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14 things to know about Pavilion REIT before you invest (updated 2020)

Like many REITs in Malayisa, Pavilion REIT’s share price has been hit by the impact of COVID-19. Listed in 2011, it owns four retail shopping malls and an office tower in the Klang Valley. Its portfolio includes the renowned Pavilion Kuala Lumpur Mall that is popular among tourists and locals including Pavilion Kuala Lumpur Mall, Elite Pavilion Mall, Intermark Mall, DA MEN Mall, and Pavilion Tower.

Here are 14 things to know about Pavilion REIT before you invest:

1. Pavilion REIT derived 97.9% of its gross revenue in 2019 from its retail properties. Pavilion REIT’s office property, Pavilion Tower, contributes only a very small portion of the REIT’s gross revenue. Hence, the REIT can be broadly regarded as a pure-play retail one.

Source: Pavilion REIT 2019 annual report

2. Pavilion Kuala Lumpur Mall and Elite Pavilion Mall are the crown jewels of Pavilion REIT. Both of these malls contributed to about 89.3% of the REIT’s gross revenue in 2019. The two malls are connected to each other and located in the bustling tourist spot of Bukit Bintang. Bukit Bintang is readily accessible by public transport like the MRT and Monorail and is dotted with prominent hotel chains. The malls are located at a strategic spot as a sheltered air-conditioned pedestrian bridge also connects them to KLCC. These malls generally serve the middle and upper-income segment consumers and are premier shopping heavens for locals and tourists alike. The malls are popular among locals, who make up 70% of the shoppers in both malls.

4. Intermark Mall is situated near KLCC and is close to an LRT station. It is a podium located below two office towers — Vista and Integra Towers — as well as DoubleTree by Hilton Hotel Kuala Lumpur. It generally serves the office crowd during weekdays and the hotel guests in the vicinity. On the other hand, DA MEN Mall is a neighbourhood mall serving the Subang Jaya community, which is about half an hour’s drive from Bukit Bintang.

5. Just like how Mapletree North Asia Commercial Trust relies on Festival Walk for 62% of its NPI, Pavilion REIT faces a similar concentration risk because it obtains revenue mainly from Pavilion Malls. Festival Walk was damaged in a clash between anti-government protestors and police. The mall had to be closed for two months before it was reopened. Similar things could happen to Pavilion REIT but chances of such incidences stemming from political uncertainties and racial tensions happening in Malaysia are low at the moment.

6. As of 2019, there were 276 shopping malls, is equivalent to 78.4 million square feet of retail space, in the Klang Valley. The glut in retail supply is evident in the Klang Valley as another 2.6 million square feet of retail space is in the pipeline. However, well-maintained and strategically located malls like the Pavilion malls will survive and be able to outcompete the weaker ones. Pavilion malls are well-positioned as premium shopping destinations along the likes of Genting Highlands Premium Outlets, Starhill Gallery, Suria KLCC, and The Gardens Mall in the Klang Valley.

7. Pavilion Malls are not spared from e-commerce disruption as the popularity of online shopping continues to grow. In general, Malaysians still flock to shopping malls especially larger ones during weekends as they offer free air-conditioning in this hot and humid region and serve as a convenient meeting point. Again, Pavilion malls target the upper-middle and high-income segments. Some shoppers still prefer to buy luxurious goods in physical stores. Brick-and-mortar stores are here to stay as they provide a different experience to shoppers and they complement online shopping.

8. Average property yield between 2012 and 2019 stood at 6.3% which is commendable, and is above the REIT’s 5.0% cost of debt in 2019. Investors may want to take note that the DA MEN Mall only achieved a meagre 0.3% property yield in 2019. This is due to the stiff competition the mall experiences from neighbourhood malls like Sunway Pyramid and Subang Parade. Also, DA MEN Mall has been suffering from declining occupancy rates since its acquisition in 2016. As shown below, Elite Pavilion Mall is the only mall that can be encumbered to a bank as collateral to raise additional funds in the future.

