Security deposits to cushion Axis-REIT

HLIB Research said YESB was a tenant contributing 5% of Axis-REIT’s total revenue for the financial year ended Dec 31, 2022.

PETALING JAYA: Axis Real Estate Investment Trust’s (Axis-REIT) loss of revenue due to the recent cessation of a lease agreement will likely be partly shielded by the six months’ security deposits paid by the major tenant of Axis Steel Centre @ SiLC, who had defaulted.

This is based on the lease agreement set between Axis-REIT and Yongnam Engineering Sdn Bhd (YESB) in 2014, according to Hong Leong Investment Bank (HLIB) Research.

The brokerage noted YESB was a tenant contributing 5% of Axis-REIT’s total revenue for the financial year ended Dec 31, 2022 (FY22).

Axis-REIT on Monday announced that YESB, the tenant of Axis Steel Centre @ SiLC, had defaulted its rental payments. Correspondingly, Axis-REIT issued a termination notice to YESB to end its existing lease agreement.

While HLIB Research maintained its “buy” call on Axis-REIT, the brokerage cut its target price for the fund to RM2.16 from RM2.23 previously.

This followed the downward revision in earnings forecasts for Axis-REIT for FY23 by 8.5% and FY24 by 3.3% on the assumption that the said property would remain vacant until mid-2024.

“We think the property will remain vacant in the near to mid-term due to the time taken to return vacant possession to Axis-REIT,” HLIB Research explained.

“Additionally, the manufacturing facility is presumably a built-to-suit property which might warrant asset-enhancement initiatives on the property to be ready to lease out to new tenants, thus leading to a prolonged vacancy period,” it added.

According to HLIB Research, Axis-REIT’s management could potentially explore legal action against YESB to recover the outstanding leases, and potentially the remaining unexpired period of the lease agreement until 2029.

The latter, it said, could entail nearly RM100mil of leases in totality to Axis-REIT.

“Nonetheless, details about management’s next course of action are scarce at this juncture. Furthermore, litigations (should there be any) would stretch for a long period of time and pose uncertainties with regards to the outcome,” it said.

For background, Axis-REIT undertook the acquisition of Axis Steel Centre @ SilLC in 2014 via a sale and leaseback agreement with YESB for a fixed term of 15 years until 2029. Rental rates for the fixed term would be at an agreed step-up rate of 10% every three years.

The first term of the three-year monthly lease rate was initially set at RM1mil, and increased to about RM1.2mil currently at its third term.

“We understand Axis-REIT had earlier made a provision of doubtful debts amounting to RM7.3mil in the first quarter of 2023 on the outstanding rental payments. Our back-of-the-envelope calculation suggests that the provision made is about six months’ worth of rental,” HLIB Research said.

Regardless of the recent setback, HLIB Research said it continued to like Axis-REIT in view of the fund’s robust track record, occupant tenancy in its diversified portfolio and resilience amid tough times.

Also, it is one of the very few syariah-compliant REITs around, it said.

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