Pavilion REIT's bigger Christmas gift

Pavilion REIT (Feb 9, RM1.16)
Maintain outperform with target price of RM1.27:
At 107% of forecast, earnings for the short 25-day quarter post listing were within expectations as it is a seasonally strong quarter. We tweak our numbers for updated balance sheet items but maintain our dividend discount model-based target price and reiterate our "outperform" call.

Pavilion's 4QFY11 was only a 25-day quarter as the stock was listed on Dec 7, 2011. December is a seasonally strong month as Christmas festivities and year-end school holidays typically boost retail sales.

Pavilion declared a dividend per unit of 44 sen, representing 100% payout. A positive surprise was the RM18 million revaluation gain for Pavilion KL, which helped raise Pavilion's net asset value to RM2.87 billion or 96 sen per unit.

Another nice surprise was the 12.5% increase in retail sales from RM1.6 billion in 2010 to RM1.8 billion in 2011. As shopper traffic was flattish year-on-year (y-o-y) at 31 million, this implies higher retail sales per shopper.

This is a positive development as it suggests that the quality of the shopper traffic has improved. Higher retail sales is good news for Pavilion as turnover rent typically comprises about 4% of total rental revenues.

Pavilion enjoyed 5% to 6% rental reversion for the 7% of tenancies that expired in 2011. We believe that Pavilion Mall, which opened in 2007, is still at an early stage in its rental reversion cycle.

In its first cycle of rental reversions in 2010, rental rates were raised by 8% to 12.5%. We expect similarly strong rental reversions during its next major rental review in 2013 when 67% of net lettable area comes up for renewal.  — CIMB IB Research, Feb 9

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