Axis REIT (July 27, RM2.61)
Maintain market perform at RM2.56 with fair value of RM2.55: Unit holders approved the placement of an additional 20% of new units on Tuesday. As usual, upcoming asset acquisitions will be funded via placement as well as borrowings so overall gearing will be reduced to below 35%. Gearing stood at 38% as at 2Q11, above the REIT's internal target of 35%. In the pipeline, there is one potential asset from the promoter, Axis Techpoint 1 PJ (office warehouse), as well as five logistics warehouses in Bayan Lepas and Seberang Perai, Penang, Shah Alam, Selangor, and Port of Tanjung Pelepas and Pasir Gudang, Johor, from third parties that can be injected. These assets are worth about RM260 million in total, of which RM170 million can be satisfied from the upcoming placement proceeds. The placement would also provide greater capacity for the REIT to take on borrowings that will be sufficient to make up the shortfall.
In 2Q11, Axis REIT has renegotiated 460,000 sq ft of space. This represents 10.36% of the total net lettable area of the portfolio, which is close to the total 12.56% of NLA that will expire this year. Rental reversion is relatively flattish at 2% to 3% on average. Lease expiry for the next two years will be 13.75% and 22.18% of NLA, hence lease renewal risk is higher in 2013.
A total of RM10 million per year has been budgeted for capital expenditure for asset refurbishment over the next two years. Properties which have been planned for enhancement include: (i) Menara Axis Penthouse: 6,700 sq ft of unused area to be converted to Grade A office space; (ii) Crystal Plaza; (iii) Subang Hi-Tech; (iv) Infinite Centre; (v) Wisma Bintang; and (vi) Kayangan Depot. The asset enhancement plans are expected to enhance the yield of the properties as well as occupancy. Overall occupancy of Axis REIT's portfolio stood at 95.98% as at June 2011, a slight growth from 95.73% in Dec 2010.
The risks include: (i) unfavourable economic conditions; and (ii) country risks. We maintain our "market perform" recommendation on Axis REIT. Based on an unchanged 7.4% target yield for industrial MREITs, our indicative fair value is kept at RM2.55. — RHB Research, July 27