We attended AXREIT’s 2Q13 results briefing last Friday. It appears that occupancy rates for its assets are steady at 95.6% while it achieves positive rental reversions of 8.4% and secured 46.2% of portfolio’s NLA that are expiring in FY13. 2nd tranche of Sukuk amounting to RM155.0m is coming up in 2H13 at a lower fixed rate of 4.1%, which will reduce financing cost. RM15.0m is to be spent on Asset Enhancement Initiative (“AEI”) in 2H13, which will be mainly internally funded by the access cash available from 90% of unitholders opting for IDRPs the last round, management fees paid in units and improvement in receivables. Investors can also look forward to potential gains from upcoming asset disposal in FY13 (undisclosed) although it hinges on the next asset  acquisition to minimize loss of income. We make no changes to FY13-14E estimates, for now. Maintain MARKET PERFORM with unchanged TP of RM3.60, based on FY14E target gross yield of  5.7% (net: 5.2%) which is a +2.2ppt spread to our target 10-year MGS of 3.5%.

Stable operations and lower financing rates. QoQ, its average occupancy rates did not budge from 95.6%. Fonterra HQ’s occupancy rate stood at 85% due to the vacant space built for future expansion while Axis Business Campus (previously known as Wisma Bintang) saw 15.7% occupancy due to major ongoing refurbishment. Rental reversions in 1H13 were positive at 8.4% or secured 46.2% of portfolio’s NLA that are up for expiry in FY13. AXREIT 2nd tranche of Sukuk amounting to RM155.0m be coming up in 2H13, carrying a lower interest rate of 4.1% which will lower FY14E  financing rates to slightly below 4.3%; every 0.1ppt drop in financing rates improves RNI by 0.5%. 

More AEIs in the pipeline to strengthen organic growth. Expected CAPEX for FY13 is RM26.0m and so far they have spent RM11.0m on AEI in 1H13 and expect to spend another RM15.0m in 2H13 on Infinite Centre, Axis Business Campus and Crystal Plaza. Since most of their assets have a low cost base, AEIs will help to boost rental rates while still being more attractive than market rates. The aggressive AEIs are mainly funded by the access cash available from 90% of unitholders opting for IDRPs the last round, management fees paid in units and improvement in receivables.

Investors can look forward to gains from upcoming asset disposal. Management is looking to dispose of one of their assets, which have matured in value (undisclosed) and will return the full gains on disposal to unitholders. Note that the asset disposal will take place around the  same time as new asset acquisitions to ensure minimal disruptions to earnings. AXREIT has yet to announce any new asset acquisitions in FY13. Management has highlighted that they are still targeting to acquire RM380m-RM400m worth of assets this year. For now, the group has identified two assets from its private equity group (Great Avenue Warehouse and Total Logistics Warehouse, in  Shah Alam) which will likely take place by year-end while the approved placement of 90.7m units will take place in a similar time period as the new acquisitions, to minimize dilutions to existing shareholders. We believe it may be tough achieving their full asset acquisition target for FY13 as the asset acquisition environment has been rather challenging given the extremely low rates of 5%-6%  vs. AXREIT 7%-8% NPI target.

Maintain MARKET PERFORM with unchanged TP of RM3.60, based on a FY14E target gross yield of 5.7% (net: 5.2%) which carries a 2.2ppt spread to our target 10-year MGS of 3.5%. We are maintaining FY13-14E estimates, for now. We take a neutral view on AXREIT due to the challenging asset acquisition environment, meaning less excitement for the REIT. However, we can take solace in their aggressive AEI initiatives to achieve strong organic growth. AXREIT is also highly institutionalized while foreign shareholding is quite low at 5% (excl. related parties), which limits further its downside risks.

Source: Kenanga