6 things we learned from the 2018 IGB REIT AGM

When Mid Valley Megamall started operations in Malaysia in 1999, it introduced the new retail concept of the ‘megamall’ by incorporating together the best in retail, food, and lifestyle offerings under one roof. The concept has proven to be a mega-success (pun intended) and adapted by many other malls in Malaysia since.

The owner of Mid Valley Megamall, IGB REIT, has seen its share price perform relative well over the last few months even though many Malaysia retail REITs have been badly affected due to rising interest rate, a soft retail market, and the upheaval caused by the recent Malaysian elections. As of 26 June 2018, IGB REIT’s share price is trading at RM1.65 — a 50% premium above its net asset value (NAV) per share of RM1.06 as at 31 December 2017.

IGB REIT owns two prime properties located in the strategic area of Klang Valley: the aforementioned Mid Valley Megamall and The Gardens Mall. Mid Valley Megamall is positioned as a one-stop mall for locals, families, and tourists while The Gardens Mall targets high-end shoppers with international luxury brands.

We previously attended IGB’s 2017 annual meeting where the REIT reported a solid set of results. Will this year prove to be the same? Here are six things we learned from the 2018 IGB REIT AGM:

1. Gross revenue increased 3.46% year-on-year to RM524.9 million in 2017, which was mainly contributed by higher rental income. Net property income increased 3.45%, where Mid Valley Megamall recorded growth of 4.36% while The Gardens Mall contributed a slight growth of 0.89%. Net profit showed a significant increase of 23.59% due to the recognition of RM40 million fair value gain on investment properties in 2017. Excluding fair value gains, net profit increased 9.19%.

Source: IGB REIT Annual Report 2017

2. Income distribution increased 7.2% year-on-year to RM326 million in 2017. Distribution per unit (DPU) increased 9.28 sen per unit in 2017, from 8.71 sen per unit in 2016. The management shared their intention to change IGB’s distribution from semi-annual payouts to quarterly payouts to provide investors with more stable and regular income.

3. Net gearing reduced by 100 basis points to 25%. In 2017, IGB issued a RM1.2 billion in medium-term notes with a tenure of seven years to refinance a previous fixed-rate term loan facility.

4. Mid Valley Megamall is one largest malls in Malaysia with over 1.8 million square feet of retails space and 6,092 car parking lots. Likewise, The Gardens Mall boasts 837,159 square feet of retail space and 4,128 parking lots. The car parks of both malls are linked together. However, even with the large number of parking lots, shoppers are finding it difficult to find a space at either mall. A shareholder said she had to wait half an hour to find a lot and another shareholder griped that she had problems finding a lot especially after 11 a.m. To alleviate the problem, the management answered that 2,000 new parking lots are scheduled to be completed by the third quarter of 2018, but there would be no more available space to increase the number of lots after this and advised shoppers to use public transport if possible. One shareholder asked the management on news of the link bridge from the new KTM station — Setia Eco World — to Mid Valley Megamall after it collapsed during construction. The management said that they have no intention to rebuild the link bridge.

5. Mid Valley Megamall has a wide tenant base of 541 tenants, an increase from 509 tenants in 2016. Some of new tenants include Smiggle, Innisfree, The Hour Glass, and Morganfield’s. Even though the retail sector remains challenging due to soft consumer sentiment and the growth e-commerce, Mid Valley Megamall is still one of the few malls in the Klang Valley that has a full occupancy rate since 2015. The Gardens Mall also posted a 100% occupancy rate in 2017. It has 228 tenants and can count Les Suites, Kakigori, Tory Burch, Putien, and Dyson among its new tenants. The management also supports selected tenants to set up a pop-up shop at The Gardens Mall for a period of two weeks every quarter. In 2018, 18,000 square feet of new net lettable area (NLA) will be introduced on the lower ground for F&B and lifestyle tenants.

6. Even though both malls have a relatively diverse tenant base, the top 10 tenants at each mall occupy 53.1% and 47.5% of NLA at Mid Valley Megamall and The Gardens Mall respectively. In order to mitigate its tenant concentration risk, the management aims to continue diversifying its tenant base, engage tenants for forward renewals, and closely monitor its anchor tenants’ performance and to support them if required to do so. Moving forward, a soft retail sector and the threat of e-commerce could mean limited growth for IGB REIT as it only owns two properties currently and does not have any potential acquisitions in the pipeline at the moment.

With additional article contributions by Calvin Soon.

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Mitra Chen is a value investor since 2008. Prior to that, she had over 20 years experience in human resources in the recruitment industry. She strongly believes that everyone can achieve financial independence when they use the right financial methods and tools for their investments.

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