IGB REIT (Bursa: 5227) is a retail REIT that owns two prime properties strategically located in Klang Valley, Malaysia: Mid Valley Megamall and The Gardens Mall.
Mid Valley Mall is Malaysia’s largest retail mall with a net lettable area (NLA) of 1.82 million square feet and 6,092 carpark bays. The mall is a one-stop destination for locals, out-of-state residents and tourists alike.
The Gardens Mall is high-end retail mall that houses international luxury brands and is targeted towards expatriates and upper-income households from nearby affluent residential areas in Bukit Tunku, Bangsar, Damansara Height, Mont Kiara, Sri Hartamas, Seputeh, and Taman Desa. The mall has an NLA of 866,411 square feet and 4,128 car park bays. The retail levels and carparks of both Mid Valley Megamall and The Gardens Mall are linked together.
The two malls are part of Mid Valley City, one of the largest mixed-use developments in Malaysia which spans a 50-acre site comprising retail, leisure, dining, and entertainment spaces, hotels, commercial office buildings; and an exhibition centre. The success of Mid Valley City has transformed the area into a sought after residential and commercial zone which attracts many multinational corporations and established local companies. As such, Mid Valley City is a self-contained ecosystem that provides a consistent flow of shopper, tourist and office traffic within itself.
Since the beginning of the year, IGB REIT’s unit price has appreciated 7.5% from RM1.60 to RM1.72. At this price, it is a 64% premium over IGB REIT’s net asset value per unit of RM1.05 (as at 31 Dec 2016).
We attended IGB’s 2017 AGM to find out more and why investors are willing to pay such a high premium to own a unit of IGB REIT.
Here are eight things we learned from IGB REIT’s 2017 AGM:
1. Strong tenant mix and high occupancy rate. Mid Valley Megamall has a diverse tenant base of 509 tenants. Its 10 largest tenants occupy 52.32% of the mall’s NLA. It is one of the few malls in Klang Valley that has nearly a 100% occupancy rate over recent years that has, in turn, driven rental rates up. The Gardens Mall has 247 tenants and its 10 major tenants occupy 47.0% of total NLA. The mall also enjoys a high occupancy rate of between 97% and 99% from 2013 to 2016.
2. Well-spread tenancy maturity. Chairman Robert Tan shared that management schedules around 30% of leases to expire in a single year as they do not want a large number of leases to expire all at once. About 90% of leases expiring in 2017 have already been renewed. Even though the remaining leases have yet to be renewed, the chairman reassured unitholders that there’s a long queue of potential tenants to take up the balance.
3. High rate of daily shopper traffic. Mid Valley City has a large catchment area spanning all of the Klang Valley area. It is in close proximity to affluent suburbs and its location pulls visitors who live within a 20-minute drive. Beyond this, Mid Valley also attracts visitors from secondary catchment areas residing another 10-20 minutes’ drive away. The area is also accessible via a network of highways and is served by various modes of public transport including a KTM station that is located next to Mid Valley City.
As a result, the visitor footfall for both Mid Valley Megamall and The Gardens Mall is among the highest in Malaysia — the malls have a footfall of 3.5 million visitors a month. The average annual visitation is 69 times and 54 times a year for Mid Valley Mall and The Gardens Mall respectively. This means visitors patronise the malls more than once a week on average.
4. Growth in revenue, net property income (NPI) and distributable income. Total revenue increased 3.7% year-on-year in 2016 to RM597 million mainly contributed by the increased NLA in Mid Valley Megamall well as positive rental reversions from both malls. As a result, NPI and distributable income increased 5.6% and 6.7% year-on-year respectively. Distribution per unit increased from 8.19 sen to 8.72 sen even though the distribution pay-out ratio reduced slightly 97.7% from to 96.2%.
5. Planning in transport infrastructure. Even though the malls have almost physically grown to its maximum level, we can still see the management striving to attract more traffic to the malls. As the malls attract a large number of visitors daily, the carparks are always full despite having over 10,000 lots! The management realizes the problem and plans to add another 2,000 parking bays within six months.
A unitholder suggested that the red indicator lights above the parking lots be removed because they are redundant since drivers only look out for the green indicator lights that signal an empty lot. He also mentioned that the colour-blind cannot differentiate between green and red lights. The chairman said the management will take this it into consideration and joked that one of the directors is also colour-blind.
A link between the new Setia Eco World KTM station and Mid Valley City collapsed during the construction. Since rebuilding of the link will take some time, the management has taken the initiative to build its own link which will be completed by 1Q 2018.
6. Inorganic Growth. IGB has the right of first refusal over its sponsor’s future retail assets. In addition, IGB will explore potential acquisitions that meet the its investment criteria as the REIT has significant headroom to fund new acquisitions as its gearing ratio is only at 26%.
7. Financing facilities. IGB REIT has a term loan of RM1.2 billion from EPF (37.5%), Great Eastern (37.5%) and Public Bank (25%). Proceeds from the term loan were utilised to part-finance the acquisition of Mid Valley Megamall and The Gardens Mall during IGB’s IPO. The term loan has a tenure of five years with an option to extend for another two years. It bears a fixed interest rate of 4.4% per annum for the first five years and 5.0% per annum for the 6th and 7th year if extended.
8. Health safety issues. A unitholder brought up the rat sighting at the Komugi Bakery at Mid Valley Megamall in October 2016 and asked the management whether any corrective measures were being put in place. CEO Antony Barragry said the rat sighting may be due to the increased construction work around the two malls.
The management has since imposed stricter guidelines relating to tenant hygiene, increased the number of inspections conducted, and ensures immediate action is taken when a tenant is found to have poor standards of cleanliness and hygiene.
With additional article contributions by Calvin Soon.
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Thanks for the analysis. What are your takes on investing on this share trading at 64% premium?
IGB REIT is always on investors’ watchlists as many believe and trust in the management’s capabilities to manage the REIT well. The management is also very committed to delivering sustainable DPU for unitholders. They always strive to improve their properties’ conditions, facilities, and infrastructure so that their malls are sought after by retailers.
Even though the REIT is trading at a high premium at this moment, it has a lot of potential organic growth (continuous AEI programmes) and inorganic growth (both South Key and South Point projects are in progress.).