5 things I learned from the 2023 Pavilion REIT AGM and EGM

Listed in 2011, Pavilion REIT owns five properties in the Klang Valley, namely Pavilion Kuala Lumpur Mall, Elite Pavilion Mall, Intermark Mall, DA MEN Mall, and Pavilion Tower (an office building). In 2022, the REIT performed well due to the gradual easing of pandemic restrictions from April 1, which led to the recovery of the Malaysian economy. With the economy showing signs of improvement, the management sought approval from unitholders to add Pavilion Bukit Jalil Mall to the existing portfolio.

Here are five things I learned from the 2023 Pavilion REIT AGM and EGM.

1. Gross revenue increased 16.6% year-on-year to RM569.7 million in 2022. The rise in occupancy rates at Pavilion REIT malls is primarily attributed to the signing of new leases and lease renewals by both new and existing tenants following the return of shoppers to malls. However, the trend of remote work, which has become increasingly popular after the pandemic, has caused a drop in the occupancy rate at Pavilion Tower in 2022.

Occupancy rate20212022Y-o-y change
Pavilion Kuala Lumpur Mall90.2%91.6%1.4%
Elite Pavilion Mall86.4%92.3%5.9%
Intermark Mall83.6%86.9%3.3%
DA MEN Mall62.3%64.5%2.2%
Pavilion Tower (Office)79.1%72.8%-6.3%

Additionally, the number of visitors to Pavilion KL rebounded to pre-pandemic levels (2019), reaching between 30 million and 33 million visitations in 2022. The management views this as a positive sign, as the figure does not include the full return of tourists.

Source: Pavilion REIT

2. Net property income increased 53.9% year-on-year to RM364.2 million in 2022 as the REIT stopped granting COVID-19 related rental rebates. Distribution per unit (DPU) surged from 4.41 sen in 2021 to 8.37 sen in 2022, close to the pre-pandemic DPU of8.50 sen in 2019.

3. Unitholders remained concerned about the overall performance of DA MEN Mall. The mall is relatively small and comprised only 3.0% of the REIT’s investment property value in 2022. Since 2020, the mall has been incurring losses and underperforming. The management acknowledged their mistake and decided to focus on three sectors of tenant mix, namely F&B, entertainment (cinema and karaoke), and education (music and STEM schools), while reducing allocation from other sectors like fashion. This strategy has resulted in an occupancy rate of over 70% as of February 2023, compared to 64.5% in 2022. The management hopes to break even by attracting increased traffic to the mall and achieving an occupancy level of 80%.

According to CEO Dato’ Philip Ho Yew Hong, weekend vehicular traffic entering DA MEN mall remained problematic, and the management is in discussions with the local council to propose a flyover to alleviate the situation.

3. The management sought approval from the unitholders to acquire Pavilion Bukit Jalil, located at the south of the city centre for a consideration of RM2.2 billion. The DPU-accretive acquisition is expected to boost the REIT’s DPU from 8.37 sen in 2022 to 8.51 sen post-acquisition. Based on the targeted net property income of RM146 million, this transaction is yield-accretive at 6.6%, compared to the REIT’s property yield of 6.0% in 2022. Moreover, the acquisition will decrease the dependence on Pavilion Kuala Lumpur and Elite Pavilion Malls.

Net property income contribution (%)Before acquisitionAfter acquisition
Pavilion Kuala Lumpur Mall86.9%62.0%
Elite Pavilion Mall11.2%8.0%
Intermark Mall2.7%1.9%
Pavilion Tower1.1%0.8%
DA MEN Mall-2.0%-1.4%
Pavilion Bukit Jalil Mall28.6%

The acquisition is a related party transaction as the seller, Regal Path Sdn Bhd, is controlled by the REIT’s sponsors — chairman Tan Sri Lim Siew Choon, executive director Puan Sri Tan Kewi Yong, and Qatar Holding LLC. The REIT intends to raise RM1 billion from term loans and RM1.27 billion from two tranches of private placements. If the proposed placements are not undertaken, consideration units totalling RM600 million will be issued to Regal Path to partly settle the acquisition, and term loans amounting to RM1.6 billion will be raised so that the deal will go through. The proposed private placements are expected to improve the liquidity of the REIT’s shares, thereby qualifying the REIT for the FTSE4Good Bursa Malaysia Index.

If the targeted net property income is not met, the mall will be revalued and the purchase price will be adjusted downward accordingly. Gearing is expected to increase from 33.8% in 2022 to 36.8% post-acquisition.

5. The management shared the reasons of the Pavilion Bukit Jalil’s acquisition:

  • Positive rental reversion: By the time the takeover is completed, a portion of the tenant leases are up for renewal.
  • Strong anticipated growth in rental rates: The mall’s current average rental rate of RM9.34 per square feet has ample headroom for growth when compared to other large-scale malls like Mid Valley Megamall, 1 Utama Shopping Centre, and Sunway Pyramid Shopping Mall, which charge higher rates.
  • The mall is spacious and has the potential to increase its net lettable area.
  • The mall houses a 28,000-square-foot outdoor piazza and exhibition centres that will bring additional income to the REIT which Pavilion Kuala Lumpur Mall lacks.
  • As of February 2023, the mall’s occupancy rate was 81.4%. In 2022, the annual footfall of the mall was approximately 16.8 million. The mall is located in an area with a population of approximately 1.5 million, and 75% of the residents in the rapidly growing Bukit Jalil are under the age of 40 and typically belong to the affluent segment.

The fifth perspective

After the COVID-19 restrictions were lifted in April 2022, Pavilion REIT demonstrated its strength by rebounding strongly in 2022. The Pavilion Bukit Jalil acquisition was approved by unitholders by the end of the meetings. The REIT appears to be on track to full recovery as tourists, particularly from China, return to Malaysia. In terms of net lettable area, Pavilion Bukit Jalil is 15.0% larger than Pavilion Kuala Lumpur and Elite Pavilion Malls combined. However, the oversupply of retail space in the city remains a downside risk.

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Tan Jiunn Yi

Jiunn Yi holds a honour's degree in economics from UWE Bristol and passed the CFA Level III examinations. He believes in finding value in your investments, and has a strong interest in financial modelling, analysis, and stock valuation.

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