12 things I learned from Pavilion REIT’s 2017 AGM

Pavilion REIT (PAVREIT) is a retail-centric property investment trust which owns three shopping malls and one office tower. Of its properties, Pavilion Kuala Lumpur Mall, Intermark Mall, and Pavilion Tower are located in Kuala Lumpur, while Da Men Mall is located in Selangor. The portfolio has a total net lettable area of 1.97 million square feet. PAVREIT first listed on Bursa Malaysia in December 2011.

This is my second year attending PAVREIT’s AGM and here are my key takeaways from the meeting and CEO Philip Ho Yew Hong’s opening presentation:

  • Gross revenue increased 11.1% year-on-year from RM414 million to RM460 million. The increase was due to revenue recognition from the acquisitions of Da Men Mall and Intermark Mall. Da Men Mall contributed 7% of gross revenue (RM32 million) while Intermark Mall contributed 3.5% of gross revenue (RM16.1 million).
  • Property operating expenses increased 18.4% year-on-year from RM122 million to RM145 million. The increase in expenses was mainly due to the initial setup costs of upgrading the M&E systems in De Men Mall and Intermark Mall after their acquisitions. Because of this, net property income (NPI) only increased 8.0% year-on-year from RM292 million to RM315 million.
  • Property valuation increased 16.6% year-on-year from RM4.48 billion to RM5.23 billion. The jump in value is again mainly due to the acquisitions of Da Men Mall and Intermark Mall in 2016. Da Men Mall and Intermark Mall are valued at RM483 million and RM163 million respectively.
  • Gearing ratio increased from 15.88% to 25.3% due to PAVREIT funding the 2016 acquisitions of Da Men Mall and Intermark Mall entirely with debt. However, the gearing ratio is still below the industry average of 30%-40% and way below the 50% allowed under REIT regulations.
  • 21% of PAVREIT’s debt are at fixed interest rates with the rest on floating rates. Due to the volatile market, the management felt that the fixed interest rates were rather high and there was a potentially favourable movement for floating rates. Hence, a decision was made to refinance their maturing debt on floating rates.
  • Pavilion Kuala Lumpur Mall has the highest occupancy rate (95.8%) among all properties in PAVREIT’s portfolio. About 69% of the mall’s net lettable area was due for renewal in 2016 and the manager took the opportunity to reposition its tenant mix to enhance the mall’s retail experience. The exercise is expected to continue until mid-2017 and a number of new international brands like Staccato, Blanc Eyelash, Laduree, Manolo Blajmik, Paul and Pazzion, and Great Southern have been introduced to the mall. However, for the time being, this exercise has affected the mall’s performance marginally — a 0.9% drop in gross revenue from RM403 million to RM399 million.
  • Shopper traffic at Da Men Mall is still low and, correspondingly, the occupancy rate at the mall is at 87%. The management has taken the initiative to revamp its tenant mix by bringing in new brands like Home & Shoes Gallery, Sasa, Nature Republic, and The Container Arthox. Da Men Mall faces competition from malls like Sunway Pyramid, Subang Parade and Empire Subang in the Subang Jaya and UEP Subang Jaya areas, . Hence, the mall is targeting to hold more niche and community activities gain more exposure for Da Men mall. PAVREIT also revealed that Da Men Mall could be revamped into a children enrichment centre if the opportunity arises.
  • Occupancy rate at Intermark Mall is at 76.5%. PAVREIT intends to improve its food and beverage and service offerings to accommodate the needs of tenants at the two existing two office towers as well as guests from the nearby Double Tree Hotel.
  • The occupancy rate at Pavilion Office Tower is a lot healthier at 94% despite a relatively weak office market. PAVREIT intends to maintain a good tenant retention rate and rental reversions for 2017.
  • A unitholder asked which party bore the cost of the overhead bridge linking Pavilion Mall and Pavilion Bayan Tree, and the underpass linking Fahrenheit 88 and Pavilion KL Mall. The CEO replied that the cost of the bridge was borne by Pavilion Bayan Tree Signature and the cost of underpass by Pavilion Elite. PAVREIT did not bear any cost.
  • Another unitholder commented about the traffic congestion around Da Men Mall and how the congestion deters him from visiting the mall even though he lives nearby. The CEO said that he was caught in a jam before and he’s aware of how bad the traffic around the mall is. At the moment, the mall links up with the local police to help manage the traffic during heavy rains and the management hopes to convince Majlis Perbandaran Subang Jaya to open a side road leading to Persiaran Kewajipan.
  • Amusingly, one unitholder asked (in my opinion) a number of irrelevant questions. (Is Parkson invested in PAVREIT? Will PAVREIT give a good rate to Parkson? Is it appropriate to develop a mall in Genting Highland since that area has been developed in a modern way?) After a barrage of questions, some irritated unitholders shouted “Out of topic!” and asked him to sit down. Despite his incessant questions, I observed that both the chairman and CEO patiently answered all his questions. Regarding PAVREIT’s management, I had the opportunity to chat with a unitholder who’s been a PAVREIT investor since its IPO and also holds investments in other retail REITs. From our conversation, she exhibited strong confidence in PAVREIT’s management compared to their peers and she strongly believes that PAVREIT can deliver a good performance for 2017. While we can’t say for sure, I’m looking forward to seeing their results in a year’s time!

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Calvin Soon is a value investor and a partner of Invesmart Network PLT. Away from investing, he owns a consultancy business. Calvin believes that anybody can achieve financial independence if they use the right investment process and understand what they invest in.

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