News

• Pavilion REIT (PREIT) proposed the acquisition of The Intermark Mall, a 6-storey retail building together with 367 designated car park bays from The Intermark Sdn. Bhd. for a total cash consideration of RM160m. The retail mall consists of a total net lettable area of 225,014 sq ft at an occupancy rate of 74% (tenant mix depicted in Figure #1).
• Bundled with the SPA is a rental guarantee of RM15m for the period of 36 months where RM417k to be paid monthly for the first 24 months and a lump sum RM5m to be paid on the 25th month from the completion date.

Highlights/ Comments

• Value for Money. We view the purchase as value for money with a workout pricing of RM711psf NLA for a freehold strata title on the fringe of the Golden Triangle in KL as compared to recent transaction on Da:men at around RM1,140psf at USJ albeit difference in size. Besides, the proposed acquisition price is at a 29.5% discount to the book value.
• Healthy rental income. Assumption of an occupancy rate of 74% and average rental rate at RM7.2 psf will translate to additional rental income of RM14.4m (excluding the car park income of roughly RM840k p.a.), representing a gross rental yield of 9.0%. With the guaranteed rental of RM5m p.a., guided net rental yield expected to be at circa 6.1%p.a. (3.0% p.a. without it).
• Rooms for improvement. The implied NPI margin is rather low at around 32% compared to existing PRE IT’s NP I margin at around 70%. Besides, the low occupancy rate suggests that there are plenty of rooms for improvement after the acquisition. Consequently, we opine that the net rental yield is sustainable even after the guaranteed period. Using 100% debt to fund the deal, gearing is expected to increase to around 21% (vs industry 32%); while the total net investment properties would then increase to RM4.8bn.
• Yield Accretive. Assuming 9m contribution, our FY16 rental income p.a. for PREIT will be raised by circa 4.1%. Assuming a payout ratio of 100%, DPU would increase to 8.7 sen from 8.64 sen with an improved yield at 5.69%.
• Overall, we are positive on the acquisition given yield accretion. The commercial asset is deemed good quality at a strategic location with an attractive price.

Rating

HOLD , TP: RM1.53

Positives:

• Largest direct exposure to the super-prime location.
• Strong branding and rental reversions.
• Well-managed tenant mix. Negatives:
• Over-supply of office space in Klang Valley.

Negatives

• consumer sentiment as a result of GST implementation and price hike.

Valuation

• Maintain HOLD recommendation with a marginally higher TP of RM1.53 (from RM1.52) given the increased DPU.
• Targeted yield remains at 5.7%, derived from historical average yield spread of Pavilion REIT and 10-year MGS.

Source: Hong Leong Investment Bank Research - 30 Dec 2015