UOB Kay Hian
23 July 2025

Pavilion REIT Poised for Growth: Strong 2Q25 Results, Rising Tourism, and Strategic Expansions Drive Positive Outlook

Broker: UOB Kay Hian | Date: 23 July 2025

Overview: Pavilion REIT Delivers In-Line 2Q25 Results, Maintains Upbeat Guidance

Pavilion Real Estate Investment Trust (Pavilion REIT, ticker: PREIT MK) reported solid and in-line results for the second quarter of 2025, continuing to impress with resilient rental growth and rising tourist arrivals. Backed by a diversified portfolio including the iconic Pavilion Kuala Lumpur (KL) Shopping Mall, Pavilion Office Tower, and recent hotel acquisitions, PREIT remains well-positioned to ride Malaysia’s tourism recovery and local retail momentum.

Management is maintaining its rental reversion guidance of 3-5% year-on-year for 2025. The trust stands out for its ability to capitalize on higher tourist footfall, synergies from newly acquired hotels, and a favorable interest rate environment. The outlook is further bolstered by strong operational performance at Pavilion Bukit Jalil, driven by robust event activity and increasing occupancy.

Pavilion REIT at a Glance

• Share Price: RM1.71
• Target Price: RM1.88 (previously RM1.69)
• Upside Potential: +9.9%
• Market Capitalization: RM6,705.8 million (US\$1,584.0 million)
• Shares Issued: 3,921.5 million
• Major Shareholders: Qatar Investment Authority (25.7%), Lim Siew Choon (21.6%), Employees Provident Fund (12.0%)
• FY25 NAV/Share: RM1.00
• FY25 Net Debt/Share: RM0.72
• 52-Week High/Low: RM1.74/RM1.22

2Q25 Financial Performance: Robust Revenue and Profit Growth

• NPI Margin (2Q25): 60.9% (up 1.2 ppt YoY)
• Core PAT Margin (2Q25): 36.9% (up 3.5 ppt YoY)

These results represent 45% of both internal and consensus full-year estimates, setting a strong pace for the remainder of the year. Management declared a 2.29 sen dividend for 2Q25 (1H25: 4.97 sen), translating to an annualized yield of 5.8%, tracking at 51% of the full-year forecast of 9.76 sen.

Key Financials and Valuation Metrics

Operational Highlights: Resilient Rental Reversions and Tourism-Driven Growth

• Rental Reversion Guidance: 3-5% YoY in 2025 (2024: 5%). Pavilion KL is expected to deliver higher growth (4-5% YoY) than Pavilion Bukit Jalil (3-5%) and Intermark (3%).
• Drivers for Achievability:
  • Major renewals completed in 2H24
  • Occupancy rates trending upwards
  • Tenants likely to pass on the sales and service tax through product price adjustments. Anticipated price hikes are 3-4%, with occupancy over operating cost ratios ranging 5-10% for international, 10-15% for regional, and 15-20% for F&B brands.

Pavilion KL: Anchored by International Tourism

• Revenue and NPI for 2Q25: RM123 million and RM84 million, respectively (flattish YoY)
• Occupancy Rate: Stable at 96.4%
• 3Q25 Trends: Notable uptick in tourist arrivals, especially from Middle Eastern, Indonesian, and Chinese families during the summer holidays
• Hotel Synergy: Management anticipates continued synergies from the Pavilion Hotel and Banyan Tree Hotel acquisitions, strengthening Pavilion KL’s appeal to tourists and business travelers.

Pavilion Bukit Jalil: Exhibition-Led Footfall Expansion

• Revenue (2Q25): RM58 million (+15% YoY)
• NPI (2Q25): RM31 million (+21% YoY)
• Drivers: Higher occupancy and increased events at the exhibition centre (now fully booked with 4-5 events/month versus 3-4/month in 2024)
• Footfall: Double-digit YoY growth in 1H25, expected to be sustainable
• Occupancy Target: 94% by end-2025 (up from 90.1% in 2Q25) as new tenants ramp up renovations and openings

Gearing and Financing Update

• Gearing Ratio: Rising to 40.5% (from 36.3% as of end-2Q25) due to the RM400 million payment for Pavilion Bukit Jalil acquisition, funded via debt.
• Annualised NPI for Bukit Jalil: RM136 million, below the RM146 million target due to higher labor and electricity costs.
• Latest Valuation: Pavilion Bukit Jalil remains valued at RM2.21 billion.
• Interest Rate Sensitivity: 87.9% of borrowings are floating rate, positioning PREIT to benefit from the recent 25bp overnight policy rate cut.

Valuation and Recommendation: Upgraded Target Price, Attractive Dividend Yield

• Recommendation: Maintain BUY
• Target Price: Raised to RM1.88 (from RM1.69), reflecting a higher terminal growth rate (2.3% vs 1.8%) in DDM valuation model (required rate of return: 7.8%).
• Yield: Implied 2026 dividend yield of 5.4%, matching the 10-year historical mean. Current yield spread stands at 2.9bp, one standard deviation above the decade-average, signaling attractive relative value.

Environmental, Social, and Governance (ESG) Initiatives

• Environmental: Pavilion KL now procures 20% renewable energy from Tenaga Nasional.
• Social: Over 500 events hosted annually at PREIT properties, supporting community engagement.
• Governance: Implementation of an Anti-Bribery & Corruption policy, reinforcing PREIT’s commitment to ethical business practices.

Key Metrics and Financial Position

Revenue Breakdown by Asset (2Q25)

• Pavilion KL: 57.7%
• Pavilion Bukit Jalil: 27.3%
• Intermark: 3.5%
• Da:men: 1.1%
• Elite: 8.8%
• Banyan Tree KL: 0.1%
• Pavilion Hotel KL: 0.3%
• Office: 1.2%

Conclusion: Pavilion REIT Remains a Top Pick for Yield-Driven Investors

Pavilion REIT’s strong 2Q25 performance, resilient rental reversion, and tangible upside from tourism and exhibition-driven retail bode well for sustained growth. With a robust dividend profile, prudent gearing, and proactive ESG initiatives, PREIT offers an attractive yield premium and defensive exposure in the Malaysian real estate investment trust sector. UOB Kay Hian maintains a BUY rating with an upgraded target price of RM1.88, underpinned by both operational excellence and strategic expansion.