IGB REIT - Gardens Mall main growth driver

It does not have an attractive retail asset in the pipeline from its sponsor.

Going forwards, Gardens Mall would remain the revenue growth driver for the company on lower rental base, with stable cash flow supported by contributions from Mid Valley Megamall.

Third party acquisitions would be challenging due to excessive valuations in spite of low gearing of 25%.

The planned construction of Southkey Megamall in Johor is also expected to be a long term play.

However, Gardens Mall will be the growth driver given the lower rental base than Mid Valley Megamall and 53% of its net lettable area expiring in 2013.

IGB REITs current (July 2013) rental rates are estimated to be below rm10 psf, a large discount to average rents at Pavilion KL and Suria KLCC despite its prime location.

IGB REIT

Its IPO was priced at a the higher end of its indicative range and at yields that were much lower than Pavilion REIT’s when it was listed late 2011.

 

At rm1.41, IGB REIT’s yields have narrowed further to roughly 4.5% for the current financial year (annualized), making the lowest yielding REIT on Bursa Malaysia . It is now (late Sept 2012) trading at a comparatively pricey 1.42 times its book value of 99.6 sen per unit.

 

The trust intends to distribute all of its income up to Dec 2014. That would give unit holders yields of 4.8% to 5.1% for the two years. Comparable retail focues REITs such as Sunway REIT, Pavilion REIT and CapitaMalls Malaysia are currently (Sept 2012) yielding between 54% and 5.4% for 2013 at prevailing prices. In this respect, the strong interest in IGB REIT could trigger a slight upward rerating for its peers.

 

IGB REIT’s portfolio consists of just two properties, Mid Valley Megamall and the Gardens Mall, valued at a combined rm4.6 billion, making its portfolio just a shade smaller than Sunway REITs.

 

The mall has near full occupancy and enjoyed positive rental reversions, which averaged over 5% per year in the past three years (2009-2011). The Gardens has also registered steady rental increases over the past three years. Furthermore, it is still in the early stages of its rental cycle – heading into just is second three year rental cycle – and thus could see sharper upward reversions.

 

The bulk of the current (Sept 2012) leases are up for renewal in late 2013 and 2014, together accounting for nearly 86% of total net lettable area.

 

IGB REIt plans to acquire more property going forward. The trust currently (Sept 2012) has gearing of about 26% well below the guidance maximum of 50% suggesting further leverage and quite substantial purchasing power. Among potential acquisition are Mid Valley Southpoint and Southkey Megamall being developed in JB. On the other hand, suggestions acquisition abroad including US and Europe could add an additional element risk to the trust.