Pavilion – BT Singapore

Pavilion Reit shines on debut with 16% gain

SHARES in Pavilion Real Estate Investment Trust (PReit) posted a smart 16 per cent gain on debut yesterday, closing at RM1.02 each amid brisk trading volumes.

The trust, partly owned by the Qatar Investment Authority, had priced the institutional portion of its RM710 million (S$291 million) initial public offering at 90 sen each. The retail portion of the offer was priced at 88 sen.

The premium was in stark contrast to the broader market which fell 0.2 per cent amid continuing worries over the eurozone’s financial health and could illustrate investor caution amid a preference for safe and reasonably yielding stocks. At RM1 a share, according to HwangDBS Vickers Research in a pre-IPO report, the trust offers a distribution yield of 5.8 per cent.

The trust is the sole premium retail Reit in Malaysia with its most valuable asset being Pavilion KL – 1.3 million square feet of net lettable area – which is valued at RM3.4 billion.

The trust also manages Pavilion Tower – a 20-storey office tower with 167,700 sq feet of net lettable area – which is valued at RM128 million.

Pavilion KL is one of the most popular complexes in the city. With a diversified tenant base comprising everything from supermarkets (Parkson) to high-end fashion outlets (Prada, Gucci), it boasts an occupancy rate of 99 per cent. Average rental rates are around RM17 per sq foot for retail space and RM6 per sq foot for office space.

HwangDBS said that the trust’s growth would be driven by positive rental conversions from expiring leases. Around 67 per cent of leases are due to expire in 2013 which the research firm said ‘would lift our FY13 revenue forecast by 4 per cent year-on-year – assuming a 5 per cent rental hike – to RM325 million.’ But growth for next year would be ‘marginal’ as only 5 per cent of the leases are slated to expire.

The trust is expected to use 93 per cent of its gross proceeds to part finance its purchase price of RM3.3 billion which would give it a gearing after listing of some 20.1 per cent, well below the required 50 per cent limit. That was positive, HwangDBS said, because ‘it suggests that it could borrow up to RM1 billion to fund future acquisitions.’ The research house set its target price at RM1.

The initial public offering of Pavilion Reit will be the fourth largest in Malaysia this year after those of Bumi Armada Bhd, MSM Malaysia Holdings Bhd and UOA Development Bhd.

The demand by investors for shares exceeded supply by over 40 times for MSM and Bumi Armada’s offerings. In Pavilion’s case, it was by 26 times.