Dear Unitholders,

It is with great pleasure that we present Axis-REIT’s Integrated Annual Report (IAR) for the financial year ended 31 December 2022.

2022 saw the reopening of most economic sectors and Malaysia’s international borders, after almost two years of pandemic-led movement restrictions and lockdowns. The long-awaited reopening, albeit gradual, has been much welcomed, lifting consumer sentiment as well as business conditions as economic activity normalised.

Amid the optimism, there were still some challenges that weighed on the recovery. These included the persistent shortage of labour and rising labour costs. There were also concerns that pent-up consumer spending would taper off, exacerbated by inflationary pressures and a backdrop of higher interest rates.

Headwinds aside, industrial real estate, which had been fairly insulated relative to other property segments through the pandemic, proved resilient as Malaysia remained an attractive investment destination in the reconfiguration of the global supply chain. This resulted in sustained demand, particularly for third party logistics and warehousing assets, which provided favourable operating conditions for industrial REITs.

Against this backdrop, we continued to accomplish our operational and financial targets. Specifically, we added 4 properties with a cumulative 1.7 million sq. ft. of NLA to the portfolio, renewed tenancies for 77% of our expiring leases, and secured new tenancies for 120,000 sq. ft. of space. With this, we maintained our portfolio occupancy at a strong, 95%. Our operating results delivered realised net income growth of 15.7% and a DPU of 9.75 sen.

Beyond our steadfast operational and financial performance, we made significant progress in the Fund’s sustainability agenda. We added our first GBI-certified property to the portfolio and thereafter, followed up with the attainment of provisional green building certifications for 2 other properties. We introduced sustainability into our capital management strategy with our first sustainability-linked financing instruments, and subscribed to become a participant member of GRESB - a widely recognised, international ESG benchmark that measures the sustainability performance of a company’s assets.

These achievements and efforts complemented our policy-level measures such as the formulation of our Environmental Policy, achieving 30% female Board representation in June 2022, and the establishment of Governance as a strategic pillar in 2021.

Cumulatively, these efforts and achievements have led to Axis-REIT’s inclusion as a constituent of the FTSE4Good Bursa Malaysia Index and the FTSE4Good Bursa Malaysia Shariah Index. These inclusions reaffirm and acknowledge our commitment towards creating long term value for our Unitholders through continuous improvements in our ESG initiatives.

PORTFOLIO HIGHLIGHTS

2022 was a milestone year for Axis-REIT’s portfolio. To begin with, in April 2022, the Fund completed the acquisition of DW1 Logistics Warehouse. At a total consideration of RM390.0 million and with 1.15 million sq. ft. of space, the acquisition is the Fund’s largest to-date in terms of value and space. It is tied to a 10-year fixed lease to Equalbase PTP Sdn Bhd, a provider of specialty commercial and industrial real estate solutions. Together with 3 other property acquisitions completed during the year, the Fund’s portfolio grew to 62 properties with 12.7 million sq. ft. of space under management, housing 161 tenants as at 31 December 2022.

On the development front, the ongoing development of Bukit Raja Distribution Centre 2 is on track for completion and handover to Shopee Express Malaysia Sdn Bhd (Shopee Express) by 31 August 2023. During the year, we also commenced our fifth development project that will see the development of Axis Mega Distribution Centre (Phase 2), with approximately 584,112 sq. ft. of built-up area that can be subdivided into 8 modules, providing maximum flexibility to cater to varying demand requirements. The project is expected to be completed by 1Q 2024.

The acquisition of DW1 Logistics Warehouse was also a first for Axis-REIT as it marked the addition of the Fund’s first GBI-certified building. Since then, we received provisional green building certifications for Bukit Raja Distribution Centre 2 and Axis Facility 2 @ Bukit Raja.

OPERATIONS REVIEW

Industrial real estate assets have continued to benefit from positive demand dynamics, and we continue to proactively engage our tenants, real estate agents and the real estate market, to drive awareness and interest in our portfolio.

We are pleased that the Fund’s properties continue to attract and retain a strong tenant base. The Fund concluded 2022 with portfolio occupancy at 95% and a tenant listing that comprises multinational companies (MNCs), government-linked companies (GLCs) and large listed companies, which attests to the success of the Fund’s branding, portfolio selection and strategy, as well as its ability to deliver exceptional business space solutions and services.

During 2022, we were able to record quantifiable results from our sustainability initiatives, as we set our initial energy and carbon reduction targets for the multi-tenanted properties in our portfolio. We are pleased to note that we surpassed the targets, and will continue to monitor our progress in the coming year.

FINANCIAL HIGHLIGHTS

The Fund’s strong portfolio expansion and operational successes translated to continued growth in its financial indicators. Revenue grew 15.6% to RM284.5 million in 2022, from RM246.2 million in the previous financial year, driven by incremental rental income from newly acquired properties, sustained portfolio occupancy, higher rents for new leases, as well as positive rental reversions for renewals.

Net property income increased by 15.2% to RM245.3 million in 2022, from RM212.9 million in 2021. The expansion in margins stemmed from prudent cost management and cost control initiatives, which have mitigated inflationary cost pressures.

