10 things I learned from the 2022 Pavilion REIT AGM

Pavilion REIT turned 10 in 2021. It currently owns four retail and one office properties including the well-known Pavilion Kuala Lumpur Mall and Elite Pavilion Mall. The two connected prime assets are located strategically along the Bukit Bintang stretch and contributed to 97.8% of the REIT’s net property income in 2021. CEO Dato’ Philip Ho Yew Hong was satisfied with the REIT’s overall performance during the year as it turned out better than anticipated.

Here are 10 things I learned from the 2022 Pavilion REIT AGM.

1. Gross revenue declined 4.2% year-on-year to RM488.6 million in 2021. All of the REIT’s assets registered lower occupancy rates in 2021 except Elite Pavilion Mall as some tenants did not renew their leases. As renovation works were not allowed during certain Movement Control Order periods, some potential tenants put off their expansion plans.

Renewals during the year were done at rates similar to the previous ones although some tenants requested for much lower rent. At Elite Pavilion Mall, the management managed to secure tenants at a lower rate to fill up the mall rather than to leave it empty.

Occupancy rate20202021
Pavilion Kuala Lumpur Mall96.5%90.2%
Elite Pavilion Mall83.2%86.4%
Intermark Mall85.7%83.6%
DA MEN Mall68.9%62.3%
Pavilion Tower (office)85.8%79.1%
Source: Pavilion REIT 2021 annual report

2. Some unitholders have expressed disappointment over DA MEN Mall over the years and this AGM was no different. DA MEN Mall’s occupancy rate remained lacklustre as Parkson left during the year and was below the Klang Valley’s average retail occupancy rate of 72.3% in 2021. Ho responded that DADI Cinema was just opened in November 2021 and is fulfilling its tenancy mix objective to bring traffic to the mall.

The valuation of the mall has stabilised at RM180 million in 2021 after dropping from RM483 million in 2016. The mall was also promoted as a COVID-19 vaccination centre and continued to rely on retail education and training centres to draw crowds.

3. Pavilion REIT’s net property income rose 1.3% year-on-year to RM236.6 million in 2021 as the malls were shuttered intermittently amid various phases of lockdowns. This resulted in lower operating expenses as the REIT achieved savings from utilities, maintenance, and marketing expenses as well as lower interest expense on the backdrop of the low interest rate environment.

Average interest cost dropped from 4.3% in 2020 to 4.0% in 2021. The provision for doubtful debts was also lower as the COVID-19 situation became more manageable and the vaccination programme sped up. On the other hand, net property income in 2021 was offset by another round of rental resistance to support its tenants in line with the industrial norm. Distribution per unit increased 6.8% year-on-year from 4.13 sen in 2020 to 4.41 sen in 2021.

4. A unitholder pointed out the sharp drop in the weighted average lease expiry (WALE) of the REIT from 1.46 years in 2020 to 0.98 in 2021. Ho explained that 63% of the leases would expire at the end of 2022. Once the leases are renewed, the WALE will bounce back to around 1.8 or 2.0. The management is optimistic about the rest of 2022 as customers return and tenant sales recover in line with the gradual recovery of the economy. The rental reversion is expected to hold up well for the REIT while vacancies are progressively backfilled. The management is confident of retaining its existing tenants.

5. Crown jewels Pavilion Kuala Lumpur Mall and Elite Pavilion Mall welcomed about 21 million visits in 2021. There are two ongoing asset enhancement initiatives at Pavilion Kuala Lumpur Mall that are set to increase the mall’s net lettable area (NLA) by another 18,000 square feet or about 1.3% of its existing NLA.

6. Ho responded to a unitholder that the occupancy costs of the REIT’s tenants vary. The occupancy costs of premium and mass-market retail tenants were less than 15% and 25% respectively in 2021. The management will closely monitor the tenants’ business performance in case occupancy costs become too unbearable for them. The same unitholder pointed out that the lease of the underground pedestrian tunnel that connects Elite Pavilion Mall and Fahrenheit88 (shopping mall) will expire in 2037. The management mentioned that they engage with the Kuala Lumpur City Hall regularly to extend the lease.

7. Fifty -seven percent of Pavilion REIT’s borrowings were on floating rates in 2021. As interest rates rise, the management locked in favourable fixed rates for a portion of its recently renewed loans in 2022 and may maintain the proportion of floating loans.

8. Several unitholders brought up the potential acquisition of Pavilion Bukit Jalil (shopping mall). They did not proceed with the offer back in 2019 to avoid bearing the relevant development risk. The directors are currently evaluating the deal and will make the necessary announcements once decisions have been made.

9. In terms of government assistance in the form of COVID-19 stimulus package, Pavilion REIT received a 10% monthly electricity rebate of about RM300,000 for 12 months. As Malaysia’s corporate labour issues hit the news headlines from time to time, Pavilion REIT went the extra mile to inspect the living standards of its contractors’ staff to ensure health and safety is not compromised.

10. A unitholder questioned the need of a rights issue as tabled during the AGM. In his point of view, the share price of the REIT may ‘collapse’ if a rights issue is proposed. Non-independent executive director Dato’ Lee Tuck Fook added that the rights issue is just one of the options that the management have in their toolbox to raise cash.

The fifth perspective

Pavilion REIT’s gearing remains at an acceptable range. As Malaysia reopened its borders in April 2022, travel is expected to bounce back and the ‘numbers will come back to some form of normality’ as phrased by Ho. The REIT is now trading at a rather attractive valuation before its performance returns to its pre-pandemic level.

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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