AXREIT is acquiring an industrial cum office facility in Nilai for RM50.0m. We like that the asset is fully tenanted for the next 10 years on decent gross yield of 7.5%. However, we expect minimal impact to FY20E CNP, by +0.5%, as imputed. BUY with TP of RM2.00 on an unchanged +1.4ppt spread to our 10-year MGS target of 3.40%. Our applied spread is on the lower-end among MREITs under our coverage (+1.3ppt to +3.2ppt).

AXREIT has proposed to acquire a warehouse cum office asset in Kawasan Perindustrian Nilai II, Nilai, Negeri Sembilan from K-Plastics Industries Sdn. Bhd for a consideration of RM50.0m. The asset is currently 100% occupied with a 10- year fixed lease term with the option to renew for another 5 years. The acquisition will be funded by borrowings and is expected to be completed by end FY19, accreting fully in FY20.

The asset has a 10% step-up rate every 3 years which amounts to an average gross yield of 7.5% over the 10-year period which is on the lower-end of more recent acquisition yields of between 7.5% and 9.0%. That said, we are fairly neutral as the acquisition has minimal impact to earnings of <1% given AXREIT’s large portfolio with investment properties totalling RM2.8b.

We like AXREIT for its strong active acquisition momentum to grow earnings, providing stable DPU from long-term leases (WALE or weighted average lease expiry of 6.2 years vs. prime retail REITs’ WALE of c.2-3 years), and it is one of the few Shariah-compliant MREITs, making it a favourite among institutional investors. At current level, gross yield of 5.3% is close to MREITs’ average of 5.5%.

Additionally, the Group is eyeing industrial assets totalling RM166m in FY19, but details are scarce pending finalised SPA. However, based on our calculations, we estimate that all these assets could potentially increase FY20E DPU by 2% while its gearing would increase to 0.44x (from 0.41x post this acquisition). As such, we expect AXREIT to undertake a placement towards end FY19 or early FY20 post these acquisitions to pare down borrowings and reckon a 10% placement is more likely (to avoid over dilution), which would then lower FY20E gearing back to 0.38x.

Source: Rakuten Research - 9 Oct 2019