential rental deferment.
In any case, Axis REIT believes it is able to collect any outstanding rentals before its dividend payout in August. As a consequence, an impact on unitholders is unlikely during this period.
There are 17.7% of total net lettable areas (NLAs) of portfolio expiring in the financial year ending Dec 31, 2020 (FY20). The management expects a flattish rental reversion this year amid Covid-19 and the MCO.
Compared with FY19, 22.4% of total NLAs expired and Axis REIT successfully secured 96% of leases with a 2% positive rental reversion. On retention, this should not be an issue as tenants are likely to maintain a status quo, keeping operations at the same locations.
The management gave assurance that it will maintain its dividend distribution policy of at least 95% of the dividend payout ratio for the first quarter (1Q) to 3Q, and at least 99% for 4Q, in line with the REIT policy of earnings distribution of more than 95% to enjoy tax-free benefits.
On acquisition targets, Axis REIT currently has two assets in the pipeline: A manufacturing facility in Shah Alam, Selangor at about RM56 million and a manufacturing facility in Kota Kinabalu, Sabah at about RM60 million.
Axis REIT is evaluating other assets to acquire as well, with an estimated total value of RM135 million. Its acquisition plan is still ongoing amid the MCO but may be delayed as it cannot go on-site to do due diligence.
We expect a better FY20 for for Axis REIT due to full-year contributions from its acquisitions in FY19 and contributions from newly acquired properties — Bukit Raja and Kawasan Perindustian Nilai II — coupled with, hopefully, a post-Covid-19 recovery. Axis REIT is still actively pursuing quality acquisitions, focusing on Grade A logistics and manufacturing facilities.
Our earnings estimates are increased marginally by 0.4% for FY20 and 0.5% for FY21 and FY22 to reflect contributions from newly acquired properties. Our “buy” call is maintained with a marginally higher TP of RM2.47 from RM2.46 previously. — Hong Leong Investment Bank Research, April 14