MALL-and-office based real estate investment trusts (REITs) continue to feel the impact of the weak consumer sentiment and the glut in office space.
On Thursday, Pavilion REIT, which owns the Pavilion Mall, posted a further slide in net profit for the second quarter ended June 30.
The week before, another notable mall-and-office based REIT, CapitaLand Malaysia Mall Trust (CMMT), which owns Sungei Wang Plaza, saw its net profit take a dive.
But a silver lining may be in the dark clouds of the local retail scene, which has been plagued by news of closures of well-known retail brands in recent months amid weak consumer sentiment.
Despite Pavilion’s net profit falling a second consecutive quarter, UOB Kay Hian Research says in a report that results were largely in line with market expectations, and points to year-on-year retail sales and year-to-date rental reversions as signs that the REIT’s performance will improve in the third quarter. While hard to comprehend, consumer sentiment as tracked by the Malaysian Institute of Economic Research’s (Mier) consumer sentiments index has been on the mend since the beginning of the year.
Yes, the index is still well below the 100-point threshold indicating confidence is back but the first quarter’s economic growth was in part supported by private consumption. Mier added a note of caution to the second quarter’s index data, saying that while sentiments have improved “cautiously”, it remains below the optimism threshold despite steady current and expected incomes that are trending up.
It says given that inflationary pressure is expected to build up, consumers remain cautious on spending. Headline inflation has risen this year and while prices have moderated from the March peak of 5.1%, inflation continues to be pervasive. Which is why analysts continue to be cautious on the outlook for REITs with a strong retail element. Most analysts have maintained a “hold” call on Pavilion, despite the REIT also announcing in a separate filing a proposal to acquire Elite Pavilion Mall, an annexe next to the REIT’s eponymous mall, even though the acquisition will be yield-accretive.
Similarly, analysts are also cautious on CMMT’s outlook, with most maintaining “hold” calls despite the financial performance for the second quarter coming in-line with market expectations.
UOB Kay Hian’s “hold” call on Pavilion, with a unit target price of RM1.65, is based on a required rate of return of 6.8% and supported by an implied yield of 5.3%.
It is estimating that should the Elite Pavilion Mall acquisition, to be funded via a mixture of debt and equity, is completed by the end of the year, this will contribute to Pavilion’s net profit rising 15% next year.
The assumption is that the acquisition will come with a net lettable area of 241,929 sq ft and an average lease of RM18 per sq ft.
Assuming 4.6% interest cost for the borrowings that Pavilion will need to take on, the research house estimates that earnings per unit will increase by 9% while dividend per unit could grow by 7% following the acquisition and on an enlarged unit base after the unit placement.
Maybank Investment Bank Research, which has also maintained a “hold” call on Pavilion with a 12-month unit target price of RM1.75, estimates the new acquisition’s net yield at 5.9% assuming rental income of RM49mil and 70% profit margin.
“Meanwhile, for the proposed placement of new units, we are assuming an issue price of RM1.66 (5% discount from the latest closing unit price of RM1.75), which translates to RM362mil of placement proceeds,” it says in a report. The research house in a June report says that CMMT’s Sungei Wang Plaza could see demand for retail space improve in the near- to mid-term following the opening of the first MRT line as this could enhance shopper traffic.
The coming weeks will see other REITs with a mixture of mall and office assets release their second quarter results. There are two REITs who only have mall assets – IGB REIT and Hektar REIT – and it will be interesting to see how these two REITs fare.
Other REITs with mall assets that have yet to release their results are Sunway REIT, which also has hotel properties under it, and KLCC REIT, which owns Suria KLCC mall.