Growth opportunities for industrial trusts

Last week, we highlighted some industrial real estate investment trusts (REITs) that are listed on the Singapore Exchange (SGX) as investing options for Malaysian investors.

Broadly speaking, prevailing yields offered by industrial REITs are slightly more attractive than retail REITs, which have seen sharp yield compression over the past year on expectations that they carry lower risks. At the same time, the outlook for industrial REITs is stronger than office REITs in terms of demand and, in turn, rental rates.

On the local bourse, investors’ choice is limited, by and large, to Axis REIT in this category while the SGX offers a few more names. Perhaps due to this scarcity, prevailing yields from Axis REIT are lower than those currently offered by the larger SGX-listed industrial trusts (in terms of total assets and market capitalisation) such as Ascendas REIT and Mapletree Logistics Trust as well as their smaller peers like Cambridge Industrial Trust and Cache Logistics Trust.

Cache: resilient portfolio earnings and assets in the pipeline

Cache is among the newer trusts, listed only in April 2010. While it does not have a long track record, it is managed by ARA-CWT Trust Management (Cache) Ltd, a joint-venture REIT management company 60% owned by ARA Asset Management and sponsor, CWT Ltd, one of the region’s largest logistics service providers. CWT is also listed on the SGX.

The trust has been active in terms of new acquisitions, doubling the number of properties in its portfolio in less than three years since listing. As at end-2012, Cache had 12 properties worth a combined S$972 million (RM2.42 billion) and book value of S$0.96 per unit. Its latest purchases last year were two ramp-up logistics warehouse/office facilities for a total of S$101.2 million.

There will likely be more acquisitions going forward with a pipeline of logistics assets from its sponsor located in Singapore, China and Malaysia. At the moment, all but one of its properties are in Singapore. The sole overseas asset is a warehouse in Shanghai, China.

Without taking into account any new acquisition, the existing portfolio is expected to generate steady earnings, with annual rent escalation clauses built into master leases that account for the majority of its leases. Occupancy currently stands at 100%. Only 2% of total gross floor area (GFA) is up for renewal this year and 6% in 2014. The bulk of leases — about two-thirds in terms of GFA — are due in 2015/16. Its weighted average lease expiry is 3.9 years.

We estimate net yields at roughly 6.8% to 6.9% for 2013/14 at the current price of S$1.26.

Axis REIT still on the acquisition trail

Axis REIT is hoping to capitalise on some of the spillover demand for industrial space from Singapore. Among the properties currently being evaluated for acquisition are factories and logistics warehouses in Johor, where costs are lower than in the island state. The trust is also looking at warehouses in Shah Alam and Port Klang, Selangor, as well as a hypermarket in Melaka among others. These assets are worth some RM661 million combined.

For the current year, Axis plans to close deals worth some RM350 million, which would boost the total value of its investment properties by roughly 23%. Presently, its portfolio is valued at over RM1.5 billion while book value (after  income distribution for the fourth quarter [4Q] of 2012) stands at RM2.11 per unit.

To part finance the new acquisitions, Axis intends to issue up to 91 million new units or about 20% of its existing capital. This will keep gearing levels comfortably within the 30% to 35% range.

The trust is also undertaking a major asset enhancement for Axis Business campus. Renovations on the west and south wings are slated for completion by April/May this year while a new six-storey building is targeted for completion by July 2014. Management expects the rebranding of the property to translate into higher future rental income.

Income going forward will be underpinned by growth on several fronts — new acquisitions, asset enhancement initiatives as well as organic growth. Last year, leases accounting for about 9% of total net lettable area (NLA) were renewed with a 10% rental reversion, on average.

This year, some 17% of NLA is up for renewal while another 30% is due in 2014. Occupancy for its portfolio stands at 96.2% with 24 of the 31 properties fully occupied. The weighted average lease expiry is a relatively long 4.4 years in terms of NLA and 4.2 years in terms of rental income.

Axis has also started looking at opportunities for capital recycling, beginning with the disposal of Kayangan Depot, one of its underperforming properties, which was completed at end-2012. The sale netted proceeds totalling RM23.6 million and gains of RM5.9 million, which will be distributed back to unit holders.

Combined with income from operations, Axis is making distributions totalling 5.6 sen per unit for 4Q12. The unit will trade ex-entitlement Feb 5. In the current year, we estimate distribution per unit to rise to 17.6 sen (after taking into account impact from new acquisitions and dilution from the additional units issued), up from 17.3 sen per unit in 2012 (excluding the 1.3 sen per unit distributed from gains from the disposal of Kayangan Depot).

Dividend per unit is forecast to increase further to 18.6 sen in 2014. That would give unit holders decent net yields of 5% to 5.3% for the two years.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

 

This article first appeared in The Edge Financial Daily, on Jan 30, 2013.

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