We attended AXREIT’s 2Q14 results briefing and came away with mixed views. We are more positive on its recent asset acquisitions as we believe it will be DPU accretive should all five acquisitions are completed by FY14, followed by a 18% placement of fund size. However, there is also weakness from existing assets as occupancy rates had declined QoQ to 91.95% while reversion rates are unappealing at 0.65% which is a historical low. This is due to negative rental reversions from Axis Steel Centre. We left our FY14E estimates unchanged but have increased FY15E earnings by 4.9% to RM122.0m after: (i) including positive contributions from the two assets with an issued Letter of Offer (LO) after gaining more clarity from management on the proposed acquisition, and (ii) reducing our asset occupancy rates and lowering reversions for Axis Steel Centre. Maintain CALL but upgrade TP to RM3.53 (from RM3.37) based on FY15E target gross yield of 6.3% (+2.5ppt spread to the 10-year MGS target of 3.80%). Drop in occupancy to 91.95% in 2Q14 (from 93.23% in 1Q14).

AXREIT saw a drop in occupancy mainly for assets such as; (i) The Annex (from 100.0% to 44.8%) as the futsal courts have moved out, (ii) Infinite Centre (from >90.0%% to 61.5%) which may been disrupted due to on-going refurbishment works, and (iii) Axis Vista (from >90.0% to 85.9%). Occupancy for Axis Business Park (ABP), Fonterra HQ and Axis Business Campus (ABC) has yet to improve from 1Q14 and is still below average portfolio occupancy rates. Reversions are unexciting at 0.65% due to negative reversions (-17.5%) on Axis Steel Centre.

Proposed five asset acquisitions worth RM472.0m, with 3 Sales Purchase Agreements (SPA) and 2 Letter of Offer (LO). AXREIT has proposed to acquire 5 assets (based on announcement dated 4th August 2014). We had previously only imputed the acquisition of the 3 SPA for the Warehouse/Office assets in Shah Alam. Post the briefing, we have included the 2 additional assets with the LO (an industrial facility in Prai and Johor). We expect AXREIT’s gearing to increase to 0.43x (from 0.32x) post-acquisition and pre-placement. Post-placement, we expect management to use the proceeds of RM269.1m to pare down its debt, decreasing gearing to 0.35x, which is at AXREIT’s internal gearing limit.

This suggests that AXREIT will probably require another placement if it plans to buy sizeable assets. If the current approved placement takes place in Oct-14, the next window for a placement will be in Oct-15 (unless exemptions are obtained). On the flipside, we believe that management may look to dispose one or some of its underperforming assets during this period.

Increase FY15E earnings by 4.9% to RM122.0. We expect all 5 asset acquisitions to be completed by 4Q14, and to be positive for AXREIT’s FY15E earnings. However, we have also softened our FY15E occupancy rates as we had initially expected occupancy rates to recover by FY15, and lowered rental rates for Axis Steel Centre due to the negative reversions. As such, we are increasing our FY15E by 4.9% to RM122.0m, and GDPU by 4.9% to RM22.3 sen

Maintain CALL but upgrade TP to RM3.53. We maintain our MARKET PERFORM call as we believe the weakness seen in AXREITs asset occupancy rates may persist although we are positive on the asset acquisition. However, we have upgraded our TP to RM3.53 (from RM3.37) based on FY15E target gross yield of 6.3% (+2.5ppt spread to the 10-year MGS target of 3.80%) given the upgrade in FY15E GDPU.

Source: Kenanga