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RAM Ratings assigns initial ratings to Pavilion REIT
Published on 09 May 2025.
RAM Ratings has assigned initial ratings of AA3(s)/Stable, and P1(s) to the respective unsecured Medium-Term Notes (MTN) and unsecured Commercial Papers (CP), under Pavilion REIT Capital Berhad’s (the Issuer) RM8.0 bil MTN Programme and RM200.0 mil CP Programme (collectively, Bond Programmes). We have concurrently assigned an AA2(s)/Stable rating to the secured MTNs to be issued under the MTN Programme. The Issuer is a non-operating, wholly owned financing vehicle of Pavilion Real Estate Investment Trust (PavREIT).
The AA3(s)/Stable and P1(s) ratings assigned to the unsecured MTNs and CPs reflect PavREIT’s credit profile as the ultimate obligor, as stipulated under the Real estate investment trust (REIT) Trustee Financing Agreement (RTFA) signed with the Issuer. The one-notch uplift for the secured MTNs reflect the enhancement afforded by the collateral, based on RAM’s rating methodology for well-secured debt, indicating a strong likelihood of recovery in the event of default through the liquidation of the properties secured against the MTNs. All secured MTNs issued under the programme will be subject to a minimum security coverage ratio of 1.67 times.
The ratings are supported by the quality of its asset portfolio comprising five retail malls and one office building. Its asset profile is strong, anchored by its flagship assets, Pavilion Kuala Lumpur Mall and Pavilion Bukit Jalil (PBJ). Both are super-regional malls in prime, integrated developments with strong catchment areas. While PavREIT’s portfolio is retail-centric (98.9% and 98.5% of total revenue and asset value, respectively), it has a wide and diverse retail and office tenant base, of low tenant concentration risk. Its planned acquisition of two hospitality assets on a long-term master-lease arrangement in the second half of 2025 will also further diversify its asset base and lend added stability to its cash flow profile.
Its high exposure to interest rate risk with nearly 90% of borrowings in variable rates is a key moderating rating factor. Expectations of a stable, if not lower interest rate environment and its well-laddered debt maturities will keep this risk manageable for now. Its current leverage of 37%, after considering the potential RM400 mil deferred payment for PBJ and hotel acquisition costs of RM480 mil (assuming no further major funding commitment), should provide adequate headroom to pursue asset growth. Its fixed charge cover of 2.62 times is appropriate for its rating, although weaker than the industry median.
We expect the repositioning of Da Men, improved occupancy and higher rental reversions from PBJ to drive PavREIT’s future income growth. This, combined with its plans to refinance costlier borrowings with cheaper unsecured debt through the Bond Programmes should translate to further improvements to its coverage ratios and bring its average borrowing costs closer to the industry average. Its free asset base of RM900 mil, active capital management and improving earnings outlook will further enhance its funding profile.
As of end-December 2024, the REIT had an overall portfolio occupancy rate of 90.4%, with most of its assets surpassing pre-pandemic performance. Its net property income margins averaged 61.8%, in line with comparable prime malls. At RM8.5 bil of assets under management, PavREIT is the third largest REIT in Malaysia by asset size and the largest retail REIT by net lettable area.
Analytical contacts
Darrel Tiang
(603) 3385 2531
darrel@ram.com.my
Tan Han Nee
(603) 3385 2529
hannee@ram.com.my
Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
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