Pavilion Real Estate Investment Trust (July 18, RM1.64)

Maintain hold with a higher fair value (FV) of RM1.60: We maintain our “hold” recommendation on Pavilion Real Estate Investment Trust (REIT) with a higher FV of RM1.60 from RM1.53 based on an unchanged forward target yield of 5.5%. The upward FV revision is derived from a higher payout ratio of 100% versus 95% previously.

We have revised our earnings forecast downwards by 1.4% and 0.3% for financial year 2018 forecast (FY18F) and FY19F with minor tweaks in operating expenses.

Shopping malls located in Kuala Lumpur city centre remained resilient with Pavilion Kuala Lumpur and Intermark Mall having occupancy rates at 98.9% and 90% respectively.

Meanwhile, we expect low single-digit rental growth, both with leases expiring in FY18 at a marginal 14% and 20% respectively.

As for Da Men Mall (86% occupancy rate), management is targeting to achieve near full occupancy by evaluating its tenant mix. We believe rebates may be offered to assist underperforming tenants and encourage higher occupancy rates, especially with 51% of leases expiring in 2018 (2019: 23%).

Pavilion Tower has an occupancy rate of 98.5%, contributing 2.5% of gross revenue and net property income. With 37% of leases expiring in 2018, it is expected to retain all tenants, maintaining close to full occupancy.

The acquisition of Elite Pavilion Mall has been completed, and earnings contribution to commence from second half of FY18. Assuming an occupancy rate of 95%, we expect Elite Pavilion Mall will add about 8% or RM46 million to Pavilion REIT’s total revenue.

With 100% debt financing of RM580 million, the acquisition of Elite Pavilion Mall will result in a higher net gearing, from 23% to 31%, which is still manageable.

At 31%, Pavilion REIT still has room for future acquisitions, particularly Fahrenheit88, where it has the right of first refusal.

Overall, we are “neutral” on the REIT sector over the next 12 months. Prospects for the sector are expected to be subdued, especially with potential overnight policy rate hikes in 2018 as well as muted rental reversion opportunities affected partly by the oversupply of retail and office spaces.

Nonetheless, we believe Pavilion REIT will remain resilient given its assets are strategically located in prime and highly populated areas and able to maintain high occupancy rates. — AmInvestment Bank, July 18

This article first appeared in The Edge Financial Daily, on July 19, 2018.

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