KrisAssets' malls worth RM4.6b

KUALA LUMPUR (Mar 20): The keenly-anticipated Real Estate Investment Trust (REIT) offering by IGB Corp Bhd 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, sources said.

Sources said the deal is structured on a capitalisation rate of 5.3%.

The valuation is said to have exceeded the management's earlier expectations of around RM4 billion and a capitalisation rate of 5.5%, a source said.

The IPO for the retail REIT is expected to come in the second half of 2012, more than half a year after bankers began vying to secure the deal from the low profile Tan family that controls IGB Corp.

It is understood that CIMB Investment Bank Bhd has clinched the deal and will act as the lead banker for the retail REIT deal.

The retail REIT is expected to start with two key assets, Mid Valley Megamall and The Gardens Mall, both in the Mid Valley City area developed by IGB.

KrisAssets completed its acquisition of The Gardens Mall from IGB Corp last July for a cash consideration of RM222.67 million, apart from taking over the holding company's liabilities.

Prior to that, KrisAssets only had Mid Valley Megamall in its portfolio.

Although both malls are next to each other, they serve different segments of the consumer market. Mid Valley Megamall is positioned for the mass market consumer segment while The Gardens Mall targets the higher income consumers.

Mid Valley Megamall has a net lettable area (NLA) of over 1.7 million sq ft spread across five levels of retail space. Apart from that, it also houses a 48,300 sq ft exhibition space.

The large retail mall has over 430 tenants, anchored by its major tenants Carrefour hypermarket, Golden Screen Cinemas, Jaya Jusco and Metrojaya.

According to KrisAssets' 2010 annual report, Mid Valley Megamall recorded over 35 million visitors in 2010 and had an occupancy rate of 99.86%.

The Gardens Mall meanwhile is a five-storey shopping complex with an NLA of about 800,000 sq ft.

Most of its 200 tenants are upper-mid to upper-range retail boutiques and food and beverage outlets while its anchor tenants are GSC Signature cinema, Cold Storage supermarket, Robinsons and Isetan departmental stores.

Following a recent revaluation of the two retail malls, The Gardens Mall and Mid Valley Megamall now have a combined revised market value of about RM3.29 billion.

In an announcement to Bursa Malaysia on Feb 21, KrisAssets said the valuations for both malls had been revised upwards following a revaluation exercise undertaken at the end of December 2011.

Separately, the revised market value for Mid Valley Megamall is RM2.36 billion while The Gardens Mall's revised market value was RM930 million.

Nevertheless, an industry observer said that 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.

A close comparison for IGB's retail REIT could be Pavilion REIT — which owns Pavilion KL mall and Pavilion Tower office block — listed in December last year.

Based on an earlier calculation by The Edge Financial Daily, Pavilion KL is valued at RM2,390 psf based on the REIT's purchase consideration of RM3.19 billion and the NLA of 1.335 million sq ft making it the highest value for a mall injected into a property trust.

However, Pavilion KL mall's appraised value is even higher at RM3.415 billion or RM2,558 psf.

A simple calculation of KrisAssets' malls show that the RM2.36 billion revised market value for both malls translate to roughly RM944 psf, which is grossly undervalued compared with Pavilion REIT.

Nevertheless, analysts concur if the REIT exercise prices the two malls at up to RM4.6 billion, the valuation would be around RM1,840 psf — still lower than Pavilion REIT's pricing.

Analysts concur that the potential REIT exercise, if it materialises, would provide a big boost to KrisAssets, which is 75.66%-owned by IGB.

"KrisAssets has essentially been almost akin to a REIT, but an undervalued one. Such an exercise will unlock its full value", said an analyst.

Expectation of an impending REIT had awoken both KrisAssets and IGB's share price from a prolonged lull.

For most of 2011, KrisAssets' shares had been trading at between RM4 and RM4.50 levels until mid-November when interest started to pick up.

KrisAssets' share price hit an all-time high of RM7.10 on March 14. on Monday, it closed one sen higher at RM7.06.

IGB, meanwhile, saw its share price climb from early December last year to a four-year high of RM2.91 on March 5. on Monday, IGB closed unchanged at RM2.80.

Analysts say that investors had bought into KrisAssets and IGB hoping for a windfall payout which could come in the form of a special dividend or dividend in specie.

"KrisAssets' current market capitalisation of RM3.11 billion means there is a potential upside of at least RM1.2 billion assuming the retail REIT is packaged at RM4.3 billion," says a property analyst.

After IGB's REIT plans come to fruition, question marks remain over KrisAsset's fate.

Market observers have long anticipated the move to inject the retail assets into a REIT having deemed KrisAssets' structure to be largely inefficient.

Though KrisAssets' current structure resembles a REIT, it is not eligible for the tax benefits that REITs currently enjoy.

A property trust is exempt from corporate tax if it distributes at least 90% of its total annual income while unitholders similarly enjoy a lower withholding tax rate of 10% on distribution.

"If KrisAssets ends up as just a holding company largely for the REITs, it may be better for it to distribute them back to its shareholders," opines the analyst.

"That will enable KrisAssets' shareholders to realise the unlocked value of their investment, and allow the effects to flow through to IGB, where the major shareholders have a direct interest", he said.

Meanwhile, IGB is understood to be not keen to inject its hotel assets into another REIT, contrary to a recent newspaper report.

"IGB still has room to grow their hotel assets, especially the ones overseas. There's no need to REIT it at this point.

"It will also be quite difficult to sell the hotel REIT story to investors shortly after selling a retail REIT," says an industry observer.

What's for certain, injecting KrisAssets' malls into the REIT would free up capital for KrisAssets and IGB to undertake its other plans.