City&Country: Cover Story-- Axis REIT’s assets hit billion ringgit mark

Axis REIT, which completed the acquisition of four new properties last month, recently saw the value of its portfolio exceed RM1 billion.

“When we started this whole exercise, our market capitalisation was quite small [RM257.37 million]. We’re now just over RM800 million. We have targeted a psychological hurdle [of assets under management] of RM1 billion. Our assets will stand at RM1.2 billion by the end of the year. So we’ve joined the billionaires’ club, which is nice,” Axis REIT Managers Bhd (ARMB) CEO and executive director Stewart LaBrooy tells City & Country.

ARMB is responsible for the fund’s portfolio of industrial and office assets.

Ideally, LaBrooy would like the real estate investment trust (REIT) to acquire 100 assets as that will give ARMB more flexibility in raising capital. “When you get to that size, you have a lot of assets you can pledge to raise capital,” he says. That will enable the fund to buy and sell assets, thus unlocking their value.

However, he declines to give a timeline for this ambitious, long-term goal as it difficult to predict, given the property cycles.

The REIT now has 23 assets valued at RM1.09 billion under its name. Some 95% of its properties are in the Klang Valley, with the remainder in Penang and Johor. When all its properties come onstream by Dec 31, 2010, the REIT will have a net lettable area of 4.3 million sq ft.

Earlier this month, Axis REIT completed the acquisition of Tesco Johor Baru for RM75.6 million and the Axis PDI centre in Kuala Langat, Selangor, for RM85 million. It is also in the midst of acquiring Axis Technology Centre in Petaling Jaya for RM49.7 million and PTP D8 in Johor for RM30.5 million.

“We don’t just want to grow for the sake of growing; we also want to grow in steps which make sense to unit holders, that they get their returns and can see a much larger risk-free portfolio to look at as we sort of grow, looking forward,” says LaBrooy.

For 3QFY2010 ended Sept 30, the REIT more than doubled its net profit to RM24.26 million from RM10.25 million a year ago on the back of a 26.7% increase in revenue to RM22.39 million from RM17.67 million.

Meanwhile, its earnings per unit rose almost 100% to 7.6 sen from 3.83 sen a year ago.

On Sept 5, Axis REIT declared a third interim distribution of 3.05 sen per unit amounting to RM9.365 million in respect of the realised income from July 1 to Sept 5.

The current gross yield of its assets stands at 11.31% based on book value, compared with the industry average of 4% to 5%.

“I think this is why our performance has also been well received in the market because we have always been able to buy well. Some of these acquisitions are running at a yield of 8% to 9.5%, so some of these will be accreted to the fund ... everyone wins in this strategy,” LaBrooy says.

Axis REIT was one of the earliest REITs in the country, making its debut on the Main Market of Bursa Malaysia in 2005.

It had seven properties in its portfolio as at Dec 31, 2005 — Menara Axis, Crystal Plaza, Axis Business Park, Electrolux, Infinite Centre, Kompleks Kemajuan and Kayangan Depot. The aggregate net lettable area of the properties was 1.34 million sq ft.

LaBrooy says in the run-up to the listing, his team and he studied Ascendas REIT, which is listed on the Singapore Exchange, closely.

“They were very kind to us, they actually opened their doors and helped us a lot ... at the time they were part of the Goodman Group as well, so the Australian guys there ... they actually discussed with us their strategies, their structure, how they operated,” he recalls.

Acquisition strategy
Axis REIT will continue to focus on the industrial and office space market due to the former’s stable nature and the relative ease in locking in long-term tenancies with companies in the case of the latter, says LaBrooy.

He notes that despite the tough market, the company managed to lease out 60% of its available space in 1H2010 and does not foresee any problems until the year-end.

“We’ve seen a 5% increase in rents on average this year and we are being proactive and defensive in ensuring we have our rents tied in for the next couple of years.

