About Pavilion REIT

It has forecast a dividend yield of 6.51% in FY2012 ending Dec 31 based on its tentative retail price of 88 sen a unit. Its pro forma NAV upon listing is 94 sen per unit.

Market observers say that while Pavilion REIT’s dividend yield is decent, its two assets may not be enough to entice medium to long term investors.

So how does Pavilion REIT’s promised dividend yield stack up against those offered by some of the Malaysian REIT?

The three are Sunway REIT, Axis REIT and CpitaMalls. Sunway REIT’s gross dividend is at about 5.72% based on closing price of rm1.15. Axis REIT offers a dividend yield of about 6.79% (based on closing price of rm2.55). As for CMMT, it offers a gross dividend yield of 6.59% (based on closing price of rm1.36).

The above REITS reveal that Pavilion REIT’s projected yield of 6.51% in FY2012 may pale in comparison to other offerings in the region.

It aims to add more assets to its portfolio and wants to continue its “shopping spree” to acquire at least three more retail properties within the next three years (2011-2013), depending on the economic situation.

Pavilion REIT will be looking at potential injections [into the REIT] maybe in 2013. Potentially, the first acquisition will be Fahrenheit88, depending on the valuation and the yield.

It has right of first refusal (ROFR) to Fahrenheit88, an extension of Pavilion Kuala Lumpur and a new shopping mall to be built in USJ Subang Jaya. The acquisitions of the extension to Pavilion and the mall in Subang Jaya could take place in 2014 or 2015 once both projects are completed. Both developments are undertaken by the sponsor company, Urusharta Cemerlang Sdn Bhd.

Pavilion REIT’s portfolio currently consists of Pavilion Kuala Lumpur mall and the 20-storey office building Pavilion Tower, which have a total appraised value of about RM3.5 billion. As at June 30 2011, Pavilion KL was about 98.5% occupied while the occupancy rate at Pavilion Tower was 64.5%, including committed tenancies that had yet to commence.

It could either finance these additional property injections by going back to its shareholders or through bank borrowings, although the latter was the preferred option for now. The proceeds of close to RM700mil is being utilised to pay down the debt.

Upon listing, the REIT will have RM730.6 million debt, about 20.1% of its estimated total asset value, giving it headroom to gear up further with the debt ceiling set at 50% of total asset value. Under Securities Commission rulings it is allowed to gear up to 50% LTV ratio.

The current Pavilion shopping complex, which has been fully occupied for two years with a potential-retailer waiting list of 200 and rental yields of about RM16 per sq ft, will begin extension works by the first half of 2012. Pavilion REIT had “obtained all development approvals” for the extension.

This is an extension of about 300,000 sq ft of retail space, and will be built by Pavilion REIT's sponsors (original shareholders Urusharta Cemerlang Sdn Bhd) on the former carpark of Millenium Hotel. They (the sponsors) will also build an apartment on top of the new retail space.

Pavilion REIT will also develop another shopping mall in UEP Subang Jaya, following the compact mall concept with an apartment block on top of it. This compact mall which will be developed by Usurharta Cemerlang will have another brand name that will be managed by the Pavilion Group.

Pursuant to the initial public offering (IPO), 755 million units would be offered to Malaysian and foreign institutional investors and selected investors at the institutional price (other than cornerstone investors) which would be determined by way of book building.

A total 265 million units has been earmarked for allocation to six identified cornerstone investors at an offer price of 90 sen per unit or the institutional price, whichever is lower. The six cornerstone investors are Permodalan Nasional Bhd, Employees Provident Fund, Kumpulan Wang Persaraan, Great Eastern Life Assurance (M) Bhd, American International Assurance Bhd and HwangDBS Investment Management Bhd.

About 35 million units will be offered to the general public in Malaysia, eligible tenants of Pavilion Kuala Lumpur Mall and Pavilion Tower, directors of the manager and the eligible employees of the manager, Urusharta Cemerlang Sdn Bhd, Capital Flagship Sdn Bhd and Kuala Lumpur Pavilion Sdn Bhd at the indicative retail price of 88 sen per unit.

At an indicative retail price of 88 sen, the manager expected Pavilion REIT to provide a distribution yield of 6.41% and 6.51% for the one-month forecast period ending Dec 31, 2011 and the 12-month forecast period ending Dec 31, 2012 respectively.

The total appraised value of Pavilion REIT's initial property portfolio was about RM3.5bil. With the inclusion of Pavilion Kuala Lumpur Mall, which forms 96.4% of the total appraised value of Pavilion REIT's initial property portfolio, Pavilion REIT would become one of Malaysia 's largest listed REITs with the largest exposure to the retail sector of any listed Malaysian REIT by appraised value.

Upon listing, Malton Bhd’s chairman Datuk Lim Siew Choon and his wife, Datin Tan Kewi Yong, will collectively own 37.6% of Pavilion REIT whileQatar Holdings LLC, will hold 36.1%.