In-Depth Analysis of Pavilion REIT’s Strategic Moves

Report Date: December 6, 2024

Broker: Maybank Investment Bank Berhad

Overview of Pavilion REIT’s Latest Proposal

Pavilion REIT (PREIT MK), a prominent player in Malaysia’s real estate investment trust sector, has recently announced a strategic acquisition plan to expand its portfolio. The proposed acquisition includes two hotels operated by Banyan Tree Hotels & Resorts, valued at MYR480 million. This move is anticipated to bolster Pavilion REIT’s earnings per unit (EPU) and distribution per unit (DPU), with projected accretions of 0.7% and 4.6% in the fiscal years 2025 and 2026, respectively. The acquisition is expected to be funded through the placement of new units, aiming to raise between MYR264 million to MYR552 million in gross proceeds.

Financing the Acquisition

To finance this ambitious acquisition, Pavilion REIT has laid out a detailed funding strategy. The hotels, Banyan Tree Kuala Lumpur (BTKL) and Pavilion Hotel Kuala Lumpur (PHKL), will be acquired from Lumayan Indah Sdn Bhd and Harmoni Perkasa Sdn Bhd for MYR140 million and MYR340 million, respectively. The plan involves issuing new placement units to existing major unitholders who are not related parties. Additionally, there is an option to issue units worth MYR246.5 million directly to the vendors, with any shortfall to be covered by borrowings and internally generated funds. The completion of the deal is targeted for the first half of 2025, which will subsequently reduce PREIT’s gross gearing from 0.38x to 0.36x.

Leasing and Revenue Projections

Post-acquisition, both hotels will be leased to Harmoni Perkasa Sdn Bhd for a fixed annual rental income of MYR33.5 million for the first five years, translating to a net property income (NPI) yield of 7.0%. There is a provision for incremental adjustments of 5%-10% every five years. Notably, if the net operating income exceeds the fixed rental, Pavilion REIT stands to gain 40% of the surplus. These properties, the first hospitality assets in PREIT’s portfolio, will constitute 5.5% of the REIT’s total assets under management, capitalizing on Malaysia’s growing tourism industry.

Adjustments in Financial Projections

With the impending acquisitions, Pavilion REIT has revised its financial forecasts, increasing core net profit estimates for FY25 and FY26 by 4% and 8%, respectively. These adjustments are based on the assumption of full funding through new placement units and the commencement of fixed rental income from July 2025.

Performance Metrics and Market Position

The report highlights Pavilion REIT’s robust market position with a current share price of MYR1.51 and a 12-month price target of MYR1.72, reflecting a 19% potential upside. The company boasts a market capitalization of MYR5.5 billion, with significant stakes held by major shareholders such as Qatar Holding LLC and LIM SIEW CHOON. Pavilion REIT’s diversified portfolio primarily focuses on retail real estate properties, making it a significant player in the Malaysia real estate sector.

Detailed Property Insights

In a detailed analysis of the properties, Banyan Tree Kuala Lumpur, a freehold property with a strata floor area of 10,212 sq. m., features 55 rooms and 81 parking bays. In contrast, Pavilion Hotel Kuala Lumpur, with a 99-year lease expiring in 2109, offers 325 rooms and is integrated within the Pavilion Kuala Lumpur shopping mall.

Financial Summary and Risk Assessment

Pavilion REIT’s financial summary underscores a steady revenue and net property income growth trajectory, with core net profits expected to increase substantially over the forecast period. However, the report also cautions about potential risks, including changes in rental and occupancy rates, operating expenses, and interest rates that could adversely affect earnings. Additionally, the impending lease renewals in 2025 for significant portions of its property portfolio could pose challenges.

Conclusion

Maybank Investment Bank Berhad’s report concludes with a reaffirmation of a ‘BUY’ recommendation for Pavilion REIT, citing the strategic acquisitions as pivotal for future growth and enhanced returns. Investors are encouraged to consider the robust potential returns and strategic positioning of Pavilion REIT in the Malaysian real estate market.