“Single tenant businesses tend to be long leases and  lower risk while the multi-tenanted ones are where you make more money and better rental reversions with office space, so again, we also diversify geographically,” he says.

LaBrooy remains bullish about properties in the Klang Valley as it is a hub of economic activity and talent attraction, and where the population grows 7% a year.

The industrial markets in Penang and Johor are promising, he says, while Iskandar Malaysia in Johor is boosting property prices.

For now, the fund has no plans to diversify into residential properties as homebuyers in this country are typically owner-occupiers.

“It only works in countries with a culture of renting. It’s very tough because REITs need stable income. If tenants rotate all the time, that’s tough. When people invest, they look at sectors. We are a very conservative sector [and] industrials are more stable.

“We tend to keep that diversification in our portfolio, so we don’t have any concentration in any one location. The only one I am guilty of is logistics but [it] is an interesting industry actually,” LaBrooy explains.

He cites the real estate market situation in Dubai, where values plummeted by half following the debt crisis in late 2009 in the aftermath of the global financial meltdown.

Dubai, which is part of the United Arab Emirates, had borrowed over US$80 billion to transform itself into a financial and tourism hub.

“Everything except industrial space was down — hotels, office space, condos. Industrials went up, I think, because everything came by port there. There has been no let-up in demand for goods and services in that sector.

“So logistics is a very stable sector and it allows one the opportunity to own large tracts of land in very strategic locations as opposed to buying small parcels,” LaBrooy says.

He notes that many of the occupants of the company’s industrial properties are engaged in consumer goods-based logistics, where they deal in necessities such as food, electrical appliances and other local demand drivers.

“A lot of the logistics players are from the distribution side rather than export. We’re very careful, watching world trends and tracking them,” he says.

LaBrooy says Axis REIT prefers to invest in older properties with potential for capital appreciation and higher rental yields.

It banks on the group’s experience in real estate to identify these properties, which are then renovated to boost rental yields and capital appreciation.

He cites Wisma Kemajuan, a mixed-use building comprising an office, showroom and professional warehouse space, in Section 19, Petaling Jaya, which the group acquired in December 2005 for RM29 million. The building was refurbished in 2007 at a cost of RM3 million and today, it is worth RM52 million, he says.

By focusing on both office and industrial properties, the fund will also not “go down in flames” if one of these sectors is hit, he adds.

Capital market strategy
Axis REIT is the only REIT on Bursa Malaysia that is trading in the RM2 range, which is where the fund “likes to be”, says LaBrooy.

“There has been a rally in the prices but we’re very conscious about the fact that people invest at this level. We want to meet their yield expectations, so we work very hard to ensure we deliver on our promises to the market,” he comments.

There are currently 375.9 million Axis REIT units on the market, trading at RM2.23 as at last Wednesday’s close.

The fund had started out with 205.9 million units, placed out at RM1.25 apiece, with a projected distribution per unit (DPU) of 3.76 sen.

It has since undertaken three placement exercises to fund property acquisitions, the latest being the private placement of 68.2 million units to raise about RM134 million for the purchase of two new industrial properties in Selangor.

ARMB was surprised that the placement was oversubscribed by three times despite the “tremendous resurgence in REITs by CapitaMalls Malaysia Trust  and Sunway Real Estate Investment Trust” which, says LaBrooy, not only brought in a lot of liquidity, but could also have exhausted the market.

He observes that in terms of capital gains, REITs are performing “reasonably well”.

“Very few are trading below their listing price while some are trading at par but we’ve actually managed to post quite a strong performance in comparison with other REITs.

“And despite the fact that share prices are tracked back to yields, we’ve managed to maintain ours against  rising share prices.

“The last time we went in, we raised RM197 million. We were trading at RM1.82, so it was at a premium to our net asset value, which meant our average weighted cost of capital was very attractive for us to go out and do some pretty good deals that actually help us a lot in managing the expectations of the fund.

