Axis REIT land lease proposal seen mildly positive

PETALINGJAYA: Axis Real Estate Investment Trust (REIT) Bhd’s proposal to lease about seven acres of vacant land in Subang, Selangor from Malaysia Airports Holdings Bhd (MAHB) is seen as “mildly positive” by analysts.

Maybank Investment Bank Research (Maybank IB) said that the deal has a longterm lease structure and is potentially yield-accretive, despite having a minor contribution to earnings.

“We are in favour of the proposal, as our estimated net property yield of 6.8% (assuming a 90% net property margin) is above our estimated weighted average cost of capital of 5% (debt:equity, 40:60),” said the investment bank in a report.

To recap, the land, which MAHB is currently leasing from the Federal Land Commission, will be based on a 30+19-year tenure for a total consideration of RM19.9mil.

Axis REIT has proposed to construct a single-storey manufacturing plant-cum-office building on the land, for lease to Upeca Aerotech Sdn Bhd for a 20+6-year tenure. The estimated initial development cost is RM74.2mil, which includes the RM19.9mil land lease cost. The handover date is targeted for Dec 15, 2018.

The leaseback has an initial rental of RM5.6mil per annum for the first three years and is subject to rental step-ups in later years. The research firm has increased its financial year 2018 (FY18)/FY19 earnings estimate by -3.4%/+1.5% after imputing higher borrowings and the new asset’s contribution.

It noted that the proposal could potentially raise gross gearing to 0.38 times from 0.36 times as at the end of the third quarter of 2017.

Maybank IB has a “hold” call on the stock with a 12-month target price of RM1.70.

MIDF Research, which has upgraded the stock to a “buy”, said the asset is expected to start contributing to earnings from FY19 onwards.

“We estimate that the new asset will contribute about RM2mil per year to Axis REIT’s net property income, as we have taken into account the interest cost and annual rental income of the asset upon completion.

“Meanwhile, we expect its net gearing to increase to 39.6% from 36.5% currently. However, we note that Axis REIT is in the midst of a placement exercise, which is expected to reduce its gearing.”

Shares of Axis REIT closed unchanged at RM1.58.