Axis REIT (Jan 18, RM2.73)
Maintain market perform with fair value RM2.72 from RM2.70: Axis REIT is currently looking at 11 potential assets totalling RM545 million that could be injected into the REIT over the next two years. The real estate investment trust plans to acquire half of these assets by end-2012. These assets include the two proposed acquisitions in Penang announced in 4QFY11.
The Bayan Lepas acquisition was completed on Wednesday, while the Seberang Prai acquisition is expected to be completed by month-end.
Axis REIT recorded an overall portfolio occupancy rate of 97.22% in 4QFY11, its highest ever (3QFY11: 96.83%; 4QFY10: 95.73%). This is expected to increase by 2QFY12 when Quattro West's new tenant moves in, increasing the asset's occupancy rate to 100% from 89.45%. Lease expiry for the next three years will be 16.98%, 19.13% and 22.41% of net leasable area (NLA), hence lease renewal risk will be higher in 2013 and 2014.
Axis REIT will be looking to spend at least RM20 million in capital expenditure for asset refurbishment in FY12. The major asset enhancement works will be on Wisma Bintang, where the scope of work includes the construction of a four-storey office block and the refurbishment of the façade of Lots 13A and 13B. Work is expected to start in 3QFY12, with completion by 1QFY13. Other assets lined up for refurbishment are: (i) Subang Hi-Tech (40% completed); (ii) Infinite Centre (work to start in 1QFY12); and (iii) Axis Eureka (pending proposal).
Axis REIT's current gearing level stands at 0.24 times (from 0.35 times), after we factor in the higher asset values and lower borrowings. The lower gearing will give Axis REIT plenty of debt headroom for the acquisition of new assets, although it will likely keep long-term gearing around its internal target of 0.35 times.
Axis REIT will try to maintain its weighted average cost of debt at about 4.5% (currently 4.66%). The management intends to do this by: (i) restructuring its short-term borrowings into medium- to long-term loans with lower spreads; and (ii) issuing long-term sukuk bonds as part of its debt funding model.
We raise slightly our target price for Axis REIT to RM2.72 (from RM2.70) based on a target yield of 6.45% on our revised FY12 dividends per unit (DPU). We maintain our "market perform" recommendation on Axis REIT. We like Axis REIT as it continues to deliver on its DPU, even with the placement of new units that could have potentially resulted in a DPU dilution. The MREITs continue to be the defensive picks for property exposure. — RHB Research Institute, Jan 18