Tuesday, August 6, 2013

Pavilion REIT : Rental reversions on track but sentiment hurt by rising interest rate environment (CS)

Pavilion REIT
Maintain NEUTRAL
Price (01 Aug 13 , RM) 1.45
TP (prev. TP RM) 1.49 (1.65)
Rental reversions on track but sentiment hurt by rising interest rate environment

● Pav REIT's 1H13 distributable income of RM110 mn was in line with expectations as Pavilion Mall benefitted from the higher rental income from "Fashion Avenue." Occupancy remained close to fully occupied at 99.5% and 94.0% for Pavilion mall and the office tower, respectively.

● Close to half of Pavilion mall's tenants up for renewal this year have been renewed, achieving rental reversions in the mid-teens. Majority of remaining tenant expiries should be renewed in 3Q13.


● The potential acquisition of Farenheit 88 is likely to be pushed back to end 2014 (from end 2013) as the current owners will be conducting new asset enhancements (AEI). However, this could benefit Pav REIT, as asking prices may fall over the next year given the current higher yield environment.

● Maintain NEUTRAL, we cut our target price to RM1.49 (from RM1.65 previously) to factor in a higher risk free rate of 3.8%. Pav REIT currently trades at a fair 2013 gross yield of 5.0% vs the M-REIT average of 5.5%.

1H13 distributable income of RM110 mn
Pav REIT's 1H13 distributable income of RM110 mn was in line with expectations as Pavilion Mall benefitted from the higher rental income from "Fashion Avenue" (previously Tangs) and average rental rates reached RM19.00 psf (RM16.70 psf at IPO at end 2011). As of June 2013, occupancy remained close to fully occupied at 99.5% and 94.0% for Pavilion mall and the office tower, respectively. The office tower is expected to revert back to 100% occupancy in 4Q13.

Half of expiring tenants renewed
Of the 67% of tenants (by NLA) in Pavilion Mall up for renewal, close to half (30% of NLA) have been renewed, achieving rental reversions in the mid-teens (rental rate of the new three-year term versus the previous three-year term), in-line with our expectations of +14%. The majority of remaining tenants (37% of NLA) still due for renewal this year are already in advanced negotiations and should be completed in 3Q13.

Acquisition of Farenheit 88 pushed back
The potential acquisition of Farenheit 88 is likely to be pushed back to end 2014 (from end 2013) as the current owners will be conducting asset enhancements (AEI) on the second floor of the mall. With the new AEI plans, the earliest that Pav REIT will be able to make a decision on the acquisition would be towards the end of 2014.

The low-yield environment experienced in the past year has created a large pricing disparity between buyers and sellers of retail assets. As such, the delay could benefit Pav REIT, as asking prices may fall over the next year given the current higher yield environment.

Fair 2013 gross yield of 5.0%
Maintain NEUTRAL, we cut our target price to RM1.49 (from RM1.65 previously) to factor in a higher risk free rate of 3.8% (vs 3.5% previously), which was the average MGR 10-year yield prior to the recent Fitch rating downgrade on Malaysia's sovereign credit outlook. Pav REIT currently trades at a fair 2013 gross yield of 5.0% vs the M-REIT average of 5.5%.




Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 02/08/13

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