Listed in 2012, IGB REIT is a retail REIT that owns two popular shopping malls in the Klang Valley, namely Mid Valley Megamall and The Gardens Mall. The two malls are frequented mostly by locals and depend less on tourists. Hence, they are less affected by the COVID-19 pandemic compared to other retail-focused REITs like Pavilion REIT.
Although our lifestyle has been significantly altered by the virus, the locals still yearn for the freedom to shop, dine in, and lepak (hang out and chill) at our favourite shopping malls. This is seen from the large crowd sizes in malls during the weekend every time the government eases safety measures.
Here are eight things I learned from the 2021 IGB REIT AGM.
1. Gross revenue reduced by 15.7% year-on-year to RM465.2 million in 2020. Likewise, distribution per unit dropped by 26.3% from 9.16 sen in 2019 to 6.75 sen in 2020 because of the rental support amounting to RM81.5 million provided to tenants on a case-by-case basis to help them weather the storm. The rental assistance initiative will proceed at a smaller scale as more economic sectors are now allowed to operate this year than in 2020. While the REIT continues to pay at least 90% of the distributable income to unitholders, its payout ratio has decreased slightly from 95.0% in 2019 to 92.5% in 2020 to ensure sufficient cash to run its operations.
2. A unitholder pointed out that reimbursement costs surged by 35.9% year-on-year to RM68.0 million in 2020. CFO Chai Lai Sim explained that the increase was due to higher allowance for impairment of trade receivables from tenants who faced operational challenges in settling their rental payments. CEO Antony Patrick Barragry stated that the REIT’s short-term business strategy is to retain its tenants and tide through the pandemic together.
3. Robinsons, an anchor tenant of The Gardens Mall, closed all of its stores during the crisis in both Malaysia and Singapore in October 2020. A portion of the retail space left by Robinsons in the mall has been taken up by Isetan as pop-up stores. Other vacated areas will be offered to potential tenants at competitive market rates that benefit both parties. Esprit also terminated its tenancy with the REIT during the year. Despite the challenging business environment, the REIT managed to register a low-single digit positive rental reversion according to Barragry.
4. The malls receive three million visitors on average per month. When movement restrictions were relaxed in March 2021, mall footfall and sales recovered to about 75% of pre-pandemic levels. The REIT will set aside at least RM10 million in 2021 to keep the malls relevant and modern to both tenants and patrons. The REIT also enjoyed a 15% pass-through discount on electricity charges for half a year in 2020 under the government’s economic stimulus package.
5. Barragry did not reveal the REIT’s top 10 tenants for confidentiality. It was disclosed in the 2020 annual report that anchor tenants such as AEON BiG, Aeon, Metrojaya, Golden Screen Cinemas, Isetan, and GSC Aurum Theatre contributed to 9.0% of the REIT’s total rental income in 2020. The tenants’ occupancy cost (as a percentage of sales) increased by approximately 10% because of the drop in sales. This REIT’s disclosure is less comprehensive compared to other local peers such as KLCCP Stapled Group, Pavilion REIT, and Sunway REIT.
6. Barragry shared with unitholders that the REIT’s leases usually last for three years, and about one-third of leases will expire in 2021. IGB REIT’s weighted average lease expiry normally ranges between one to two years and is similar to that of Pavilion REIT at 1.3 on average, as both REITs are retail-focused and own prime shopping malls in the city.
7. The injection of The Mall, Mid Valley Southkey in Johor Bahru by its sponsor into IGB REIT will most likely be delayed. Barragry added that it will be tough for the REIT to assess any given opportunities, acquire retail assets and turn them around in this pandemic. The management will only acquire Southkey Megamallonce it achieves stable positive rental reversions and remains popular year after year.
8. A unitholder also questioned the jump in ‘other revenue’ from RM6.1 million in 2019 to RM10.2 million in 2020. Chai explained that other revenue primarily comprises late payment interests. The REIT hopes tenants pay on time and the amount of late payment interests to remain low. On a separate note, questions regarding its soon-to-be listed sister company, IGB Commercial REIT was not answered given that it is a separate entity.
The fifth perspective
The short-term outlook is still gloomy as Malaysia moved into the second stage of its three-stage national COVID-19 vaccination programme in April 2020. The progress of the programme could even be slowed down by the inequitable distribution of vaccines globally. In addition, another movement control order was imposed abruptly on certain parts of the Klang Valley in May. Footfall to the two malls and the tenant sales will most likely experience another sharp drop as inter-district travel is not allowed.
Nevertheless, IGB REIT’s relatively low gearing at 23.3% puts it in a financially strong position as it aims to ride through this crisis. IGB REIT’s good tenant mix and strategic location will also provide patrons with a shopping experience that is unmatched from online shopping.
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