On behalf of the Board of Directors of Axis REIT Managers Berhad (“Board”), it gives us great pleasure to present Axis-REIT’s inaugural Integrated Annual Report for the financial year ended 31 December 2019.
Our transition to integrated reporting is a natural “next step” for the Fund, having embarked on Sustainability Reporting since 2016. It is also a step forward for us as we embrace the heightened corporate regulatory requirements and responsibilities, particularly as the Fund crossed the RM2.0 billion threshold in terms of market capitalisation to be classified as a large company in early-2019.
This Report aims to present a holistic and comprehensive view of Axis-REIT’s business and value creation model, addressing how we utilise our financial, manufactured, intellectual, human, social and natural capital resources. It presents the key challenges and opportunities that affect the Fund, and is a means for management to monitor and improve the Fund’s performance, and for stakeholders to track the Fund’s progress in a transparent, integrated and holistic manner.
Looking back, 2019 presented a challenging year from a global macroeconomic backdrop as businesses contended with headwinds arising from external trade tensions and an extended weakness in commodity-related sectors. These developments weighed on investor sentiment, triggered volatility in financial markets and translated to uncertainties in business strategies and expansion plans.
Despite the challenges, Malaysia’s economy remained resilient, posting commendable GDP growth. This was largely attributed to firm domestic demand, resilience in the services and manufacturing sectors, supportive labour market conditions, and Bank Negara Malaysia’s accommodative monetary policy.
With a portfolio that is focused on industrial properties, Axis-REIT has been largely insulated from the short-term volatility arising from economic and political uncertainties on the global stage. Sustained demand for strategically located industrial properties has enabled our portfolio to generate a resilient income stream. We have continued to focus on growing and strengthening our position as a leader in this space, in line with our mission of providing consistent distributions to the Fund’s Unitholders through portfolio growth.
Toward this end, we completed two acquisitions in 2019, both being manufacturing facilities located in Nusajaya, Johor, for RM55.8 million in total. The acquisitions reinforced our presence in the rapidly-growing Iskandar Malaysia region, and expanded our footprint in Johor, which now accounts for just over a quarter of our portfolio by net lettable area (“NLA”).
In addition to the acquisitions, we embarked on our third property development project during the year – a “built-to-lease” warehouse facility, built to the specifications and requirements of Federal Express Services (M) Sdn Bhd (“FedEx”). The greenfield project, known as Axis Facility @ Batu Kawan, is slated for handover by end-February 2020. The development is particularly significant to the Fund as it also augments our reputation as a trusted and capable property development partner in the industrial space segment.
Collectively these three properties raised our portfolio count to 48 properties. The Fund’s portfolio valuation rose to RM3.0 billion as at 31 December 2019 – a 6.9% increase from the previous year. Apart from the new property additions, the increase was also, in part, derived from a revaluation gain of RM101.6 million on our property portfolio, which included higher valuations for our recently-completed property development projects, Axis Mega Distribution Centre and Axis Aerotech Centre @ Subang.
With these latest additions, Axis-REIT’s portfolio remains concentrated on industrial properties, while our office properties remain stable with improved occupancy rates amid sustained demand for well-located, Grade A office space.
We continue to maintain an active portfolio management programme to optimise the performance of the Fund’s existing assets. Our approach encompasses stakeholder relationship management, proactive asset maintenance and refurbishment, as well as strategic AEIs to maintain high tenant satisfaction rates and the appeal of our properties, as well as to safeguard the valuation of our portfolio.
We worked closely with our existing tenants to understand and anticipate their business space needs. We also engaged our extensive network of real estate agents and leveraged on digital marketing to increase our brand presence and reach. We spent a total of RM9.1 million in asset refurbishments and AEIs during the year.
These efforts enabled us to successfully secure leases for 2.04 million sq. ft. of space, which is equivalent to 96% of space with leases and tenancies that were expiring or were due for renewal during the year. These leases included renewals for 1.8 million sq. ft., which represents an 84% tenant retention rate.
