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Pavilion REIT could see three more acquisitions by 2015

KUALA LUMPUR (Nov 15): Main Market-bound Pavilion Real Estate Investment Trust (Pavilion REIT), which has decided to list on Dec 7 in spite of market volatility, may take at least two more malls in the Klang Valley into its fold by 2015.

"We [Pavilion] will be looking at potential injections [into the REIT] maybe in 2013," Philip Ho, CEO of Pavilion REIT Management Sdn Bhd told reporters at its prospectus launch on Monday. "Potentially, the first acquisition will be Fahrenheit88, depending on the valuation and the yield [in the future]," he said, adding that Pavilion is giving itself 18 to 24 months to evaluate Fahreheit88, the refurbished KL Plaza, given that the mall is still relatively new.

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, 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.

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.

"Normally people have about 30 to 35% net gearing. We are a little bit conservative," Ho said, adding that the current level of debt takes into consideration future potential acquisitions and opportunities.

Pavilion REIT, which is paying RM3.32 billion in cash and new units for the two assets, is looking to raise about RM700 million from selling 26.33% of itself or 790 million units at prices indicated between 88 and 90 sen per unit. Cornerstone investors will pay 90 sen per unit or the institutional price, whichever is lower, while retail investors will pay a maximum of 88 sen per unit, a discount to the final institution price. The final price will be set on Nov 23, with its listing slated for Dec 7.

The REIT is forecast to give a yield of 6.51% for FY12, using the 88 sen tentative retail price. This is based on the REIT achieving a forecast net property income of RM220 million on revenue of RM314.4 million and RM172.1 million distributable income for FY12 ending Dec 31, 2012.

The manager intends to distribute at least 90% of its distributable income on a half-yearly basis, but says it will distribute 100% of its distributable income for the period from its listing to Dec 31, 2012, according to its prospectus.

Maybank Investment Bank Bhd CEO Datuk Zafrul Tengku Aziz said the REIT, poised to be one of the year's largest listings, will appeal to investors seeking safety in yields. "I think even with the market conditions now, [the] market is looking at companies that are stable and [can] give a stable yield. Definitely Pavilion REIT is one of those companies that fit such criteria," he said. The investment bank is joint principal advisor to the REIT along with CIMB Investment Bank Bhd.

Even so, Pavilion REIT may face some competition from PCCW Ltd's spin-off, HKT Trust Ltd, that has just filed for IPO in Hong Kong and is reportedly offering 2012 yields ranging between 7.6% and 9%.

Still, that six cornerstone investors — which comprise pension funds and insurance companies — have been secured for the exercise is testament to the "kind of stable cash flow and dividend yield element" that Pavilion REIT provides, CIMB Investment Bank CEO Datuk Charon Wardini Mokhzani added. "With the strong cash flow and very solid balance sheet, the investment thesis is very clear to domestic and international investors."

The six cornerstone investors are Permodalan Nasional Bhd, Employees Provident Fund Board, Kumpulan Wang Simpanan Persaraan, Great Eastern Life Assurance (M) Bhd, American International Assurance Bhd and HwangDBS Investment Management Bhd. Collectively, they will take up 265 million units or 33.5% of the total 790 million units offered under the IPO or 8.83% of the REIT.

Thirty-five million units or 4.4% of the offered units have been slated for the general public, including eligible tenants and employees. The remaining 490 million units will be offered to local and foreign institutional investors through a book-building exercise.

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 while Qatar Holdings LLC, will hold 36.1%.

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