Axis REIT; Buy; RM2.90
Price Target: RM3.60; AXRB MK

Axis REIT posted average rental reversions of 8% in 2013 on 790k sq ft or 14% of the REIT’s total NLA. A majority of the office properties still saw double digit reversions despite a challenging office market in the wake of 27m sq ft of office supply entering the market by 2016-17. Portfolio occupancies slipped mildly to 95% in 2013 from 96% in 2012, partly due to closure of Axis Business Campus for refurbishment.

In terms of asset enhancement initiatives, Axis Business Campus is now being marketed to prospective tenants at preliminary gross rental yields of 13% (we have assumed tenancy and rental recognition to begin in the beginning of 2H14). Axis Business Park and Wisma Academy & The Annex will also undergo refurbishments to raise rental yields, with projected gross yields at 12% and 10% respectively.

2014 is expected to be more optimistic for Axis REIT, with a slew of potential asset acquisitions lined up – a manufacturing facility in Seberang Prai (8% net yield), a Shah Alam distribution centre (7% net yield), a warehouse in Shah Alam (7-8% net yield) and a Port Klang warehouse (8% net yield). In total, potential acquisitions for Axis REIT number at RM380m after including other assets which are more preliminary in negotiations.

We think Axis REIT will still provide a robust 7% forward distribution yield, and earnings would further be boosted by acquisitions and the re-opening of Axis Business Campus in 2014. The sale of Axis Plaza, to be concluded by Apr 2014, will result in a 2.37sen distribution upside (using 2013’s units outstanding). In terms of capital management, we understand the REIT has interest rate swaps lined up, and will be locking in debt at a 3-year rate, implying a 31% effective floating rate. Maintain BUY with RM3.60 TP. 

Source: HwangDBS Research - 22 Jan 2014