Pavilion REIT can see recovery from Pavilion KL, says analyst


PAVILION Real Estate Investment Trust (REIT) might see a better recovery in the fourth quarter (4Q) of this year, as lower operating expenses and borrowing cost drove up its net profit for the first half of 2021 (1H21).

However, Hong Leong Investment Bank Bhd (HLIB Research) said REIT’s 1H21 core net profit of RM51.7 million was below its expectations and consensus expectations, while the negative deviation was due to lower-than expected rental income, arising from the Movement Control Order (MCO3.0) restrictions.

“Revenue for the quarter was stable at RM124.8 million as property operating expenses increased 14.5% mainly driven by higher other operating expenses due to additional rebates for tenants that were not providing essential services and supplies during the quarter,” it said.

The research house said the profit decrease was also caused by a lower net property income of RM47.6 million, lower interest income and higher other trust expenses.

It added that for year-to-date, its revenue declined to RM251 million mainly due to lower occupancy rate from shopping malls, lower marketing events and advertising income.

“Total operating expenses were lower by 7.7% owing to lower utilities and other operating expenses with lower marketing and promotional expenses. Overall, these resulted in non-performance income improvement while lower borrowing costs (12.1%) from falling interest rates drove up core net profit to RM51.7 million,” it said.

Additionally, its overall occupancy rate decreased to 82.7% with its five properties.

“That said, Pavilion KL’s occupancy remained strong above 90%. As for gearing level, it maintained at 34.8%. with the majority of its total borrowings being charged a floating interest rate,” HLIB Research said.

In line with that, the research house maintained a ‘Hold’ call for the REIT, as it remains hopeful for recovery in the later part of the year.

“We remain cautious on its outlook, as we expect prolonged rental assistance to selected tenants. We are hopeful for better recovery in 4Q, as we take some cues from the National Recovery Plan with Phase 3, estimated in September and October 2021.

“We hope to see a reopening recovery for malls, given loosening of social restrictions such as dine-ins and leisure shopping possibly allowed.

“This consumerism reopening revival should see revenge spending given pent up demand,” it noted.

Meanwhile, RHB Malaysia Small Cap Research said it will maintain a ‘Buy’ call for the REIT as it sees Pavilion KL strong positioning as a key beneficiary of a footfall normalisation, upon vaccinations reaching critical mass.

In its report, it said Pavilion KL remains the biggest contributor, accounting for more than 80% of the REIT’s 1H21 revenue and from the encouraging progress of the inoculation drive the eventual broad reopening of the economy would see Pavilion KL as a key beneficiary.

“Pavilion KL could see a return in footfall and revenge-spending, especially during the year-end festivities when international borders are expected to remain closed. Recall that the relaxation of movement restrictions last year saw a surplus in domestic shoppers at the mall,” it said.

The research bank also views management’s efforts in turning the Da Men Mall into an “edutainment centre” positively, with Dadi Cinemas’ planned opening possibly leading to higher occupancy and shopper traffic over the medium term.

Management had also shared that rental assistance will continue to be granted on a case-by-case basis, taking into consideration each tenants’ profile and track record.

The research bank said current risks to earnings will include an extension of the blanket MCO, in the face of the record high number of Covid-19 cases, and a major delay in the vaccination programme.