Pavilion REIT ... double digit rental increases

Expect its near-term organic growth to be resilient and the asset pipeline intact. There are mostly fixed-rate debts to shield against rising interest costs.

Sixty-six percent of Pavilion KL’s net lettable area (NLA) will expire in 2013 with 6% to 7% of this to be leased to some of the 200 prospective tenants on its waiting list. Of the other 90% of expiring leases, one-third have been renewed at double digit rental increases.

This should spill over into first quarter of 2014 as the majority of leases expiring are in September 2013 and there would be a fit-out period for new tenants.

Average rental rates are still at substantial 20% to 25% discount to Suria KLCC’s rents, implying upside to prime rents. Do not see risks to rentals due to Pavilion KL’s prime location and long waiting list, and average occupancy costs remain manageable at 15-18%.

The Pavilion KL extension is on track for completion by end-2015 (we assumed acquisition in 2016), and the USJ retail mall (da:men) by early 2015 (not included in forecasts).

Fahrenheit88, which still suffers from low traffic, may be reviewed only in 2014 when its refurbishments (e.g. Parkamaya retail market and some areas on Level 2) mature. There is upside to its earnings if it acquires da:men.

Pavilion REIT now has a blueprint for its asset pipeline - it plans to acquire sponsor-driven greenfield developments after existing assets (completed and under construction) are acquired.

The REIT sees opportunities in Johor city centre and Penang island, although these are early days given the large land area and capital expenditure required (at least 15 acres for 1m to 1.5m sq ft in NLA).