8 things I learned from Al-Salam REIT’s 2017 AGM

For those who have travelled between Singapore and Malaysia through the causeway, you have noticed the City Square Mall located right beside the Johor immigration complex. For years, City Square Mall has been the only modern mall located on the main street of Johor Bahru. However, in recent years, the redevelopment of Johor Bahru city has brought us the Komtar JBCC mall.

Fully opened only in 2015, the building is four-level shopping mall that has created a new shopping experience for visitors from both sides of the border. The mall has an Angry Birds theme park and has attracted many retailers to open their first stores in the city. This includes famous retailers such as Mark & Spencer, Swarovski, and Chanel.

The Komtar JBCC mall is also the crown jewel asset of Al-Salam REIT (Bursa: 5269). Al-Salam REIT is a diversified Islamic REIT with properties serving the retail, office, and food & beverage segments. It got me interested enough to drive down to find out more about Al-Salam REIT during its AGM held in Johor Bahru.

It turns out I was not the only one interested in the REIT. Its AGM saw a full-house meeting with both local and international investors. Al-Salam REIT is managed by Damansara REIT Managers Sdn. Bhd., the same REIT manager as Al-`Aqar Healthcare REIT. (You can find out more about the things I learned from Al-`Aqar Healthcare REIT’s 2017 AGM which was also held on the same day.)

Here are the 8 things I learned at Al-Salam REIT’s 2017 AGM:

  1. Al-Salam REIT was only listed on the Bursa Malaysia in 2015. Therefore, FY2016 is the first year the REIT was able to report a full-year result. In 2016, the REIT recorded a gross revenue of RM 76.1 million; 52% of it was contributed from Komtar JBCC. It ended the year with a net income of RM46.7 million and earnings per unit of 8.05 sen. Al-Salam REIT paid out 6.0 sen in distribution per unit, giving investors an annual distribution yield of about 5.6% during the year. The REIT has a market capitalization of about RM600 million and a property value of RM922 million.
  2. A unitholder asked during the AGM if there are still growth opportunities left for Komtar JBCC. The REIT manager mentioned that the average rent in JBCC is about RM7.70 per square feet. The rental rates within the mall range from about RM4.00 to RM25.00 per square feet. However, the attractiveness of the mall is that most of its tenancy agreements include a percentage sharing of the revenue of its tenants. Thus, as the business of its tenants improves when the mall matures, Al-Salam REIT will benefit from taking a percentage of their revenue. Moreover, the manager also believes that JBCC is well-positioned to attract more Singaporean shoppers to the mall. It has been raising awareness and improving accessibility to the mall from the immigration entry point.
  3. Komtar JBCC is valued at RM465 million, which made up slightly more than 50% of the total property value of the REIT. Apart from the JBCC retail mall, the REIT owns the office tower, Menara Komtar, connected to the mall and a single-storey hypermarket in Johor. The REIT also owns a collection of properties housing KFC & Pizza Hut outlets and its facilities across Malaysia. This is because the sponsor of the REIT is Johor Corporation, the state-owned enterprise of the Johor state. Johor Corporation is the master franchisee for all the KFC and Pizza Hut operations in Malaysia through its subsidiary QSR Brands Holdings Sdn. Bhd.
  4. Al-Salam REIT owns 22 KFC and Pizza Hut outlets, from stand-alone restaurants to shop lots. The REIT also rents out five industrial premises that support the operations of QSR Brands Holdings in Malaysia. These industrial spaces include facilities for sauce manufacturing, bakery, and commissary operations. Lastly, Al-Salam REIT owns the building that houses KFCH International College which focuses on hospitality-related courses. Overall, assets related to QSR Brands Holdings’ operations take up 34.7% of the REIT’s property value.
  5. The REIT has a gearing ratio of 35.5% at the end of 2016. The average cost of debt is 5.11%. It has 100% of its debt on a floating rate arrangement. At the end of 2016, the average maturity period of its debt is about 3 years. The short maturity and floating rates would mean Al-Salam REIT is more exposed to liquidity risk. If there is an interest rate hike, it could reduce the profitability of the REIT. And if the REIT is unable to roll over its debts when they mature, the REIT could face liquidity issues.
  6. The entire redevelopment of Komtar JB consists of Komtar JBCC retail mall, Menara Komtar, Menara Johor Land, and a proposed hotel. At the moment, only Komtar JBCC and Menara Komtar are owned by Al-Salam REIT. Although the REIT does not have a first-right-of-refusal to the other two buildings which are still under construction, they could be possible acquisition targets for the REIT in the future.
  7. The REIT manager warns about the growing supply of retail malls in Johor Bahru. Over the next few years, Johor Bahru is expecting an additional 3.4 million square feet of retail space. Some of the notable malls under construction are IKEA Tebrau, Mid-Valley Megamall, and Angsana 2. These projects might add pressure to the retail rents in Johor Bahru, directly affecting the performance of Komtar JBCC.
  8. On the other hand, the revenue coming from its food & beverage restaurant segment might be more stable. Most of the properties in this segment are based on a three-year term lease which is renewable every three years up to a maximum of 15 years. The operations of QSR Brands Holdings could provide a more stable source of rent for the REIT.

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Stanley Lim has spent the last decade in the investment industry with a focus on Asian equity markets. He has written close to 2,000 articles featuring his investment analysis, opinion, and education. Stanley is also the co-founder of ValueInvestAsia.com, a website that provides Asia-focused investment data and information to investors. Personally, Stanley is a father of three and believes that financial literacy is a key component of the solution to ending global poverty.

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