PropertiesEncumbranceTenureYear of AcquisitionProperty Yield (2019)
Pavilion Kuala Lumpur MallYes99-year leasehold expiring in 210920116.6%
Elite Pavilion MallNoAbout 95% of its net lettable area are freehold20186.7%
Intermark MallYesFreehold20168.0%
DA MEN MallYesFreehold20160.3%
Pavilion TowerYes99-year leasehold expiring in 210920114.4%

Source: Pavilion REIT annual reports

9. As Pavilion REIT acquired more retail properties, the number of leases it secured increased from 580 in 2012 to 873 in 2019. Revenue contribution from the 1o largest tenants also decreased from 19.2% to 11.3% over the same period. Some of its notable tenants include Food Republic, JD Sports, Parkson, and Royal Selangor.

10. Sixty percent of Pavilion’s Kuala Lumpur Mall and 76% of Elite Pavilion Mall’s tenancies by gross rental were about to expire in 2019. However, they recorded only a slight drop in occupancy rate from 2018 to 2019. Overall, the occupancy rates of Pavilion malls have been above 95.0% between 2012 and 2019 which is impressive as the occupancy rate in the retail scene in Kuala Lumpur was just 82.9% in 2019.

Occupancy Rates20122013201420152016201720182019
Pavilion Kuala Lumpur Mall99.1%96.2%98.1%98.5%95.8%98.9%98.7%98.0%
Elite Pavilion Mall96.7%95.0%
Intermark Mall6.5%90.0%94.4%97.1%
DA MEN MALL87.0%86.3%74.4%71.7%
Pavilion Tower100.0%100.0%80.5%98.0%94.0%98.5%94.0%85.8%

11. As the movement control order (MCO) was implemented in Malaysia, Pavilion REIT has provided its retail tenants who provide non-essential services with 14 days of free rent. The weighted average lease expiry stood at 1.62 years in 2019. Pavilion REIT is unlikely to secure renewals on short-term tenancy leases amidst the COVID-19 outbreak. Pavilion REIT’s short-term gross revenue and its ability to pay distribution will be temporarily affected. As life elsewhere is slowly returning to normal post the COVID-19 peak, Pavilion REIT can pull through the difficult times.

12. Pavilion REIT still retains the right of first refusal for fahrenheit88 shopping mall and Pavilion Hotel Kuala Lumpur managed by Banyan Tree. These two properties are conveniently located in Bukit Bintang. The management will only consider yield-accretive assets with yields between 6.5% and 7%. At the same time, the management is interested to own the Pavilion Bukit Jalil mall post-construction although it previously turned down a participation offer. The mall is currently owned by its sponsors, Qatar Investment Authority and Malton Berhad.

13. Based on unitholdings, the sponsors of Pavilion REIT are Qatar Investment Authority and Tan Sri Desmond Lim. Qatar Investment Authority is a state-owned sovereign wealth fund owned by the Qatari government. Tan Sri Desmond Lim is one of the richest persons in Malaysia. He and his wife, Puan Sri Cindy Tan sit on the board of Pavilion REIT and Malton Berhad, a listed property developer. They collectively own about 37.1% of Pavilion REIT and 37.4% of Malton.

ShareholderOwnership
Qatar Investment Authority33.2%
Tan Sri Desmond Lim Siew Choon27.8%
Puan Sri Cindy Tan Kewi Yong9.3%

14. Distribution per unit (DPU) has increased at a compounded annual growth rate of 3.1% since 2012. The growth in DPU is mainly driven by positive rental reversions over the years; and yield-accretive acquisitions of Intermark Mall in 2016 and Elite Pavilion Mall in 2018. Pavilion REIT registered a slight drop in DPU in 2019 because of lower rental incomes from Intermark Mall, DA MEN Mall, and Pavilion Tower.

Source: Pavilion REIT annual reports

The fifth perspective

Overall, Pavilion REIT owns good-quality assets like the Pavilion malls and stands to benefit from the flight-to-quality phenomenon among retailers. Its relatively strong sponsors provide them with a competitive edge to bargain for a lower cost of debt and a pipeline of potentially yield-accretive assets. There is still room for growth as its gearing stood manageably at 33.9% in 2019. Although the manager has increased DPU almost every year except for 2019, the property yields of DA MEN Mall and Pavilion Tower fell short of expectations.

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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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