Neutral on Pavilion REIT’s acceptance to participate in Pavilion Bukit Jalil

KOTA KINABALU: Pavilion Real Estate Investment Trust’s (Pavilion REIT) acceptance of an invitation to participate in the ownership of Pavilion Bukit Jalil has been viewed neutrally by analysts.

The board of directors of Pavilion REIT Management Sdn Bhd, the manager of Pavilion REIT, informed in a filing on Bursa Malaysia that Malton Bhd’s wholly-owned subsidiary Pioneer Haven Sdn Bhd had on August 8, 2018 formally invited Pavilion REIT to participate in the ownership of an ongoing development known as Pavilion Bukit Jalil.

Affin Hwang Investment Bank Bhd (Affin Hwang) had a netural view on this latest development as the discussion is still preliminary and Pavilion Bukit Jalil mall has been widely viewed as an acquisition target for Pavilion REIT.

“We are neutral on the announcement – the Pavilion Bukit Jalil mall has been widely viewed as an acquisition target for Pavilion REIT due to their common shareholder, Tan Sri Desmond Lim,” the research firm said.

Affin Hwang’s preliminary assessment on the impact of acquisition, if materialised, was based on information on various press articles and revealed that Pavilion REIT currently owns four retail malls with a combined net lettable area (NLA) of 2.2 million square feet (sf). The acquisition may lift Pavilion REIT’s NLA by 82 per cent to four million sf

The research firm also noted that Pavilion REIT has RM2.1 billion gross borrowings and RM6.3 billion total asset value as at end-June 2018 (gearing ratio of 33.7 per cent).

“With a debt-headroom of circa RM1 billion, Pavilion REIT may need to issue new shares to fund this acquisition.”

As for yields, while it is premature to speculate, the research firm estimated that the recently concluded acquisition of Pavilion Elite delivers a net property yield of circa 6.5 per cent.

According to AmInvestment Bank Bhd (AmInvestment Bank), Pavilion REIT’s debt-to-asset ratio increased to 28 per cent following the RM580 million acquisition of Elite Pavilion Mall through 100 per cent debt financing which was completed in the first quarter of financial year 2018 (1QFY18).

With the addition of Pavilion Bukit Jalil, the research firm thus expected Pavilion REIT’s debtto-asset ratio to rise further to 46 per cent (assuming 100 per cent debt financing of RM1.6 billion), nearing the regulatory threshold of 50 per cent.

“Hence, we do not discount the possibility of equity financing to reduceitsgearing,”AmInvestment Bank said.