Pavilion REIT to see subdued rental reversion growth

KUALA LUMPUR: Pavilion Real Estate Investment Trust (PavREIT) is expected to see slower rental reversion growth from several of its properties, analysts observed.

The research arm of AmInvestment Bank Bhd (AmInvestment) revised its earnings forecast of the REIT downwards by three and five per cent for financial years 2018 (FY18) and FY19.

This was based on the expectation of minimal growth on rental reversions from various properties and taking into account that the injection of Pavilion Elite is reflected only after the first half of FY18 (1HFY18).

“We expect Pavilion Kuala Lumpur as well as Intermark Mall to continue maintaining high occupancy rates at 99 and 90 per cent respectively with marginal growth on rental reversions and minimal leases expiring in FY18 (14 and 20 per cent, respectively).

“Likewise, Pavilion Tower which has 37 per cent of leases expiring in 2018, is expected to retain all tenants, maintaining close to full occupancy.

“The successful tenant reversion at Pavilion Tower may however be at the expense of positive rental reversions as maintaining high occupancy remains the priority,” the research team explained.

Aside from that, it noted that PavREIT’s Da Men Mall continues to lag behind in terms of occupancy rate at 86 per cent.

“The management is currently evaluating the tenant mix for DaMen to increase footfall. Additionally, rebates may be offered to assist underperforming tenants and encourage higher occupancy rates, especially with 51 per cent of leases expiring in 2018,” it added.

Meanwhile, AmInvestment noted that Pavilion’s gearing level is low at 0.26-folds, with 80 per cent of it being floating rate borrowings.

“However, management has guided that while interest rates are rising, existing floating remains more favourable as compared to locking in fixed rates previously.

“Hence, we expect minimal impact from the potential interest rate hikes on Pavilion’s earnings for FY18 to FY19F.

“At the same time, the low gearing level indicates room for future acquisitions, particularly since PavREIT has the right of first refusal for properties such as Fahrenheit88 in Bukit Bintang, subjected only to the owner’s intention to sell,” the research team said.

Overall, it said that PavREIT’s debt maturity looks concentrated with RM733 million maturing in 2019 and another RM736 million in 2021.

It noted that PavREIT has advised that the 2019 maturities will be refinanced to smoothen the repayment profile.

AmInvestment maintained a ‘hold’ call on the stock.