Upbeat 1Q results for Axis REIT, CMMT

AXIS REIT (RM2.74) kicked off the 1QFY12 earnings season for locally listed real estate investment trusts (REITs) on a strong note. Property income was up 18.3% y-o-y to RM32.2 million, lifted by contributions from the two newly acquired properties as well as higher average occupancy rate. The trust has also undertaken several asset enhancement projects during the period, resulting in additional lettable area and better rental rates.

Income available for distribution was up 22.5% y-o-y to RM19.9 million. A distribution of 4.3 sen per unit was declared. The unit went ex-entitlement for the distribution this week.

Axis has fared pretty well over the years with its portfolio of primarily income-producing industrial and logistics warehouses and office properties. It was the first REIT to be listed on the local bourse, back in 2005. The initial offering was priced at RM1.25 per unit. Since then, the trust has grown rapidly — its portfolio expanded from just five properties upon listing to the current 29.

Indeed, it is among the most active in terms of asset acquisitions. The latest acquisitions, completed in 1Q, were two logistics warehouses in Seberang Prai and Bayan Lepas, Penang, valued at RM107.5 million. Axis' current portfolio of properties has a combined value of more than RM1.39 billion.

Occupancy has been trending higher over the past few years, from an average of 92.3% at end-2009 to 97.8% at end-1Q12. The assets expansion and increase in occupancy rate underpinned the steady growth in Axis' income available for distribution and is reflected in the trust's unit price gains. It is currently trading at RM2.74, or about 1.3 times net asset value of RM2.11.

Going forward, Axis intends to keep expanding its portfolio. It recently signed the sale and purchase agreement for an industrial facility in Nilai Industrial Park, Negri Sembilan, for RM26.5 million and is negotiating the purchase of eight other properties, mostly industrial facilities and warehouses, worth RM338 million.

The acquisitions are likely to be funded by a combination of new units placement and borrowings, probably by end of the year. Gearing stood at 28.8% as at end-March. If all goes to plan, total assets under management will expand to well over RM1.7 billion.

In addition, the trust has several ongoing asset enhancement projects. This includes the Infinite Centre and Wisma Bintang in Petaling Jaya and Axis Eureka, Cyberjaya, likely to be completed in 2012/13. It expects the properties to earn improved yields after the enhancement.

Axis is trading at the higher end of the sector's price-to-net asset value (P/NAV) but its yields are still fairly attractive and compare well against the larger listed REITs in terms of total assets. Total distribution per unit is estimated at 17.4 sen for the current year. That translates into a gross yield of roughly 6.4% at the prevailing unit price.

CMMT has done well since IPO
CapitaMalls Malaysia Trust (CMMT; RM1.39) too reported a solid set of earnings results for 1Q. Total revenue was up 35.5% y-o-y to RM71.4 million, boosted by full quarter contributions from Gurney Plaza Extension (acquired end-March 2011) and East Coast Mall (November 2011) as well as positive rental reversion for leases renewed during the quarter.

In terms of valuations, CMMT is trading at a lower P/NAV than Axis at 1.25 times NAV of RM1.12. By comparison, the latter is now trading at approximately 1.3 times NAV of RM2.11 per unit. However, CMMT's yields are also expected to be lower at 6% based on our estimated distribution of roughly 8.4 sen per unit for this year.

CMMT too has fared well since listing on the local bourse in July 2010. Its IPO was priced at RM1 per unit. Based on the prevailing price, investors would have made capital gains of 39% in less than two years, excluding income distribution totalling 11.27 sen per unit during the period.

Gearing stood at 28.8% as at end-March, which gives the trust room to make further acquisitions. Given its pedigree — its sponsor CapitaMalls Asia is among the largest developers, owners and managers of shopping malls in the region — there is a high likelihood that CMMT will continue to expand its portfolio of assets.

Income from retail-focused real estate investment trusts is widely seen as among the most resilient to business cycles. CMMT's existing portfolio of four shopping malls — Gurney Plaza (including extension) in Penang, Sungai Wang Plaza in Kuala Lumpur, The Mines in Seri Kembangan, Selangor, and East Coast Mall, Kuantan, Pahang, — had an average occupancy of 98.3% as at end-1Q12 and combined value of RM2.78 billion.

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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