As a result of these efforts, the Fund’s portfolio occupancy rate stood at 92%, and we achieved a positive rental reversion of 2% across the portfolio, while extending our weighted average lease expiry (“WALE”) to 6 years.
Our investment and portfolio management efforts translated into another strong financial performance for Axis-REIT in FYE2019. The Fund’s reported revenue grew 5.6% to RM222.5 million in 2019. At the bottom line, reported net realised income stood at RM115.2 million for FYE2019, up just 1.5% from a year earlier. The low growth reported was mainly due to the impact of lease incentive adjustments pursuant to the accounting standard, MFRS 16. Without these adjustments, net realised income for FYE2019 would have amounted to RM116.2 million, a healthy 8.6% increase from the previous year, in line with the Fund’s top line growth.
The Fund’s distribution per unit (“DPU”) for FYE2019 amounted to 9.26 sen, up from 8.74 sen in FYE2018. This translated to a distribution yield of 5.2% (based on Axis-REIT’s closing Unit price as at 31 December 2019 of RM1.77). Taking into account Axis-REIT’s units’ stellar capital gains during the year, total returns to Unitholders was a robust 19.4%.
As has been the practice in previous years, the Board announced an Income Distribution Reinvestment Plan (“IDRP”) for FYE2019, allowing Unitholders of Axis-REIT to reinvest a portion of the final distribution into new units in the Fund. The IDRP is expected to be completed by 10 March 2020.
Axis-REIT’s balance sheet remains strong with financing significantly lower, at 28.7% as at 31 December 2019, following the repayment of financing with proceeds from the Fund’s private placement exercises undertaken during the year. Consequently, our net asset value (“NAV”) rose by 24.9% to RM2.1 billion or RM1.45 per unit. This reflects the increased Unitholders capital following the completion of the said private placement exercises during the year, as well as the revaluation gain on our property portfolio.
Looking ahead, we are optimistic about the Fund’s prospects in the coming year and beyond. Our outlook is premised on expectations that the Malaysian economy will remain resilient in facing any external economic and geopolitical headwinds, and that demand dynamics in the domestic industrial property market will remain positive. In particular, these include expectations of:
Continued growth in the country’s manufacturing sector, driven by firm domestic demand, continued investments in the manufacturing sector and positive labour market conditions.
The fundamental strength and stability of the domestic manufacturing and logistics sectors also make Malaysia a possible beneficiary of potential trade redirection and import substitution, should on-going global trade tensions escalate.
Continued and rapid expansion of e-commerce, which supports demand for choice industrial properties
Reports have estimated that internet retailing in Malaysia has grown over 10-fold in the last decade, and will continue to grow exponentially. Consumers are increasingly embracing internet shopping and the proliferation of e-commerce channels are changing the retail landscape, which in turn, has altered supply chain dynamics.
These developments have driven up demand for strategicallylocated industrial properties with good connectivity to transport networks in key urban areas.
Bank Negara Malaysia maintaining an accommodative monetary policy amid downside risks to global growth in 2020. This was demonstrated in the central bank’s decision to reduce the Overnight Policy Rate in January 2020 – a pre-emptive move to support economic growth.
In light of the broader economic and industry dynamics, we have taken steps to position the Fund for growth, taking into account the prevailing macroeconomic conditions and market opportunities. These include:
Reinforcing our position as the leading Industrial REIT.
Axis-REIT is the country’s leading Industrial REIT, with 91% of our portfolio sitting on industrial property titles. We aim to reinforce our leadership in this segment and have built up a robust acquisition pipeline to grow our portfolio of industrial properties. During 2019, we identified seven more acquisition targets, valued at RM288.3 million. The acquisitions are on-going and slated for completion in the first half of 2020, along with the upcoming handover of our third property development project, Axis Facility @ Batu Kawan, which is expected at end-February 2020.
