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6 things I learned from the 2021 Pavilion REIT AGM

Malaysian retailers recorded the worst performance in 2020 in the past two decades because of movement restrictions imposed by the government to curb the pandemic. As landlords, REITs were also not spared as they handed rental waivers and rebates to their tenants.

Footfall to prime shopping malls like Pavilion Kuala Lumpur Mall plummeted in the first few months when the Movement Control Order (MCO) was implemented in Malaysia. The atmosphere of the recent Pavilion REIT AGM I attended was gloomy as the management explained what it was doing to pull through the crisis.

Here are six things I learned from the 2021 Pavilion REIT AGM:

1. Gross revenue dropped by 12.8% year-on-year to RM510.2 million in 2020. This was due to revenue losses from lower occupancy rates of malls as some tenants decided not to renew their tenancies. Revenue from turnover rent, marketing events, advertising income, and car park income were also badly affected. Distribution per unit (DPU) halved from 8.50 sen in 2019 to 4.13 sen in 2020 because the REIT gave tenants rental waivers and rebates totalling RM80.9 million to help them tide through the pandemic.

The two crown jewels of the REIT – Pavilion Kuala Lumpur Mall and Elite Pavilion Mall – continued to contribute to about 90% of the REIT’s gross revenue in 2020. A unitholder mentioned that eslite spectrum, a Taiwanese leisure lifestyle retailer, will soon open an outlet at rival mall, The Starhill. The management replied that they do not foresee the outlet to completely draw crowds away from the two Pavilion malls given their broad base of tenants.

2. In 2020, Elite Pavilion Mall and DA MEN Mall were revalued downwards by RM10 million and RM40 million respectively because of their reduced occupancy rates. The management do not foresee any issues in getting the tenancies expiring in 2021 renewed or replaced. Rent was still being negotiated and CEO Dato’ Philip Ho Yew Hong said the management is ‘not giving in’.

3. In 2020, Pavilion REIT’s gearing ratio remained healthy at 34.7%. Fifty-seven percent of its borrowings were based on floating rates. Borrowings amounting to RM1.1 billion were due in 2021, of which RM400 million had been renewed. The average cost of interest decreased from 4.8% in 2019 to 4.3% in 2020 — in line with the decline in Bank Negara Malaysia’s overnight policy rate.

4. Dadi Cinema in DA MEN Mall had been scheduled to open by 2020, but the opening was delayed to 2021 because of the various restrictions imposed during the MCO period. Several tenants offering non-essential services such as entertainment activities were not allowed to operate their businesses for several months in 2020 to comply with the MCO. The occupancy rate of the mall remained low in 2020. It is a suburban mall that relies on events to draw crowds. The management tried to improve the tenancy mix of the mall. But again, there are quite a number of shopping malls in the vicinity like Sunway Pyramid Shopping Mall, SS15 Courtyard, and Subang Parade.

With the increasing amount of retail space in Klang Valley and Selangor, it may be tough for the management to turn this asset around and reposition it. While disposals may not be ideal during this difficult period, the management is open to evaluating any reasonable offers tabled to them. Although a number of unitholders were concerned about its non-performance, DA MEN mall contributed to less than 5% of the REIT’s gross revenue in both 2019 and 2020.

5. Footfall to Pavilion REIT’s malls has recovered to between 40% and 65% of pre-pandemic levels. Total tenant sales have also improved to around 60% and 70% compared to pre-pandemic levels. The REIT needs probably at least 12 to 18 months to fully bounce back as international and domestic travel restrictions are yet to be lifted. The management continues to conduct promotions and events to attract shoppers to visit the malls. A number of cost-cutting initiatives in recruitment and power are also in place.

6.  Occupancy costs (as a percentage of a tenant sales) varied for different tenants of the REIT. The costs might go up to 20% and 30% for certain tenants in the fashion industry. On the other hand, the management also denied being involved in a project development in Lok Kawi, Sabah which was misreported.

The fifth perspective

Pavilion REIT has undoubtedly been hit hard by COVID-19, but it continues to own high-quality malls located in high-traffic, prime locations in Kuala Lumpur. As the pandemic eventually eases, we should see higher footfall return to its malls. However, the lifting of travel restrictions and return of international tourists will be key to Pavilion REIT’s recovery to pre-pandemic levels.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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