Axis REIT, an office and industrial Real Estate Investment Trust (REIT), was listed on Bursa Malaysia in August 2005. It owns 19 properties, with a market value of RM723 million compared with the acquisition plus enhancement cost of RM599 million. It acquired five new properties in 2008, with three located in Johor and two in Petaling Jaya, bringing its net lettable area (NLA) up to 2.85 million sq ft.

Its portfolio of properties ranges from office industrial buildings, warehousing/logistic centres, commercial offices to warehousing retail facilities and light industrial buildings. Geographically, its properties in Petaling Jaya are the largest contributor to book value (72.6% of book value) followed by Shah Alam (10.9%), Johor (9.5%), Kedah (5.2%) and Klang (1.8%).

Axis converted into a syariah-compliant REIT in December 2008 and has successfully refinanced its debt with Islamic bonds. Being syariah-compliant widens Axis’ investor base and potentially lets it tap Middle Eastern funds. On the flipside, there will be more restrictions in terms of accepting tenants. For example, the REIT cannot own real estate in which all the tenants operate non-permissible activities.   

Axis is one of the few REITs in Malaysia that have grown through acquisitions. Axis management has a proven track record of identifying good acquisition targets that provide attractive yields and growing the REIT. Since listing, it has grown the book value of assets under management by 118%.

Although REITs in general are allowed to have a gearing limit of 50%, Axis REIT has been more prudent when it comes to borrowing and has an internal policy of capping gearing at 40%. Its gearing level now stands at 33%. Most of its loans are short-term in nature and Axis is looking to convert part of the debt to medium-term loans to reduce refinancing risks.

It successfully placed out 50 million units at RM 1.80 apiece in January 2008 and has used the proceeds to fund the acquisition of the five new properties during the year. It deferred capital raising towards the end of 2008 due to the weakness in market prices. However, management has already taken preparatory steps to raise capital in the event that the market recovers.

Axis reported a 15.4% rise in 1Q2009 net profit to RM10.4 million, arising from higher rental yields from new acquisitions in 2008. The average occupancy of its property portfolio as at March 31, 2009, stands at 95.4%. Going forward, there will be a risk of non-renewal of tenancy as 19% of its NLA will be up for renewal in FY2009 and another 24% in FY2010. The potential for an upward revision of rental rates is also slim if economic conditions do not improve.

Axis is trading below its revalued net asset value of RM1.75 per share. Effective January 2009, Axis REIT changed its income distribution policy from semi-annual to quarterly payments. It paid a quarterly dividend of 3.9 sen per share, translating to an annual dividend of 15.6 sen. This would imply that Axis could provide an attractive gross dividend yield of 11%. Assuming a more difficult FY2010 and a decline in dividend per unit to 15 sen per annum, Axis would still provide an attractive yield of 10.5%. However, the shares are illiquid and dividend per unit is unlikely to improve in difficult economic conditions.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.



This article appeared in The Edge Malaysia, Issue 755, May 18-24, 2009