IGB REIT is a Malaysia-domiciled real estate investment trust established on 25 July 2012 and listed on the Main Market of Bursa Malaysia on 21 September 2012. Two malls sit within its portfolio today – Mid Valley Megamall and The Gardens Mall. Launched in 1995, the Mid Valley project is one of the largest urban development projects in the world. Mid Valley Megamall itself is the primary component of Phase One of this undertaking. Mid Valley Megamall is Malaysia’s largest retail mall with gross floor area 4.5 million square feet and net lettable area of 1.7 million square feet. There are 5 trading levels with more than 11,000 parking bays. The Garden Malls is a high-end retail mall houses international luxury brands from all over the world designed to target upper middle to upper income level consumer groups. The net lettable area of this mall is about 866,411 sqft with 4,128 parking bays.
1. Excellent Track Record in Generating Returns
In the past, IGB REIT has delivered tremendous wealth to its unitholders by having strong financial track records. For the past 5 years, IGB REIT has consistently grown its revenue from RM430,726 to RM 524,918. Both malls managed to grow yearly in terms of net property income as well. One of the main factor is high occupancy rates of both malls. The occupancy rate of Mid Valley Mall at 99.9% and The Gardens Mall at 98% as at 31st December 2017.
One key factor to the success of the two crown jewels of IGB REIT is its strategic location giving it a large catchment area spanning all of the Klang Valley area. It is located near Bangsar, Damansara Heights and many affluent suburbs. In addition, it is also easily accessible via public transports including KTM and multiple highways such as Kerinchi Link, New Pantai Expressway and Federal Highway. 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.
2. Superior Tenant Mix Led to Sustainable Distribution Per Unit
Apart from being one of Malaysia’s largest shopping centre, Mid Valley Megamall is also the first retail hub to house four major anchor tenants: AEON BiG, Golden Screen Cinemas, AEON and Metrojaya. The combination is enhanced with the support of 18 junior and mini anchors and more than 421 specialty shops. The Gardens Mall is a premium 6-level shopping haven for more than 200 outlets where top fashion brands such as Louis Vuitton, Versace Collection, Hermès and Burberry reside. These two malls caters for all class of consumers from high, middle and low income groups.
IGB REIT enjoys well spread tenancy maturity. Its Chairman Robert Tan stated that the management scheduled around 30% of leases to expire in a single year as to avoid many leases to expire all at once. About 90% of leases expiring in 2017 have 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.
The latest quarter ending 31st March 2018, IGB REIT have decided to change its distribution period from half yearly to quarterly and to distribute at least 90% of IGB REIT’s distributable income for the financial year ending 31st December 2018. For the first quarter ending 31st March 2018, IGB REIT Manager made an income distribution of 95% of IGB REIT’s distributable income amounting to RM87.3 million or 2.48 cents per unit. The REIT’s net property income and distributable income hit a record high of RM373.56 million and RM342.8 million respectively in FY2017. Shareholders are rewarded with a distribution per unit of 9.28 cents — the highest since listing. Furthermore, latest revaluation dated 2 April 2018 indicated the market value of Mid Valley Megamall and The Gardens Mall to be RM3.645 billion and RM1.285 billion.
3. Management Growth Plan & Effort to Enhance Customers’ Experience
In terms of growth plan, the management do not expect any acquisitions in the near term. The Southkey Mall in Johor is slated for completion in the second half of FY18 (2HFY18), but the acquisition is expected to happen only by FY21. IGB REIT 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%.
The management has committed to bring unparalleled retail and lifestyle experiences to customers by refreshing their tenant mix and carrying out asset enhancement initiatives (AEI) at both Mid Valley Megamall and The Gardens Mall. The asset enhancement initiatives (AEI) includes works to refurbish escalators, upgrading of toilets and car parks. These efforts have helped to maximise the sales of tenants and generate growth through improved rental income. Moving forward, IGB REIT management expect minimal capital expenditure of RM15 million to RM25 million on minor refurbishments and upkeep of both malls. FY18 will see 37% and 18% of Mid Valley Megamall’s and The Gardens Mall’s net lettable areas (NLAs) up for expiry, while FY19 will see 23% and 44% of Mid Valley Megamall’s and The Garden Mall’s NLAs up for expiry respectively.
Our Point of View
In summary, IGB REIT no doubt has strong competitive advantage due to its excellent track record, superior tenant mix and experienced management. However, IGB REIT will still be subjected to a certain amount of risk such as inflation, online shopping and poor consumer sentiment which will put pressure on current tenants’ earnings. Investors should be mindful of increasing competition from new malls such as KL Gateway, KL Eco City, and Bangsar Trade Centre which are all a stone’s throw away from Mid Valley and Garden Malls. Once retail mall competition increases, rental rates may face compression.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice