Higher income distribution for Axis REIT

Axis REIT has done quite well in terms of expanding its assets portfolio over the past few years and, as a result, has been gradually raising its income distribution to unitholders. We expect this trend to continue in the current year. Based on the estimated distribution of 17.5 sen per unit for 2011, investors will earn a fairly attractive gross yield of 7.4% at the prevailing price of RM2.36.

Expanding assets portfolio
It was the first real estate investment trust (REIT) to be listed on the Bursa Malaysia in August 2005 and was reclassified as an Islamic REIT in December 2008. The trust focuses primarily on assets within the office and industrial sectors. Its properties are located in Petaling Jaya, Shah Alam, Klang, Prai, Johor and Kedah.

From the initial five properties on listing, Axis REIT now owns and manages 26 properties worth over RM1.16 billion. Five properties were acquired last year, including two logistics warehouses in Seberang Prai that were completed in 1Q10. The latest acquisitions — Tesco Hypermarket in Johor, Axis PDI Centre and Axis Technology Centre — were completed in 4Q10.

The trust’s earnings have been expanding in tandem. Income before tax (excluding fair value adjustments for assets) has grown steadily, from RM26.4 million in 2006 to RM52.6 million last year. In 2010, Axis REIT successfully renegotiated an average rental increase of 8.9% for leases due during the year, which accounted for some 18.5% of the total net lettable area under its management.

The value of its portfolio of properties too has been trending higher. For instance, in 2009 the trust recognised revaluation gains of some RM19.1
million. The valuation for its stable of properties rose by another RM45.6 million last year.

Investors made smart gains
REITs are typically viewed as low risk investments with relatively slow capital appreciation. Their main attraction is steady, higher than market average yields. Nonetheless, unitholders for Axis REIT have not done too shabbily relative to the benchmark index, the FBM KLCI, over the past year.

Indeed, investors in the REIT would have made a capital gain of 22% since the start of 2010. Over the same period, the FBM KLCI was up 19%. Including the income distributed totalling 16 sen per unit for 2010, unitholders would have made returns totalling 30%.

More yield accretive acquisitions in the pipeline
Axis REIT intends to stick to its strategy of acquiring yield accretive properties whilst promoting rental growth for existing assets through enhancements.

For the current year, there are three transactions pending completion including its first asset disposal. The trust is in the midst of completing the sale of North Port Logistic Centre for RM14.5 million on expectations that the property has limited upside to future rental growth. The sale will net gains totalling RM760,000. The trust intends to re-deploy the proceeds towards more yield accretive properties.

The two acquisitions pending completion are for a warehouse-office (D8, Port of Tanjung Pelepas) in Johor and an office building (Axis Eureka) in Cyberjaya for a combined RM81.2 million.

Furthermore, the trust is planning to add five more logistics warehouses in Johor and the Klang Valley as well as two more office blocks in Cyberjaya — estimated to be worth some RM365 million in the current year. It is also looking at the acquisition of Axis Technology Centre 2, consisting of a 6-storey office block, single-storey warehouse and car parks.

Some of the asset enhancements currently underway are the upgrade/facelift for Crystal Plaza, Fuji Xerox and Infinite Centre as well as the expansion of some 7,000 sq ft of net lettable area for a new penthouse level in Menara Axis. Other enhancements on the drawing board for the current year include that for the Cycle & Carriage complex and Kayangan Depot.

Income distribution expected to rise further in 2011
As such, we expect its earnings will continue to trend higher in 2011, lifted by full-year contributions from the five properties acquired last year as well as partial contributions from proposed new asset purchases this year.

Distribution per unit in the current year is estimated at roughly 17.5 sen per unit. That would earn unitholders a relatively attractive yield of 7.4%. Axis REIT is currently trading at roughly 1.2 times its net asset value of RM2.01 per unit.


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.


This article appeared in The Edge Financial Daily, January 28, 2011.