No excitement in this pavilion
We expect Pavilion’s net property income (NPI) in 2014 to be driven by 2013’s rental reversions for 67% of its net lettable area (NLA). Higher earnings growth could come from new asset injections, but none are foreseen in the near-term horizon.
Our DDM-based target price is lowered to RM1.31 (from RM1.46) following adjustments to our cost of equity assumptions from 8.4% to 9.1%. Given the risk of higher interest rates in 2014, we think returns on REITs in general would be subdued. With the change in our recommendation structure, Pavilion REIT is now a Hold from a Neutral previously.
2013’s rental reversions to grow 2014’s NPI
For 2013, 67% of Pavilion‘s NLA was up for rental reversions. YTD, we estimate that more than 70% of the NLA that was up for reversions have been completed. The reversions that have been completed were at a rate of 10-15%. We expect the overall reversions for 2013 to support the growth in NPI for 2014 given the lack of acquisitions in 2013.
The completion of the Asset Enhancement Initiatives (AEI) for one of Pavilion's acquisition targets, Farenheit88, is expected to be in 2015. The mall was expected to be acquired sometime in 2014, although due to the AEI, the acquisition is expected to be delayed by one or two years.
The Extension to be completed by end-2015
Another acquisition target, The Extension, is currently under construction. The completion of The Extension is expected by end-2015. Given that the property is under construction, the acquisition of the asset is likely to be in 2016, following completion. The asset would also likely be without existing tenants, which Pavilion prefers, as it has a list of tenants lined up for the extra space.
Publish date: 10/12/13