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Pavilion Real Estate Investment Trust
(Dec 31, RM1.55)
Maintain buy with an unchanged target price of RM1.75: Pavilion Real Estate Investment Trust (Pavilion REIT) has entered into a sale and purchase agreement with The Intermark Sdn Bhd for the purchase of Intermark Mall, a six-storey retail building in the Kuala Lumpur city centre, with 225,014 sq ft of net lettable area and 367 car park bays, for RM160 million cash.
The acquisition comes with a rental income guarantee of RM15 million or RM5 million per annum for the first three years.
The mall was last refurbished in 2012, and was 74% occupied at end-September 2015. The purchase will be fully funded via borrowings, to be completed by the first quarter of 2016, as we understand.
Intermark Mall could nudge Pavilion REIT’s financial year 2016 estimated (FY16E) investment property portfolio by 3% to RM5.35 billion from RM5.19 billion.
Based on our ballpark calculation, the deal is yield-accretive, whereby our estimated net property yield of 6.2% is higher than our estimated borrowing cost of 4.5%.
Our main assumptions include: i) an average rate of return of RM7.20 per sq ft (derived from an estimated monthly rental of RM1.2 million per Bursa Malaysia announcement); ii) RM800,000 car park income per annum; iii) an occupancy rate of 74%; and iv) a 65% net property margin.
While we are concerned about Intermark Mall’s less favourable occupancy rate of 74%, we believe this should improve under Pavilion REIT’s hands-on management, and given its strategic location in the city centre (about 1km from thePetronas Twin Towers) and adjoined prime assets, which are two grade-A office towers and a hotel tower, which should support demand for retail outlets.
Meanwhile, Pavilion REIT’s FY16 gross gearing could raise to 0.22 times from 0.2 times — still significantly below the 0.5 times statutory limit.
This article was first published in The Edge Financial Daily, on January 4, 2016. Tap here to subscribe for your personal copy.
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