KrisAssets/IGB

Sources say the anticipated REIT offering by IGB Corp could fetch valuations of between rm4.3 billion and rm4.6 billion for the two prime retail malls currently held under IGB’s subsidiary KrisAssets Holdings Bhd. The IPO for the retail REIT is expected to come in the 2HFY2012. The retail REIT is expected to start with two key assets, Mid Valley Megamall and The Garden Mall, both in the Mid Valley City area developed by IGB.

KrisAssets completed its acquisition of The Gardens Mall from IGB Corp in July 2011 for a cash consideration of rm223 million apart from taking over the holding company’s liabilities. Prior to that, KrisAssets only had Mid Valley Megamall in its portfolio.

Following of a recent valuation of the two retail malls, both now have a combined revised market value of about rm3.29 billion (rm2.36 billion for Mid Valley and rm930 million for The Gardens). KrisAssets said the valuations for both malls had been revised upwards following a revaluation exercise undertaken at end Dec 2011. Nevertheless, the valuations for both assets could be further revised upwards during the IPO exercise given that such valuations would place an emphasis of the assets’ earnings potential.

Based on calculation of KrisAssets’ malls shows that the rm2.36 billion revised market value for both malls translates into roughly rm944 psf, which is grossly undervalued compared with Pavilion REIT. Nevertheless, if the REIT exercise prices the two malls at up to rm4.6 billion, the valuation would be around rm1840 psf – still lower than Pavilion REIT’s pricing.

The potential REIT exercise, if it materialized would provide it a big boost to KrisAssets which is 75.66% owned by IGB Corp.

After IGB’s REIT plans come to fruition, question marks remain over KrisAssets’ fate!!! What is certain is that injecting KrisAssets’ malls into the REIT would free up capital for KrisAssets and IGB to undertake their other plans.

About KrissAssets/IGB

(Dated Nov 2011)

Speculation KrissAssets is mulling a REIT following its completion of its purchase of the The Gardens shopping mall in July 2011 from parent IGB Corp Bhd.

KrisAssets’ current property asset is the 10-year-old Mid Valley Megamall. With the completion of the purchase of The Gardens, there is the possibility of a REIT being set up to take advantage of the tax benefits.

To qualify as a REIT, a fund must have most of its assets and income tied to a portfolio of real estate. In Malaysia , a REIT is exempt from corporate tax if it distributes at least 90% of its total annual income, and unit holders enjoy a lower 10% withholding tax on distribution.

Another point favouring a REIT is that it is an asset class that is not affected by market sentiments as its share price is backed by assets. The assets that KrisAssets holds, solely retail malls, command better demand due to higher returns. Compared to office spaces, retail REIT are supported by high occupancy rates and strong rental income. The local buying sentiment is also going strong at the moment.

The yields of the assets in KrisAssets of between 6% and 7% are comparable to other local REIT such as Sunway REIT, CapitaMalls Malaysia Trust REIT and the soon-to-be listed Pavillion REIT.

The retail space in Mid Valley Megamall and The Gardens saw an increase in rental income.

However, KrisAssets REIT might not take off so soon as it does not have enough funds to purchase the remaining assets from IGB Corp. IGB Corp’s remaining assets consisting of Mid Valley and The Gardens’ office towers have an estimated combined value of RM2 billion to RM3 billion. However, market observers do not discount a possible corporate exercise to raise funds for the acquisition of the other assets.

Speculation on the establishment of a KrisAssets REIT surfaced in February 2011 when KrisAssets agreed to buy the entire stake in The Gardens at an indicative price of RM820 million. To fund the acquisition, KrisAssets issued RM300 million in convertible secured bonds.

As at Sept 30, KrisAssets had RM72.8 million in cash and bank deposits. KrisAssets is 75.66% owned by IGB Corp.
The group also saw a recognition of revaluation surplus of RM25 million for Mid Valley Megamall .

Excluding the fair value gain on investment property, the group recorded pre-tax profit of RM55.1 million, representing a 20.6% increase, compared with pre-tax profit of RM45.7 million in the corresponding quarter [last year].

For 9MFY11, KrisAssets’ net profit grew 27.6% to RM170.8 million, on the back of RM273.1 million in revenue.