We maintain our HOLD rating on AXREIT with a lower DDM-derived price target of RM1.56 (from RM1.65). AXREIT should turn the corner in 2018, driven by higher rental from its manufacturing and logistic assets. However, prolonged weakness in the office market and a possible OPR hike continue to weigh on investor sentiment. We cut our 18-19E EPU by 12-19% to account for the weak office market and higher finance costs. At a 5.8% 2018E distribution yield, valuation looks fair.

Manufacturing Assets Are Bearing Fruit, Logistics Holding Up…

AXREIT has increased its manufacturing portfolio to 25% of NLA, from 8% as at end-13. We are generally positive on these manufacturing facilities, given their long tenancy, step-up rents and decent initial net yields of c.7%. Elsewhere, its warehouse / logistics assets account for 44% of NLA, comparable to 43% as at end-13. The warehouse / logistics assets are holding up fine – outgoing tenants are replaced with new ones, albeit with some vacancies in between.

… But Offices Continue to Drag

Prolonged weakness in the office market has affected AXREIT’s office portfolio – occupancy continues to slide, with little recovery in sight. That said, we note that its exposure to the office and office / industrial segment has reduced over the years - from 42% of NLA at end-13 to 26% currently.

Potential OPR Hike (we Expect One) Is a Concern

AXREIT is relatively susceptible to OPR hike(s), vis-à-vis its Malaysian peer. Roughly 71% of its total borrowings of RM857m (as at end-Sep17) are short term and 63% of loans are floating rate. In comparison, the other MREITs under our coverage have only 0-19% of short-term exposure.

EPU to Turn a Corner, But Not as Strong as Expected

Maiden contributions from new manufacturing facilities / warehouses should lift 2018E realized EPU (after four consecutive years of decline). The recovery, however, may fall short of our previous expectations. We cut our 17-19E realized EPU by 7-19%, taking into consideration the weaker-thanexpected office market and rising interest costs.

Maintain HOLD

Maintain HOLD. Its 5.8% 2018E distribution yield (near historical average), valuation looks fair – a positive, rising DPU is offset by concerns on progressive rate hikes. Upside risk is a change in market expectations from rising rates to a rate cut; downside risk is weaker-than-expected earnings.

Source: Affin Hwang Research - 14 Dec 2017