Both REITs have garnered positive sentiment from local research houses, with continued attention to their respective performances
by HABHAJAN SINGH
THESE two real estate investment trusts (REITs) have shown commendable performance in the first three months of 2024.
Pavilion REIT started the year with a higher topline thanks to income from new property Pavilion Bukit Jalil acquired in June 2023, higher occupancy rates and higher revenue rent from existing retail malls.
Axis REIT saw its net profit for the first quarter ended March 31, 2024 (1Q24) surge 40% to 42.3 million from the same period last year, on turnover of RM75.7 million, up 8% from 1Q23.
As at April 25, both counters did not receive a single ‘Sell’ call from equity analysts tracking the stocks.
Pavilion REIT has six ‘Buy’ and two ‘Hold’ calls, with a 52-week target price (TP) consensus of RM1.54, according to research houses tracked by Bloomberg. On its part, Axis REIT has six ‘Buy’ and five ‘Hold’ calls with a 52-week TP consensus of RM2. At the end of last week’s trading, Pavilion REIT shares were at RM1.32 and Axis REIT at RM1.91.
Pavilion REIT
In an exchange filing on April 25, Pavilion REIT said its net profit for 1Q24 was up 19% to RM83.2 million on a turnover of RM218.5 million, up 40% from the same period last year.
“Its core shopping malls in Kuala Lumpur (KL) city centre have held up relatively despite competition from the new TRX (Tun Razak Exchange) mall,” said Kenanga Investment Bank Bhd (Kenanga Research) in a note released the next day, with a ‘Buy’ call on the counter with a 52-week TP of RM1.59, up from earlier RM1.51.
In its report, MIDF Amanah Investment Bank Bhd said it was positive on Pavilion REIT (Buy, RM1.48) as its flagship mall namely Pavilion KL Mall should continue to record earnings growth in the mid-to-long term amid high shopper footfalls.
As at March 31, the properties under Pavilion REIT’s portfolio comprises Pavilion KL Mall, Pavilion Tower, Da men Mall, Intermark Mall, Elite Pavilion Mall and Pavilion Bukit Jalil.
Pavilion KL Mall and Pavilion Bukit Jalil contributed 62% and 23%, respectively, of the 1Q23 revenue.
In 1Q24, Pavilion REIT’s total property operating expenses were higher by RM28.2 million or 52% compared to 1Q23, mainly due to operating expenses incurred for the new property, replacement of obsolete or ageing parts/upkeeps in properties, upgrading of landlord provisions for retail lots, as well as lift lobby and toilets refurbishment at Pavilion Tower.
Higher utilities cost was also incurred due to additional consumption as a result of the hot weather, it said.
Moving forward, Pavilion REIT stated that according to a survey by Retail Group Malaysia, the greatest challenge for Malaysia’s retail industry in 2024 was the increasing cost of living.
In its report, Kenanga Research said Pavilion REIT’s assets in the KL city centre like Pavilion KL and Elite Pavilion Mall have been able to consistently chalk up higher occupancy despite the entry of the TRX mall.
“On one hand, we are mindful of the sustained elevated inflation (which could be exacerbated by subsidy rationalisation) that eats into consumers’ spending power. On the other hand, the return of tourists could potentially fill the gap,” it said.
In another report, Maybank Investment Bank Bhd (Maybank IB) (‘Buy’, RM1.55, up from RM1.47) noted that the 1Q24 results were slightly ahead of its estimates as year-on-year (YoY) earnings growth was mainly driven by the new asset and Pavilion KL Mall’s outperformance.
It said it expected Pavilion REIT earnings to remain resilient, largely backed by Pavilion KL, due to its prime location, and with additional growth contribution from Pavilion Bukit Jalil.
However, it said it remained cautious on Da Men Mall which could continue to face stiff competition from surrounding malls.
On the risk front, Maybank IB noted that the net lettable area (NLA) of Pavilion KL Mall (12%), Elite Pavilion (17%) and Pavilion Bukit Jalil (59%) were due for lease renewal in 2024. On another point, it added that 88% of Pavilion REIT’s debts was on floating rate.
On its distribution, as per the distribution policy stated in its trust deed, Pavilion REIT’s manager Pavilion REIT Management Sdn Bhd, said it intends to distribute at least 90% of Pavilion REIT distributable income on a half yearly basis.
For the financial year ending Dec 31, 2024 (FY24), it has proposed to distribute 100% of its distributable income. Distribution of 4.6 sen per unit or RM168 million earned for the second half of 2023 (2H23) was distributed on Feb 29, 2024.
Distribution for 1Q24 would be payable together with the distribution for 2Q24, according to details shared in the exchange filing.
Axis REIT
For 1Q24, Axis REIT said its property income was RM75.2 million, marginally lower compared to 4Q23, at RM75.7 million, mainly due to lower occupancy of the existing portfolio.
Upgrading its call to ‘Buy’ from ‘Hold’ for its shares, Hong Leong Investment Bank Bhd has tagged a 52-week TP of RM2.04, up from RM1.86 previously.
It noted that despite a slight dip in portfolio occupancy, subsequent quarters earnings should be sustained by contributions from a recently completed acquisition (Temerloh Hypermarket), impending acquisitions expected to be completed in FY24 and low- to mid-single digit rental reversions in FY24.
It said Axis REIT’s overall portfolio occupancy encountered some hiccups due to Axis Steel Centre @ SiLC still being untenanted (shortterm lease expired in 4Q23), as well as Axis Mega DC Phase 2 having just completed development works on March 27.
The local research house said it believed that Axis REIT’s prospects were improving on the back of three impending acquisitions that were expected to be completed in FY24 (two in 1H24 and one in 2H24), as well as further low- to mid-single digit rental reversions for FY24.
“Moreover, should Axis Steel Centre @ SiLC and Axis Mega DC Phase 2 be leased within the year, its portfolio occupancy will recover from the current 89% and lead to improved earnings in subsequent quarters,” it added.
During the quarter under review, the 2023 final income distribution of 2.4 sen per unit, totalling RM41.9 million in respect of the period from Oct 1, 2023, to Dec 31, 2023, was paid on Feb 29, 2024.
Axis REIT Managers Bhd, the management company of AxisREIT, has proposed distributing 99% of the realised income available for distribution generated from operations for 1Q24. This distribution amounts to two sen per unit, which includes a non-taxable portion of approximately 0.47 sen per unit derived from capital allowances, industrial building allowances and tax-exempt profit income.
The 2024 first interim income distribution will be payable on May 31, 2024, and the book closure date is May 8, 2024, it added.
Last week, Axis REIT also announced plans to sell the Axis Steel Centre @ SiLC in Nusajaya, Johor, to a data centre operator for RM162 million. The identity of the purchaser remains undisclosed due to confidentiality clauses in the sale and purchase agreement (SPA), with Axis REIT committed to revealing this information upon completion of the proposed disposal.
It said the proceeds from the sale, after covering related expenses, would be used to repay existing financings, strengthen Axis REIT’s financial position and reduce its financing ratio.
The move aligns with the fund’s investment objectives, as the property, acquired on Dec 30, 2014, has reached its income-generating potential in its current role as a manufacturing facility, with limited prospects for future rental growth, it added.
Commenting on the data centre sale, Maybank IB has maintained its ‘Buy’ call on Axis REIT with a 52-week TP of RM2.17.
“We are positive on the deal given its good pricing and potential capital redeployment into better yielding assets/reduction in debts,” it said.
This article first appeared in The Malaysian Reserve weekly print edition
Source: The Malaysia Reserve
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