Premium assets to lift Pavilion-REIT’s performance

PETALING JAYA: The earnings outlook for Pavilion Real Estate Investment Trust (Pavilion-REIT) is improving, underpinned by its premium asset portfolio, analysts say.

The REIT’s flagship retail assets, mainly the Pavilion Kuala Lumpur (PKL) and Pavilion Bukit Jalil (PBJ) malls, will likely enjoy improved rental income from rental revisions and floor take-up rates this year, according to Affin Hwang Research.

“With 48% of the portfolio’s net lettable area due for renewal this year – 44% at PKL and 27% at PBJ – there is room for further rental upside, particularly as PBJ’s net property income (NPI) margins continue to recover,” the research house said in a recent report on the REIT.

Pavilion-REIT’s management is guiding for mid-single-digit rate revisions and Affin Hwang Research expects improved rates and floor take-up rate to be reflected in the results for the first half of this year.

Pavilion-REIT also owns Elite Pavilion, which together with PKL contributed 77% of last year’s NPI, as well as Da Men Mall in Subang Jaya, and Intermark Mall and Pavilion Tower office block in Kuala Lumpur.

Affin Hwang Research added that Pavilion-REIT’s recently acquired hotel assets, the Banyan Tree Kuala Lumpur and Pavilion Hotel Kuala Lumpur, could provide an added boost to earnings growth as both the assets offer NPI yields of 8.1% to 8.6%, which are slightly above the average NPI yields of 6.7% for its retail assets.

Pavilion-REIT will lease Banyan Tree and Pavilion Hotel to Harmoni Perkasa Sdn Bhd under a 10-year master lease agreement, renewable for two additional terms, Affin Hwang Research said.

The deal provides the REIT with stable income through fixed annual rental of RM33.5mil (with a 5% to 10% step up every five years), including potential upside via a variable component where Pavilion-REIT will receive 40% of the surplus when the combined net operating income of Banyan Tree and Pavilion Hotel exceeds the fixed rent, with Harmoni Perkasa retaining 60%,” the research house said.

It added this is a prudent entry strategy for Pavilion-REIT’s maiden hospitality venture as it balances stable cash flows with participation in potential upside during periods of strong tourism demand .

The RM480mil purchase of the hotels was completed on June 20 and funded with the RM360mil raised from a private placement of trust units.

As of the end of March, Pavilion-REIT’s gross borrowings stood at RM3.4bil or 38.5% of its total asset value of about RM10bil.

Furthermore, the move by Bank Negara to cut the overnight policy rate by 25 basis points to 2.75% will be a boost for Pavilion-REIT as some 88% of its borrowings are on a floating-rate.

“This positions Pavilion-REIT to reap significant benefits from reduced borrowing costs, estimated to lower costs by 4%.

“The timing of this reduction aligns well with Pavilion-REIT’s borrowing cycle for the year, enhancing prospects for sustained dividend per unit growth,” Affin Hwang Research said.

It upgraded Pavilion-REIT to a “buy” from “hold” previously with a higher target price of RM1.97 per unit from RM1.61 following earnings forecast increases of between 7% to 16% for 2025 to 2027.