Axis REIT rises on insatiable hunt for yield

Excess liquidity and record low interest rates globally have undoubtedly benefited shares in more defensive and high yielding investments on the local bourse. Case in point, yields on real estate investment trusts (REITs), particularly for those focused on the more resilient retail and industrial segments of the market, have fallen sharply as prices rise.

Axis REIT (RM3.68) for instance, has far outperformed the benchmark FBM KLCI for the broader market — its unit price is currently hovering near all-time record high levels (after adjusting for distribution of 4.5 sen per unit last week).

Hunt for yield raises longer-term risks
At the current price, Axis REIT is trading at over 1.7 times the net book value of its underlying properties, the highest among locally listed REITs, suggesting high built-in expectations for capital appreciation and/or yield accretive acquisitions going forward.

Its estimated net yield has fallen to roughly 4.4%. As this buffer compared against risk-free investments such as bank deposits and government bills narrows, unitholders will be increasingly susceptible to a trend reversal. A rise in interest rates from historical low levels, for instance, would affect financing costs and distributable income.

The prevailing low interest rate environment is likely here to stay for a while yet, meaning high yielding assets will continue to attract. But investors should be aware of the associated risks following the strong run-up in Axis REIT’s unit price.

Aggressive in growing portfolio
Positively, Axis REIT has established a solid track record in terms of growing its asset base by acquiring yield accretive properties. In fact, it has been among the most active, growing its portfolio to 31 properties currently, from the initial five when it was listed in August 2005. During this period, distribution per unit has risen steadily in line with higher income.

While the outlook for the industrial segment of the market remains positive — in the first quarter the trust reported average rental reversion of 9.9% for leases renewed, which accounted for some 3.3% of total net lettable area — rising property prices may pressure yields for fresh acquisitions going forward.

Axis REIT plans to acquire properties worth some RM350 million this year, which would boost its portfolio of assets to close to RM1.9 billion. The majority of the assets under evaluation are located in Selangor although the trust is also hoping to capitalise on some of the spillover demand for industrial space from Singapore. The latter comprises factories and warehouses located in Johor, where costs are lower than in the island-state.

Decent but not overly attractive yields
To part finance the new acquisitions, Axis intends to issue up to 91 million new units or about 20% of its existing capital. This will keep gearing levels comfortably within the 30% to 35% range. Depending on the timing of the new issuance and completion of the acquisitions, we could see some earnings dilution in the near-term.

For 2013, we estimate distribution per unit will be 17.8 sen, down slightly from the 18.6 sen last year, which included 1.3 sen per unit distributed from gains from the disposal of Kayangan Depot. This will earn unitholders a decent, but not overly attractive net yield (after taking into account 10% withholding tax) of 4.4%.

Valuations are rich compared with peers
Axis REIT is trading at valuations higher than that of local retail-focused trusts, widely seen as the most resilient segment of the market. The four largest retail-focused REITs are currently valued at between 1.3 and 1.6 times net book value. At prevailing prices, these will earn unitholders net yields ranging from 4.2% to 4.6%.

Singapore-listed industrial REITs, such as Ascendas REIT, Mapletree Logistics Trust, Cambridge Industrial Trust and Cache Logistics Trust, are priced at comparatively lower premiums to their book values, of between 1.3 and 1.5 times while net yields are estimated to range from 5% to 6%.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

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