• Keep BUY, new DDM-derived MYR1.74 TP (from MYR1.78), 15% upside, c.6% FY25F yield. Pavilion REIT announced that it has entered into two conditional sale and purchase agreements to acquire Banyan Tree KL (BTKL) and Pavilion Hotel KL (PHKL) for MYR480m. While we are neutral on the deals due to the short-term dilutive impact to DPU, the acquisitions provide a 7% yield and could present synergistic opportunities with Pavilion KL (PKL).

• Proposals details. BTKL will be acquired for MYR140m from Lumayan Indah (LISB), and PHKL for MYR340m from Harmoni Perkasa (HPSB), both indirectly owned by the REIT’s major unitholders, Tan Sri Lim Siew Choon and Puan Sri Tan Kewi Yong. Of the total, MYR33.5m will be retained by PREIT as advance payment for fixed rental for the first year of the lease, bringing the total cost payable to MYR446.5m (excluding expenses related to the proposals). PREIT also proposed a placement of new units to raise between MYR264m and MYR552m. Alternatively, it may issue up to MYR246.5m worth of units to LISB and HPSB to settle part of the purchase acquisition consideration. Compared to its latest gearing ratio of 37.7% in 3Q24, PREIT’s gearing ratio could range at 33-38%, depending on the funding mechanism.

• Property details. BTKL and PHK, both launched in 2018, offer 55 rooms (starting at 51 sq m) and 325 rooms (starting at 32 sq m) respectively. For BTKL, we think the price is on the high side compared to W Hotel KL which was transacted in Dec 2023. The latter had a price/room of MYR1.8m, whereas BTKL’s is at MYR2.5m. In contrast, PHKL’s is priced at MYR1.05m. The two hotels consistently record average occupancy rates above 80%, and will provide a combined fixed annual rental rate of MYR33.5m for the first five years, rising to MYR35.2m for the final five years of the 10-year lease (with an option to renew for another 20 years). If the net operating income exceeds the fixed rental, PREIT will be entitled to 40% of the difference.

• Neutral on the acquisition. Considering the size of the assets and short-term dilutive impact, we are neutral on the acquisition. For our forecasts, we assume PREIT will proceed with the minimum scenario as it has ample debt headroom while enhancing its liquidity, and we conservatively only include the fixed rental payments. There could be more upside from the variable rent due to positive operating synergies with PKL, as better marketing strategies would boost the performance of both hotels and PKL. The acquisitions are expected to be completed by 2H25. As such, we raise our FY25-26F earnings forecasts by 1% and 2%, while our DPU forecasts drop by 1% and 2% respectively due to the higher share base.

• ESG. Our TP incorporates a 0% ESG premium/discount as PREIT’s ESG score of 3.0 is at the country median.

• Risks: Lower-than-expected occupancy rates, rental reversions, and higher- than-expected bond yields.

Source: RHB Securities Research - 6 Dec 2024