Axis REIT CEO says logistics the next big thing

Retail REITs have been the flavour of the year, but logistics is going to be the next big thing, said Stewart LaBrooy, CEO of Axis Real Estate Investment Trust (REIT).

“The logistics business is going to be the next big thing,” said LaBrooy, underlining a reason why Axis is expanding its portfolio of warehouse assets. Warehouses/logistics assets make up 44% of the group’s net lettable area (NLA).

“We’re generally underweight on industrial and office REITs and more bullish on retail REITs, but Axis seems to be the exception. It’s the only industrial-office REIT we are positive on, and it continues to perform well,” said one analyst.

Axis was the first real estate investment trust to list on Bursa Malaysia in 2005

LaBrooy himself has been with the group since 1995, long before it was listed, and is now the chairman of the Malaysian REIT Managers Association (MRMA).

Today, Axis is one of the most active REITs when it comes to expansion of portfolio. It now has 30 properties valued at  RM1.4 billion from the original five it was listed with. This year alone, the group has acquired four properties worth RM219 million — a distribution centre in Bayan Lepas, a logistics warehouse in Seberang Prai, Penang, an industrial facility in Nilai, Negri Sembilan and Wisma Academy in Petaling Jaya, Selangor.

Axis’ emphasis on logistics assets is driven by LaBrooy’s vision of the sector.

“If you look around, the growing trend around the world has been online shopping, and that relies heavily on the logistics players who make up an important part of the supply chain. On top of that, the brick and mortar retail outlets rely on the logistics industry to supply their goods,” said LaBrooy.

LaBrooy: We want to get in ahead of the game. Even now, there is a shortage of lotistics space.

He pointed out that retailers are more exposed to fluctuations in demand, while the logistics business is insulated, especially since warehouse tenancies often span several years.

“We want to get in ahead of the game. Even now, there is a shortage of logistics space. Most of the big players we talked to said they need to add 250,000 sq ft to 350,000 sq ft annually,” said LaBrooy.

Axis’ most recent expansion will put its gearing at an estimated 37% at the end of the year. To fund its next phase of growth, the group will raise funds via a placement of up to 20% of its existing shareholder capital, which should raise approximately RM270 million based on the group’s share price of RM3.

With a little bit of leveraging, the group will have approximately RM350 million for its next cluster of acquisitions, LaBrooy said.

This will mark the beginning of the group’s fifth expansion cycle. Despite the potential dilution in earnings due to the placement, the group has a track record of preserving shareholders’ distribution per unit (DPU) by acquiring high-yielding assets.

“People have the wrong idea about REITs. It isn’t just a holding company for properties. It’s a business, and that’s how we are running Axis,” said LaBrooy.

Axis has maintained its payout of 4.3 sen DPU for the third quarter.

When Axis undertook a placement in the fourth quarter last year, LaBrooy said it was five times oversubscribed. To date, unit holders who subscribed for the last placement have seen a total return of 22%, 18% from capital return and 4% from distributions.

“We also make sure to turn around the funds we have raised as quickly as possible to minimise negative carry for unit holders. Right now, the company’s benchmark is 30 days from receiving the funds to spending it. That is why we try to organise our acquisitions in clusters,” said LaBrooy.

“We target to have a yield of about 6%. To maintain this while continuously expanding, we have to look for assets that give an 8% to 10% yield.”

Axis boasts a yield of 5.48% even after its share price has risen more than 18% year-to-date.

Still, Axis has fallen in the shadow of retail REITs that have garnered huge interest from investors in the past few years.

Besides being a safe-haven asset for investors in uncertain times, LaBrooy said many of the country’s crown jewels of real estate have gone on sale.
“You simply can’t build another Sunway Pyramid or Mid Valley Megamall. Of course these retail REITs are going to perform well,” he said.

The interest in retail REITs has compressed yields over the past year, especially among the bigger retail REITs which have reached a point where there may be little upside left.
Besides acquiring new assets, LaBrooy highlighted that the company actively manages its existing portfolio to increase value for shareholders.

In addition to seeking higher rentals from tenants, he emphasises the importance of continually improving the group’s existing assets to maximise potential values.

Drawing from its roots as a property investment and development company before it was listed as a REIT, Axis is spending approximately RM28.3 million to refurbish two of its properties in Petaling Jaya to increase returns.

The group recently completed refurbishment of Infinite Centre in Section 13 as part of a defensive play to ensure the property remains competitive in the tightening office and industrial market in Petaling Jaya.

At the same time, Axis has taken an aggressive approach with the refurbishment of Wisma Bintang in Section 51A. It will spend over RM20.9 million to redevelop the five-acre piece of prime land into the Axis Business Campus.

The campus will target demand for campus-style commercial and industrial facilities, and LaBrooy expects a significant increase in rentals. A new six-storey block is expected to be completed on July 30, 2013.