-  We re-affirm our BUY rating on Pavilion REIT (PavREIT) with an unchanged fair value at RM1.33/unit based on a 5% discount to our DCF value of RM1.40/unit. 

-  PavREIT's 1QFY12 reported net income of RM48mil is in line with our and street's estimate, making up 26% and 28%, respectively. This is 14% higher than management's forecast, which is mainly contributed from advertising income and income from turnover rent from Pavilion mall.

-  Meanwhile, Pavilion Tower which accounts for 2.5% of gross rental income, came in 37% lower than management's forecast due to lower occupancy rate for this quarter. To-date, occupancy is 83%. Nevertheless, the remaining NLA of 100,000sf (circa RM5.78psf) will be occupied by middle of this year by a single tenant. Hence, achieving occupancy of 100%. 

-  During 1QFY12, higher revenue generated by advertising income resulted in higher other operating expenses. Thereby, achieving a higher net property income of 9% compared to management's forecast. 

-  PavREIT was listed on 7 December 2011. As such, there is no YoY or QoQ comparison.

-  Fashion Avenue consisting of 35 speciality stores, is currently under renovation. This would likely result rental income for the upcoming two quarters being lower than this quarter. However, expected doubling of rental rates will more than offset the 4.5 months of rental gap due to the renovation works and full impact will be reflected in FY13F. It is targeted to open in the first week of September with 100% occupancy. 

-  Pavilion extension is currently in the soil testing stage and to be completed in 36 months. Construction will begin during the 3Q of this year. 

-  No dividend has been declared for this quarter. PavREIT intends to distribute 100% of its distributable income for FY12F on a half yearly basis.  

-  Balance sheet remains strong with net gearing of 17%, implying room for acquisition. Management is looking to explore areas such as Klang Valley, Ipoh and Johor for any potential asset. 

-  At current level, PavREIT has a DPU estimate of 6.2 sen and 7.3 sen, and projected dividend yield of 5.4% and 6.4% (vs CMMT: 5.6% and 5.9%) for FY12F and FY13F, respectively. We believe FY13F will be an exceptional year given the expected doubling of rental rates at the Fashion Avenue and 67% of tenants up for renewal in FY13F. It also has exciting assets in the pipeline ' Pavilion Extension, Fahrenheit 88, and 'da:men' mall in USJ; hence, our BUY rating.