- We re-affirm our HOLD recommendation on Pavilion REIT (PREIT), with an unchanged fair value of RM1.65/unit, based on our DCF valuation, following release of its 1Q results.

- PREIT posted a 1Q13 distributable income of RM56mil (+11% YoY, +4% QoQ) and a 1.86 sen DPU, in-line with our and consensus estimates at 26% and 27%, respectively.

- Revenue rose 11% YoY and 3% QoQ to RM95mil on the underlying strength of:- (1) Upward rental adjustment achieved from the additional 5% NLA at Fashion Avenue (previous space occupied by Tangs); and (2) 100% tenancy of Pavilion Tower. Both occurred in 3Q12.

- Positively, net property income (NPI) increased by 10% YoY and 4% QoQ to RM66mil, in-line with our estimated RM263mil NPI for the full year of FY13F. Negotiation is currently on-going with the respective or prospective tenants on the bulk of NLA (nearly 70%) that is due to expire this year (majority in September). This represents Pavilion Mall’s second rental cycle (first cycle in 2010).

- Supported by the young mall status, we have pencilled in a 12% rental reversion. PREIT’s average rental stood at RM18.80psf, at a discount (33%) to Suria KLCC’s of c.RM25psf, a matured mall.

- The evaluation exercise for Fahrenheit 88 is envisaged to be conducted in 4Q13, following the mall’s upcoming renewal in 3Q. Acquisition is likely to materialise, earliest in FY14F, should it be deemed fit as a yield-accretive acquisition (>5%). Note that PREIT is not playing any part in the repositioning of mall’s tenant mix in the upcoming renewal.

- Given the lack of yield-accretive acquisitions which somewhat limits the REIT’s growth, management is of the view that the sponsor would eventually have to venture into greenfield shopping malls. PREIT is eyeing day-to-day consumer malls in the northern and southern regions of Malaysia but not Iskandar, Johor. This is largely because of preference for malls located within city centres and targeting locals.

- Potential assets for injection include Fahrenheit 88, da:men mall in USJ and Pavilion Extension, with the tentative timeline in FY14F, FY15F and FY16F, respectively. The Extension will immediately be injected into PREIT upon completion, as we understand.

- While we continue to like PREIT for its resilient and quality assets, we believe the stock’s strong earnings from rental reversions have been priced-in. PREIT is fairly priced at an FY13F yield of 4.5%.

- We prefer Capitamalls Malaysia Trust (CMMT Mk Equity, BUY) for its first mover acquisition over Queensbay Mall in the immediate term, given the mall’s position as a ready asset for acquisition.

Source: AmeSecurities