IGB REIT

Target Price: 1.43 (MIDF), 1.43 (Affin), 1.34 (Kenanga), 1.43 (RHB)

 

It expects to raise RM837.5mil from the initial public offering (IPO) of 670 million units on Bursa Malaysia 's Main Market. The IPO represents 19.7% of the REIT's total listing of 3.4 billion units. Based on a retail price of RM1.25 per unit, the total market capitalisation of IGB REIT upon listing will be approximately RM4.25bil.

The pricing of IGB REIT with a forecast yield of only 5.1% annualized for its remaining six months’ results of 2012 and 5.37% fort he full year of 2013 is no surprise, given that prices of quality listed REITs have gained substantially in recent months prior to Aug 2012 causing their yields to decline as investors sought stability in predictable dividend income.

Will IGB REIT perform as well upon its debut on the Main Market come Sept 19, 2012?

To be sure, IGB REIT too will have the balance sheet for acquisitions. Upon listing, its debt will stand at about rm1.2 billion or 25.8% of its estimated total assets of rm4.6 billion.

At is indicative pricing of rm1.25 which is still subject to finalization is the maximum retail pay – IGB REIT is selling itself at 1.26 times its pro forma NAV per unit of 99.6 sen.

IGB REIT too intends to invest in its real estate used primarily for retail purposes in Malaysia and overseas and was granted first right of refusal by its sponsor, IGB Corp, to all its future retail properties and mixed used development with retail component.

IGB has commenced work on Mid Valley Southpoint to complete in 2015.Another potential mall is the planned rm6 billion Southkey Megamall in Johor Baru in which IGB has 70% stake following a JV agreement.

IGB REIT, a unit of property developer IGB Corp Bhd intended to distribute up to 100% of its distributable income for the period commencing from the date of establishment until Dec 31, 2014, and subsequently at least 90% on a half-yearly basis.

Its first distribution, which will encompass the period of its listing until its financial year-end on Dec 31, 2012 (FY12), will be paid within two months after FY12.

IGB REIT will invest in a diversified portfolio of primarily income-producing retail real estate in Malaysia as well as overseas.

The retail offer of 201 million units represents approximately 5.9% of the total units upon listing. 24 million of those units will be made available to the public via balloting. The remaining 167 million units are reserved for application by eligible directors and employees. The IPO will see 469 million units available for institutional offering at a price to be determined by a bookbuilding exercise. This represents 13.8% of the total units upon listing. The retail offering will be opened to the public on Aug 23, 2012 while the institutional offering will start on Aug 28, 2012.

The listing expenses are estimated to be RM27mil and will be funded via internally generated funds. IGB REIT would utilise the funds contributed from the rental income of its properties. The expenses will be fully settled within one month of the listing.

Via the IPO, IGB REIT aims to enhance liquidity, raise funds for future real estate acquisitions, and provide investors stable dividends and potential capital appreciation.

 

Prior to its establishment, IGB REIT did not have any portfolio of real estate save for Mid Valley Megamall and The Gardens Mall.

Its total revenue comprises of gross rental income and other income earned from its properties, which include car park income amongst others. IGB REIT has forecasted revenue of RM197.8mil and RM408.1mil for the forecast period 2012 and 2013 respectively, which assumes that the first financial year is the six-month period ending Dec 31, 2012 and an establishment date of July 1, 2012.

The proceeds from the IPO would be utilised for the company's future expansion activities. If this listing is successful, Tan said IGB Corp would consider two other REITS in office/commercial and hotel/hospitality properties. The listing of IGB's retail REIT is to unlock the value of its retail assets - Mid Valley Megamall and The Gardens Mall, which are owned by IGB Corp's 75% subsidiary KrisAssets Holdings Bhd.

KrisAssets has proposed to sell both the malls and related assets to IGB Corp for RM4.6bil, which will be paid for in cash and the issuance of the 3.4 billion units in IGB REIT. KrisAssets had also proposed the 670 million units by Mid Valley City Gardens Sdn Bhd through the IPO. It had intended to distribute the remaining 2.73 billion units as well as the cash proceeds from the sale and the IPO to its shareholders at a later date.

 

Going Forward …

 

Over the next three years, the earnings per unit and distribution per unit will be primarily driven by high end The Gardens Mall as the current average rental base remains low.

 

The Gardens Mall represents 32% of the total REIT’s NLA, and its average rental only stood at rm8.74 psf as at May 2012 compared with rm10.75 psf at Mid Valley Megamall. About 54% of The Gardens Mall’s NLA is due to expire in 2013.

 

IGB REIT’s pipeline of assets is looking dry. Although the sponsor has inked a deal to build a Mid Valley City in Johor, the construction of the mall will only start in about two years time. The sponsor is exploring other potential markets in Penang and even overseas.

 

Hence the injection of assets from the sponsor will be remote and the REIT will have to compete in the market for third party assets.

 

Post IPO, the REIT will be geared at 26%, marginally below the average gearing of the REIT sector.

 

Given the gearing level of 26% and assuming a comfort level of 40%, IGB REIT is believed to have additional RM663 million for new acquisition.

 

The REIT could utilize the fund raising mechanism of placements amounting to 20% with its substantial shareholder base of rm3.4 billion to raise up to rm850 million in new funds to sufficiently acquire sizeable neighbourhood malls.

 

The REIT indicated that it will concentrate on organic growth opportunities rather than on new asset acquisitions in the short to medium term. There are plenty of asset enhancement initiatives opportunistic within the two malls particularly as market observers expect FY2013 to see strong rental reversions, as 54% of the NLA will be expiring.