These acquisitions and development project are in line with our strategy of curating and growing a portfolio of strategically-located, highly sought after industrial assets to better serve our clients, which in turn, will drive earnings and distribution growth for the Fund’s Unitholders.
Optimising the Fund’s capital structure to support our growth ambitions.
As our portfolio expansion efforts gain momentum, we have taken the necessary steps to optimise the Fund’s capital structure to support our strategic growth plans.
Pursuant to this, we implemented and successfully concluded capital raising exercises that raised a total of RM336.2 million in the last quarter of 2019, which was used to pare down the Fund’s short term financing and to provide headroom for future acquisitions.
We also embarked on a Sukuk issuance that was completed in January 2019, raising RM240.0 million in nominal value 7-year Islamic Medium Term Notes. The Sukuk issuance helped restructure the Fund’s financing profile, reducing its exposure to short term financing while strengthening its financing maturity profile.
As part of our capital optimisation efforts, we also took the opportunity to lock in the prevailing low financing rates, thereby increasing the Fund’s exposure to fixed rate facilities.
Collectively, these efforts helped strengthen the Fund’s financing profile, and provide sufficient financing headroom for our expansion plans.
Amid supportive macroeconomic and market dynamics, and having positioned the Fund with attractive opportunities and a strong capital structure, we are set for a productive year ahead. We will continue delivering sustainable growth to Axis-REIT’s Unitholders, derived from pursuing organic growth from our existing assets, growing our portfolio by acquiring yield-accretive properties, and seeking suitable ‘built-to-lease’ development projects that will generate stable and sustainable additional income streams.
As we seek out opportunities for expansion and growth, we are cognisant of the risks to our business model and operations. Management has formulated and maintains a comprehensive Risk Register to ensure all existing and potential material risks are identified, monitored and mitigated, and we are vigilant in updating and ensuring follow through on material risks that impact the Fund. To ensure Axis-REIT captures risks from multiple disciplines, we have incorporated ESG aspects into the Risk Register to enhance our risk management capabilities. This effort signifies a key milestone in our journey towards aligning sustainability within Axis-REIT. For more information on our risks and how we manage them, please refer to pages 100 to 103 of this Report.
In our continuous pursuit of growth, we remain conscious of our interconnectedness with our stakeholders and the communities around us. We remain committed to ensure the sustainability of our value creation model, and have taken a step forward by incorporating ESG matters in our approach.
Our sustainability committee oversees our efforts in all sustainability and ESG matters. The sustainability committee has identified the Fund’s material ESG matters, examined their implications and impact to our business model and integrated them into our business and risk management strategies. We believe this is critical for sustainable, long-term growth of the Fund. For more information on Axis-REIT’s sustainability initiatives, please refer to pages 105 to 139 of the Report.
We have, since our inception, laid the groundwork for sustainable growth. It is entrenched in our vision, mission and six principles of management. Over the years, they have guided our decisions and strategic plans, and paved the way for the Fund’s growth and success thus far. Each year, as we reap the rewards of our past efforts, we continue to sow the seeds that will position Axis-REIT for continued growth in the years to come.
Our achievements have been made possible with the focus and commitment of the entire team at Axis-REIT, from our esteemed Board members, to our talented management team and dedicated operations personnel. Their efforts enable us to effectively and efficiently leverage on our capitals and opportunities in the market to sustain and grow our income streams, in line with our mission of providing consistent distributions to the Fund’s Unitholders.
We also wish to express our appreciation and gratitude to all our external stakeholders, from our tenants, contractors, real estate partners, members of the investment community and the press, as well as the broader community around us for their support and collaboration. We look forward to our continued co-operation in the years to come.
YAM Tunku Dato’ Seri Shahabuddin Bin Tunku Besar Burhanuddin
14 February 2020
Leong Kit May
Chief Executive Officer/Executive Director
14 February 2020