“We actually track ourselves along these para­meters because it is very important for us to trade at a premium in the capital race. Or else it would be very hard to raise capital and make those numbers work,” he explains.

He says the REIT’s strategy in its capital-raising exercises — which are only performed with acquisitions in mind — is to lower its gearing to 22% upon boosting its capital before acquiring again.

“So on a leverage basis, we move up the curve,” he says.

“What we try to avoid is what we call a negative carry [where the cost of funding a securities or financial futures position is higher than the yield earned] because when we introduce so many units into the market and we get the money in and have to pay dividends of 7% to 8%, the money has to work very, very hard.

“So we time the acquisitions to coincide with capital raising and that is very, very hard to do because we need negative carry to be less than 30 days,” he explains.

Moving forward
While the company is not ruling out acquisitions in Cyberjaya, LaBrooy points out the area is focused on information technology, a sector that he is cautious about.

“We’d rather not have just one tenant. Multinationals can just pack up and leave, a case in point being Satyam Computer Services Ltd, which had to scale down aggressively after [the global financial crisis]. Also, there are risks involved because they don’t involve so much machines as intellectual capital and that can move around the world,” he explains.

“Cyberjaya, at 6,000 acres, is huge and it is going to take a long time to develop. Businesses have to be generated, human capital needs to be developed. Infrastructure needs to be developed and supported,” he says.

The REIT’s focus is basically sustainable developments, where spaces have multiple uses which can cater for various types of tenants, says LaBrooy.

“We have to pick assets that are easy to rent and have very good potential for capital gain. Location is also key,” he adds.

The REIT will also only feature properties in Malaysia to avoid the complexities of cross-border property management, currencies, regulations and local issues.

“If you want to do that, you will have to get assets from various countries as an alternative ...  that’s what’s happening in Singapore where people pool assets and list in Singapore,” LaBrooy points out.

Industry outlook
Fund managers have more money than ever before, ready for reinvestment following the privatisations in the market, LaBrooy observes.

“This has led to a rush into yielding assets and REITs have become a preferred asset class again in this volatile environment. This can be seen from the huge response to recent REIT offerings in Singapore,” he says.

He points out that Singapore’s Mapletree Industrial Trust, which comprises industrial properties, opened at S$1.15, a 23% premium to the offer price of S$0.93, and peaked at S$1.20.

“Mapletree’s S$940 million IPO was among a string of successful public offerings of property assets in Asia recently, which also included the S$3 billion listing of Singapore wealth fund Government of Singapore Investment Corporation’s logistics unit Global Logistics Properties Ltd.
“The Mapletree Trust was 40 times oversubscribed, pointing to the demand for risk-free paper. This indicates that REITs have returned as a preferred stock for investors as yield returns as an investment theme for funds,” he says.

To allow the REIT sector to grow, LaBrooy says certain measures must be taken: “Our tax regime has to match or better Singapore’s. We have to ask ourselves why two major Islamic REITs have chosen to list in Singapore.”

He adds that the ringgit has to be internationalised. “The real estate market needs to be liberalised to allow the big four to five international players to form joint ventures with local realtors or set up on their own and practise in Malaysia.

“Then and only then will we become an international destination for global companies to relocate here as these real estate companies have the research and also global mandates from multinationals to source for destinations for them.”

He also called for REIT regulations to be reviewed to allow more liberalisation in equity ownership of the manager and capital raising.

Another measure that would make the sector more competitive, he says, would be to allow REITs to manage their own assets. This is because property management is a business and the manager has issues with allowing third parties to manage these properties as mandated by law, he argues.

LaBrooy also says Islamic REIT managers should be classified as Islamic fund managers and enjoy the same tax breaks under government incentive schemes, thus encouraging more Islamic REITs to be established in the country. “Encourage foreign assets to be listed here with a suitable incentive scheme in place,” he urges.

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 830, Nov 1-7, 2010

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