News

PAVREIT has announced a conditional sale and purchase agreement with Equine Park Country Resort Sdn Bhd for the acquisition of Damen Mall in USJ, Subang Jaya for a total consideration of RM488.0m. The mall consists of 420,920sf of NLA and 1,672 car park bays.

Comments

We were not overly surprised as Damen Mall and Fahrenheit88 are PAVREIT’s acquisition targets over the last two years. However, this acquisition took place slightly sooner than expected as the mall is brand new and scheduled to open in 3CYQ15.

The total consideration is fairly significant as it makes up 10.5% of PAVREIT’s total asset base.

Valuation-wise, we believe the acquisition price is fair as we estimate cap rate of 6.5% based on portfolio NPI margin of 70% on our annualised FY16E contributions of Damen Mall (97% occupancy on rental of RM9.20psf/month) (refer overleaf).

PAVREIT is funding the acquisition fully via borrowings and we expect FY16E gearing to increase to 0.23x post the acquisition (from 0.15x currently), while financing cost will increase by 83% in FY16.

All in, we are neutral-to-positive on this acquisition which we expect to be DPU-neutral in FY16 due to higher borrowing cost, which will negate the 9-month contribution from Damen Mall. We expect the asset to be DPU accretive by FY17 from full-year GRI contributions. We expect the acquisition to add 0.31 sen (3.65%) to FY17E DPU to 8.87 sen.

Outlook

The Damen Mall acquisition is expected to be completed in 2QCY16 upon due diligence by the Trustee, and the Vendor completing construction, with tenancy of not less than 85% of NLA.

The Pavilion Extension should be completed by 2H16, while the fahrenheit88 acquisition is still on the table. We do not expect the acquisition of fahrenheit88 to occur so soon after Damen Mall to avoid straining its balance sheet, but management may acquire fahrenheit88 should the cap rates are reasonable, i.e. closer to 6.5%.

Forecast

We leave FY15-16E unchanged, with gross yields of 5.1- 5.4% in FY15-16E (net: 4.6-4.9%).

Rating

Maintain OUTPERFORM

Valuation

We maintain OUTPERFORM and our TP of RM1.71 after accounting for asset contributions in FY16-17E. Our TP is based on an unchanged target gross yield of 4.9% on a +1.0ppt yield spread to our 10-year MGS target of 3.9%. We have applied the thinnest yield spread among MREITs under our coverage as we believe PAVREIT may be trading on thinner spreads based on expectation of future asset injections in FY16-FY17.

Risks to Our Call

Bond yield expansions

Weaker-than-expected rental reversions

Weak occupancy rates

Source: Kenanga Research - 18 Sep 2015