Analysts say price for Intermark Mall purchase fair

KUALA LUMPUR (Dec 31): Analysts say Pavilion Real Estate Investment Trust (Pavilion REIT) is paying a fair price for Intermark Mall here, given that the commercial asset comes with a freehold strata title and is located on the fringe of the Golden Triangle.

Hong Leong Investment Bank Research (HLIB Research) deems the purchase consideration of RM160 million “value for money” — which works out to RM711 per sq ft of net lettable area (NLA), lower than Pavilion REIT’s recent transaction for da:mén USJ shopping mall in Petaling Jaya, Selangor, at around RM1,140 per sq ft.

“Besides, the acquisition price is at a 29.5% discount to [Pavilion REIT’s] book value [of RM227 million],” said the research firm in a note to clients yesterday.

Assuming an occupancy rate of 74% and average rental rate of RM7.20 psf, HLIB Research sees Intermark Mall giving Pavilion REIT an additional rental income of RM14.4 million (excluding the car park income of another RM840,000 per year), representing a gross rental yield of 9%.

“With the guaranteed rental of RM5 million per year, [the] guided net rental yield is expected to be at circa 6.1% per year,” it added, maintaining a “hold” call on Pavilion REIT, with a marginally higher target price (TP) of RM1.53 from RM1.52 previously.

For Kenanga Research, it believes that the acquisition price is considerably fair valuation-wise, as the estimated cap rate of 6.1% is based on net property income (NPI) margins of 68% (close to the trust’s portfolio NPI margins of 69%) on annualised financial year 2016 (FY16) contributions of Intermark Mall.

Kenanga Research is neutral to positive on the proposed acquisition, as it is expected to be neutral to mildly positive to Pavilion REIT’s distribution per unit (DPU) in FY16 due to higher borrowing costs, which will negate the nine-month contribution from Intermark Mall.

It expects the asset to be DPU-accretive by FY17 from full-year gross rental income contributions, estimating the proposed acquisition to add 0.04 sen or 0.49% to the trust’s FY16 DPU to 8.41 sen and add 0.24 sen or 2.66% to FY17 DPU to 9.1 sen.

Kenanga Research is reiterating an “outperform” call on Pavilion REIT, with a revised TP to RM1.68 from RM1.67 previously.

MIDF Research also deems the acquisition price as fair, although the estimated property yield (NPI/asset value) of 6.1% is lower than Pavilion REIT’s current property yield of 6.5%.

“We believe there is potential for Pavilion REIT to increase [the] occupancy rate given their expertise in managing malls,” it said. Currently, Intermark Mall has a total NLA of 225,014 sq ft with an occupancy rate of 74%.

“We are neutral on the acquisition, as we estimate earnings impact from the proposed acquisition to be muted at less than 1% for FY16. Rental income from Intermark Mall is expected to be offset by the borrowing cost to finance the acquisition,” said MIDF Research.

On Tuesday, Pavilion REIT announced that it is acquiring Intermark Mall, together with 367 designated car park bays, from The Intermark Sdn Bhd for RM160 million, which will be funded entirely via debt, increasing the trust’s net gearing to 19% from 16% as at Sept 30, 2015.

Pavilion REIT shares closed one sen or 0.65% higher at RM1.54 yesterday, with a market capitalisation of RM4.65 billion.

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This article first appeared in The Edge Financial Daily, on Dec 31, 2015. Subscribe to The Edge Financial Daily here.