LEVERAGING the e-commerce boom, Axis Real Estate Investment Trust (Axis REIT) — which recently made its largest acquisition of a logistics warehouse facility in Pelabuhan Tanjung Pelepas in Johor for RM390 million — continues to bank on industrial properties, which are more resilient with a long lease period, to secure its property income.

“Demand for logistics warehouses is relatively high and sustainable, driven primarily by the surge in e-commerce, which has boosted the attractiveness of industrial real estate. We will continue to seek potential properties that are in line with our goals to create sustainable distribution and earnings per unit for our unitholders,” says its CEO and executive director Leong Kit May in an email response to questions from The Edge.

Having said that, she notes that the key considerations for rental include location, facilities, condition of the properties that meet tenants’ requirements, as well as the ability to further enhance the properties.

Upon completion of the Johor acquisition next month, Axis REIT’s logistics warehouse portfolio will make up 52% of its total net lettable area, up from 45% in the financial year ended Dec 31, 2021 (FY2021). This is followed by its manufacturing facility (27%), office/industrial (14%), office (4%) and hypermarket (3%) portfolios. The industrial segment comprises logistics warehouse, manufacturing and office/industrial.

Annual rental contribution from the newly acquired logistics warehouse facility will be RM26 million for the first three years. This is about 11% of the trust’s total rental income of RM237.67 million for FY2021. The rental will be revised upwards from Year 4 to 10.

RHB Research believes that the industrial sub-segment is likely to experience a much better rental growth than other sub-segments in the coming years, driven by the fast expansion of e-commerce, partly due to the Covid-19 pandemic.

“Infrastructure investments are key to underpin the segment’s growth, and Malaysia ranks third behind Singapore and Vietnam as the logistics hub of choice in Southeast Asia. A few notable multinational corporations have chosen Malaysia to be their regional distribution centres, including Ikea, Lazada, Nestlé and BMW. Logistic facilities with smart systems such as automated storage and retrieval systems will be able to command a higher rental rate,” the research house says in an April 15 note.

Last year, Axis REIT concluded five property acquisitions for a total of RM223.2 million, increasing its portfolio to 58 properties. This lifted its total space under management to 11.4 million sq ft as at Dec 31, 2021, with an occupancy rate of 96%. At the end of March this year, Axis REIT’s total assets under management stood at RM3.76 billion and will surpass the RM4.1 billion mark after the completion of the recent acquisition.

“We will continue to grow the portfolio with the right assets to ensure sustainable returns to unitholders,” says Leong.

While its gearing ratio is expected to increase to 37% from 31% in FY2021, analysts say it is still below the gearing limit of 60% — a temporary increment from 50% until Dec 31, 2022 — prescribed by the Securities Commission Malaysia.

Despite the challenges presented by Covid-19, Axis REIT’s net property income (NPI) has been on the rise over the years. In 1QFY2022, its NPI expanded 17.2% to RM58.39 million from RM49.82 million a year ago, thanks to positive rental reversion from tenancy renewals and contributions from newly acquired properties. It has declared a first interim distribution of 2.42 sen per unit, payable on June 15.

For FY2021, it recorded an NPI of RM212.9 million, a 7.3% growth from RM198.5 million in FY2020, despite the lockdown to curb the spread of Covid-19.

Axis REIT recorded a 5.6% growth in rental reversion last year, with the renewal of 89% of the 1.96 million sq ft of leases that expired during the year. It managed to secure replacement tenancies for 2% of the net lettable area that was up for renewal.

“While the group recorded a strong growth in rental reversion, it should also be noted that we had achieved remarkable retention rates in FY2021,” says Leong.

For this year, she shares that the group has 2.49 million sq ft of space with leases that are expiring, of which 54% had already been renewed as at end-March.

“This exemplifies the clients’ satisfaction in our properties’ strategic locations and facilities provided. Moving forward, we will review the rental against the market conditions accordingly while continuously pursuing higher tenancy renewals,” she adds. RHB Research, in an April 21 note, says Axis REIT’s rental reversion rate this year will be attractive owing to the encouraging demand for warehouse and logistics assets in the light of the e-commerce boom.

Analysts have maintained their “buy” rating on Axis REIT following the release of its January-March 2022 financial results.

“The earnings outlook for Axis REIT is expected to remain positive as outlook for industrial assets remains steady on the back of solid demand for industrial space. Earnings growth is also expected to be driven by contribution from potential asset acquisitions with a total estimated value of RM120 million,” says MIDF Research, which has set a target price of RM2.08.

RHB Research sees a bigger upside for Axis REIT with a target price of RM2.32, having incorporated a 4% environmental, social and governance premium after taking into account its excellent governance score and commendable efforts in reducing greenhouse gas emissions.

Compared with a distribution per unit of 8.75 sen in FY2020, Axis REIT paid 9.49 sen in FY2021, representing a trailing 12-month distribution yield of 4.49%.

Based on last Friday’s closing price of RM1.90, Axis REIT was valued at RM3.11 billion.