The Fund announced a total distribution of 9.75 sen per Unit for the financial year 2022, which translates to a yield of 5.5% based on the Fund’s closing Unit price of RM1.79 as at 31 December 2022.

During the year, Axis-REIT obtained its first sustainability-linked term financing and entered into its first sustainability-linked Islamic Profit Rate Swap (IPRS). These instruments come with predetermined sustainability-related performance targets which, when achieved, trigger discounts on the financing profit rates, providing further incentives for the Fund to meet its sustainability commitments.

As at 31 December 2022, Axis-REIT’s financing ratio stood at 36.3%. In December 2022, we finalised the book building exercise for a private placement of 100 million new Units. The private placement exercise raised net proceeds of RM173 million, which were used to repay the Fund’s existing shortterm financings in January 2023. Following the listing of the 100 million new Units on 4 January 2023, the financing ratio of the Fund was further reduced to 32% giving the Fund sufficient headroom to seek and pursue suitable acquisitive and development opportunities.

RISK MANAGEMENT & SUSTAINABILITY

A key takeaway of the COVID-19 pandemic has been the importance of having a comprehensive risk management framework that takes into account financial as well as non-financial risks. Our Risk Management Framework includes ESG-related risks and opportunities, where both financial and non-financial risks are integrated into our Risk Register. Details of our Risk Management Framework are available in the Business Risks and Opportunities section on pages 85 to 93.

We continue to be vigilant in identifying, understanding and mitigating all financial and non-financial risks. In 2022, we established an Environmental Policy to define and strengthen our commitment towards environmental sustainability, which includes addressing and mitigating climate change risks. The policy guides our approach in meeting our environmental goals, which includes the optimisation of energy and water consumption, a reduction in waste and carbon emissions, as well as the application of sustainable practices in development projects and AEIs. In line with the policy, we will also consider properties and projects that have green building certifications in our investment process, or seek such accreditations for our properties through major refurbishments and redevelopment efforts, where possible.

These efforts are complemented by our participation in GRESB, which allows the Fund to attract and engage both local and international investors with increasingly important ESG data and benchmarks. It also allows us to benchmark our own ESG performance against industry peers and standardise ESG data collection with internationally-recognised standards and frameworks.

2023 OUTLOOK AND STRATEGY

Looking ahead, 2023 is shaping up to be another exciting year. Although global economic growth may moderate, Malaysia is expected to see continued economic growth, on the back of continued expansion in domestic demand.

For Axis-REIT, structural drivers behind industrial real estate assets remain intact - global geopolitical tensions and post-pandemic supply chain strategies continue to drive investments in supply chain reconfiguration plans, and with this, demand for industrial properties. On the ground, Malaysia’s manufacturing sector continues to flourish, supported by accommodating policies and incentives, a deep and broad ecosystem of supporting industries, as well as extensive infrastructure.

Operationally, we will continue to leverage on these positive industry dynamics, promoting and positioning our industrial portfolio to capitalise on the sustained demand for modern and well-located industrial assets. In the meantime, we will continue to maintain our office properties, which offer quality business space solutions in thriving commercial centres in the Outer Kuala Lumpur area.

On the investments front, the buoyant demand for industrial properties continues to drive acquisitions, and this has further strengthened our portfolio of properties. We believe certain properties in prime industrial locations hold significant value enhancement potential through future rejuvenation programmes.

With real estate activity accounting for an estimated 40% of carbon emissions globally, we recognise that it is imperative that property owners, developers and operators play their part in reducing carbon emissions. Towards this end, we will maintain the momentum of our sustainability agenda, with plans to pursue green building certifications for 2 more properties in 2023. We will also build on our GRESB participation to ensure validation and transparency in our sustainability reporting and take our initial steps in preparing for TCFD-aligned reporting. More details of our position on climate change are discussed in the article about our Response to Climate Change on pages 32 to 33.

ACKNOWLEDGEMENTS & APPRECIATION

With the worst of the pandemic behind us, we reflect on the last 3 years with immense appreciation for our stakeholders - our employees, tenants, contractors, suppliers, real estate agents, surrounding communities, business partners and our Unitholders - who have stood by us and supported us as we navigated the unprecedented challenges of the pandemic. Your continued trust in our abilities, strategy, and processes, have allowed Axis-REIT to exit the pandemic stronger and more resilient than before.

We are also grateful to our industry associations and media partners in acknowledging our efforts and achievements through the conferment of the following awards in 2022:

In closing, we would like to take this opportunity to welcome Madam Lim Keng Hwee and Ms Devika A/P K Sothinathan as Independent Non Executive Directors to our Board. Both Keng Hwee and Devika bring with them a wealth of experience and expertise: Keng Hwee is the founder and Executive Director of IFS Advisory Services Sdn Bhd, a firm providing corporate services, while Devika is a Partner at Sothi & Ang, where she practices conveyancing, family law and corporate law. We also extend our gratitude to our Board for all their contributions, as they continuously shared their invaluable insights and industry expertise.

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