This article first appeared in The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

AXIS Real Estate Investment Trust (KL:AXREIT) — which is in the midst of a private placement to raise up to RM454.99 million, its largest ever — is planning to have a balance sheet headroom of RM1 billion, which it expects to make use of over the next two years for further growth.

Proceeds from the shares it plans to place out to its major shareholders — the Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) — will be used to pare down its financing ratio to 33% from its projected end-October ratio of 44%, says Axis REIT.

“We have seen our financing ratio steadily increase in the last few months as a result of portfolio expansion in both the development and acquisitions space. We have consistently adopted the strategy to maintain a healthy balance sheet by ensuring the financing rate stays below 40% over the longer term by embarking on primary placements if we foresee the financing ratio will exceed 40% due to our acquisition pipeline,” says Axis REIT Managers Bhd CEO Leong Kit May in an email reply to The Edge.

This month, the REIT is expecting to complete the purchase of three more assets worth RM471.6 million that will raise its financing ratio to 44% from 36% at the end of the first half of 2024.

The REIT completed three acquisitions worth RM173 million in July, namely Axis Vista 2, a 4½-storey detached building with existing use as a 3S Service Centre; Axis Industrial Facility @ Batu Caves; and Axis Industrial Facility @ Sendayan, Negeri Sembilan.

“While we are not near the 50% mark, the primary goal of this placement is to strengthen our balance sheet by reducing our financing ratio and creating further headroom for future portfolio growth,” says Leong.

As at June 30, 2024, Axis REIT’s total bank financing stood at about RM1.69 billion, with total assets at RM4.69 billion, and total unitholders’ funds at RM2.83 billion.

Under the placement proposed on Aug 30, the REIT is looking to place out up to 263 million units representing 15.05% of its 1.75 billion issued units, with either EPF or KWAP taking up a maximum of 174.75 million units. Assuming all the placement units are issued at RM1.73 each, the exercise will raise RM454.99 million, which will be used to pare down debts and defray the cost of placement.

EPF is currently Axis REIT’s largest unitholder with a 17.65% stake, followed by KWAP with 10.03%.

If EPF takes up the 174.75 million units, its stake in Axis REIT will rise to 24.03%, while KWAP’s will be diluted to 8.72%. If KWAP takes it up instead, it will displace EPF as the largest unitholder as its stake in Axis REIT will hit 17.41%, while EPF’s will be diluted to 15.34%.

Based on an average effective profit rate of 4.13% per annum for Axis REIT’s existing bank financing as at June 30, 2024, the partial repayment of the bank financing is expected to result in gross financing cost saving of about RM18.57 million per annum, says the REIT.

The placement will provide Axis REIT with a RM1 billion headroom to enlarge its portfolio over the next two years. If the plan to acquire RM1 billion worth of properties is realised, its assets under management will have grown by 20% at end-2026.

But why didn’t Axis REIT choose a rights issue to raise the funds it needs, which will give minority shareholders a chance to participate?

“The current placement will be our 10th. We chose this route over a rights issue to ensure greater efficiency and speed in raising funds. This allows us to secure capital quickly and strategically, which is crucial for our growth plans,” says Leong.

Axis REIT’s focus is on industrial, logistics and commercial assets. As at June 30, 2024, it had 64 assets comprising 14.15 million sq ft of net leasable area (NLA), with an average occupancy rate of 89%.

Warehouses made up 59% of the REIT’s NLA, followed by manufacturing facilities at 26%, industrial assets with offices at 12%, and offices and hypermarkets at 3% each.

In the first half of its financial year ending Dec 31, 2024 (1HFY2024), Axis REIT reported a net income of RM81.22 million, compared with RM65.03 million in 1HFY2023, as property income climbed to RM151.24 million from RM137.6 million following lease commencement at Bukit Raja Distribution Centre 2 in August 2023, with a monthly rent of RM1.35 million.

The higher property income was also due to positive rental reversion, says the REIT. About 52% of the 2.49 million sq ft of space due for renewal this year has been renewed while another 8.6% was re-tenanted.

Two completed acquisitions — Axis Hypermarket @ Temerloh in January and Axis Facility 1 @ Bukit Raja in May — also contributed to the higher property income, although this was partly offset by the loss of rental income from a lease termination at Axis Steel Centre @ SiLC.

In April, Axis REIT signed an agreement to sell Axis Steel Centre @ SiLC to a data centre operator for a lump sum of RM162 million in cash. The price is 5.54% higher than its RM153.5 million cost of investment for the asset, which it bought about 10 years ago in December 2014.

The property comprises a parcel of industrial land measuring 10.91ha, on which two single-storey detached factories, a double-storey office building, a double-storey canteen and maintenance office, a single-storey training centre and a three-storey worker hostel and ancillary buildings are built.

This means the property is being disposed of at RM137.95 per sq ft (psf) without considering the value of the buildings.

This is about the same valuation AME Elite Consortium Bhd (KL:AME) got for its lands in SiLC, which AME announced in May that it was selling to Digital Hyperspace Malaysia Sdn Bhd (DHM), a subsidiary of Hong Kong-based Quantum DC (HK) Ltd, also a data centre operator.

AME’s freehold parcels, measuring 34.91 acres in total, were sold for RM209.84 million cash, or RM138 psf. Its original cost of investment, which it paid for less than four years ago in December 2020, was RM89.23 million or RM58.68 psf. This means AME managed to sell the lands for a 135.17% gain.

In contrast, Axis REIT’s cost of investment translates into RM130.71 psf.

“Axis REIT has to sell the property. If not, it will have to incur more capital expenditure to upgrade it. It will also have to hold the property while looking for a new tenant, which will not be generating income for the REIT,” says an industrial property observer with knowledge of the transaction.

When the lands were bought also played a significant role in the investment cost. Axis REIT bought Axis Steel Centre in 2014, when the Johor property market was still hot, whereas AME purchased the parcels when the Covid-19 pandemic was at its height.

Meanwhile, Axis REIT has another big vacancy to fill — its Axis Mega Distribution Centre (AMDC) Phase 2 in Telok Panglima Garang, Klang. About five months after receiving the building’s certificate of completion and compliance (CCC), its occupancy rate is only around 25%.

Phase 2 of AMDC — comprising a built-to-lease single-storey warehouse with attached offices, ancillary buildings and external elements with a built-up area of 509,040 sq ft — was completed in March 2024.

“AMDC consists of two phases. Phase 1 has been 100% occupied by a single tenant since 2019. Phase 2 is a multi-tenanted warehouse that was completed at end-March 2024. We have tenants for AMDC Phase 2 and ongoing marketing is actively underway to achieve full occupancy of AMDC Phase 2’s remaining space,” says Axis REIT.

This is not to say Axis REIT is going to be beset with challenges to churn out good returns on its investments for stakeholders. As at June 30, 2024, the REIT’s average net yield stood at 7.7%, which is competitive in the industry.

“When we break it down by specific asset classes, our office properties yield 6.9% net, office industrial properties yield 7.1% net, logistics warehouses provide a yield of 7.9% net, manufacturing facilities yield 7.8% net, and hypermarkets have the highest net yield at 8.2%. This diverse portfolio allows us to maintain a strong and balanced yield across different sectors,” says Leong.

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