We met up with AXREIT’s management recently and came out feeling neutral. The group is targeting to spend another RM15m capex on assets such as Infinite Center, Axis Business Campus, Crystal Plaza and Axis Business Park. Note there is a lumpy lease expiration of 31.5% of total NLA in FY14, of which <5% of total NLA is related to office assets which are facing muted demand due to oversupply in the Klang Valley. However, AXREIT’s track record of retaining tenants and continuously enhancing their assets provide comfort against excessive downside risks with regards to the renewals of expiring NLAs and we will be monitoring their progress closely. The scaling back of the 2nd tranche of the Sukuk program has resulted in a lower all-in blended financing rate of 4.13% which comes in handy to mitigate the mentioned risks. We make no changes to our FY13-FY14E estimates. Maintain MARKET PERFORM but lowered our TP to RM3.41 (from RM3.60) based on a higher FY14E gross yield of 6.1% (5.7% previously).

AEI updates. The group is concentrating on AEI’s with targeted CAPEX of RM15.0m targeted in 2H13 and will be mainly focused on Infinite Centre, Axis Business Campus (previously known as Wisma Bintang) and Crystal Plaza. For the whole of FY13, the group expects to spend RM26.0m CAPEX. Axis Business Campus is under major refurbishment in its South and West Wing while The Annex is also up for major refurbishment which will result in disrupted rental revenue for a 15-month period starting mid FY14.

Lumpy lease expiry in FY14. A significant amount of total NLA of 31.53% will expire in FY14 as opposed to 17.18% in FY13 and 15.56% in FY15. The main properties up for renewal in FY14 are SPLC3, Axis Steel Centre and Axis Business Park. Management is confident on maintaining tenants for SPLC3 and Axis Steel Centre, so there should be no issues with these assets. As for Axis Business Park (4.25% of total NLA), management is commencing AEIs to help retain or bring in new tenants. In the worst case scenario of the unlikely event that management fail to secure 5.0% NLA of FY14 lease expirations, FY14E core earnings will be reduced by 9% to RM86.3m. However, we think this is an unlikely event given AXREIT’s track record.

Scaled back the 2nd tranche of Sukuk for better financing rates. Its 2^nd tranche of Sukuk issuance was scaled back from RM190m to RM155m, which resulted in a blended financing rate of 4.13%. The difference will be funded by either bank borrowings or another Sukuk issuance or whichever instrument that offers the lowest financing rate blend. We view this positively as management continues to seek longer-term refinancing solutions at more compelling rates to hedge against future increases in interest rates.

Media reports on Axis Plaza and Wisma Kemajuan up for disposal may be misleading. We gathered that speculations may have homed in on these assets as occupancy rates are lower than the portfolio’s average. Management has yet to disclose as to which assets are up for disposal. However, they indicated that it will be timed together with a similar size (value-wise) acquisition to ensure minimal impact to DPU. So, timing of the placement for new acquisitions will be a good indicator. Timing of these exercises is still targeted for year-end.

Maintain MARKET PERFORM but reduce TP to RM3.41 (from RM3.60). We make no changes to our estimates (refer overleaf). Our revised TP is based on higher FY14E target gross yield of 6.1% (5.7% previously), assuming an unchanged +2.2ppt spread on a higher target 10-yr MGS of 3.9% (3.5% previously) (refer overleaf). We maintain MARKET PERFORM as we see minimal DPU catalysts as we expect: (i) acquisitions to be slow and (ii) newly acquired assets, via placements, will result in minimal accretions to DPU given the low cap rate environment.

Source: Kenanga