Period  1Q14

Actual vs. Expectations 1Q14 realised net income (RNI) of RM22.3m came in within consensus and our expectations, making up 23% of consensus’ FY14E RNI and 21% of ours.

Dividends  1Q14 GDPS of 5.30 sen was declared, which includes a 0.88 sen non-taxable portion, based on 99.6% payout. A gross electable portion of 2.20 sen per unit can be reinvested via Income Distribution Reinvestment Plan (IDRP) (refer overleaf).

Key Results Highlights QoQ, topline revenue declined marginally by 1% to RM36.0m possibly due to the slight drop in occupancy rate to 93.2% from 94.9%. Meanwhile, PAT declined by 24% to RM22.4m due to higher operating cost (+8%) to RM5.8m and the absence of fair value adjustments. RNI increased by 4% to RM22.3m due to the RM1.6m gain on disposal of Axis Plaza recognised this quarter. Stripping off this gain, RNI was lower by 2%.

 YoY, 1Q14 GRI increased slightly by 2% to RM36.0m as Axis managed to negotiate 378,937sf NLA (7.12% of portfolio) and achieve 8.87% positive reversion. The group’s financing cost was also reduced by 10% due to their refinancing efforts and repayment of loans post disposal of Axis Plaza. This was sufficient to combat the rise in operating cost (+14%) as RNI (excluding gains on disposal) also increased slightly by 1%. Including the gains on disposal, RNI rose by 9%.

Outlook  We do not discount the possibility of an acquisition in the near future as AXREIT has yet to complete the share placement exercise which they will be seeking shareholders’ approval on 29th April 2014 to allot and issue 90,762,819 units, or 19.8% of existing fund size. AXREIT typically acquires assets shortly after a disposal; recall, Axis Plaza was disposed in Dec-13. AXREIT is targeting RM380-400m worth of asset acquisitions this year. However, we think that acquisitions may be challenging due to the current low cap rate environment.

Change to Forecasts  We make no changes to FY14E estimates. Note that our FY14E estimates accounts for: (i) the gains on disposal of Axis Plaza, which will be paid in three tranches in FY14, and (ii) the loss of Axis Plaza income starting 1Q14.

Rating Maintain UNDERPERFORM

Valuation  Our TP is maintained at RM3.17 based on FY14E and FY15E target gross yield of 7.3%. In view of the gains on disposal being paid out in three tranches, we believe investors may opt to top slice holdings, especially as the share price has risen the sharpest, at 14% YTD amongst MREITs under our coverage. Meanwhile, organic growth also remains unexciting.

Risks to Our Call Office sector demand pick up in the Klang Valley.

 Decline in bond yields.

Source: Kenanga