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Thursday, December 31, 2015

Pavilion REIT makes another acquisition after three months

This article first appeared ini on December 31, 2015.

Pavilion Real Estate Investment Trust
(Dec 30, RM1.54)
Maintain buy with a higher target price of RM1.75:
Pavilion Real Estate Investment Trust (Pavilion REIT) has announced a proposal to acquire the Intermark Mall along Jalan Tun Razak for a purchase consideration of RM160 million.
The Intermark Mall has a total net lettable area of 255,014 sq ft. We believe that the net yield of 6.1% for the three-year-old mall is fair, given its prime location along Jalan Tun Razak, and direct access to the Integra and Vista office towers.
We note that the 74% occupancy rate is lower than its other portfolio assets, although we see this as an opportunity for the REIT to bring in high-yielding tenants.
The purchase would be fully funded by debt. Coupled with the RM488 million of debt for the purchase of da:mén in USJ, it could see its gearing breach the 25% mark (financial year 2015 [FY15]: 15%).
However, this still sits comfortably below the 50% gearing cap set by the Securities Commission Malaysia. The management expects the acquisition to be completed by the first quarter of 2016.
The deal has caught us by surprise as it comes not too long after its proposed acquisition of da:mén in USJ in September. We note that the acquisition would be earnings- and distribution-per-unit (DPU)-accretive upon completion, given that the mall already has a relatively stable tenancy mix.
The mall has a decent catchment from the surrounding offices and also accessibility to the nearby Ampang Park LRT station, which should lift future prospects. That said, the mall only makes up about 3% of Pavilion REIT’s estimated RM5.1 billion investment asset value.
Our FY16 forecast (FY16F) to FY17F earnings are lifted by less than 5% after adjusting for higher revenue and interest expenses going forward.
Despite the current weak consumer sentiment, Pavilion REIT is likely to still be able to sustain its DPU growth over the next 12 months, due to its inorganic growth potential. Key risks to our call include prolonged weak consumer sentiment and competition from newer malls. — RHB Research Institute, Dec 30

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