IGBREIT: Retail REIT Operations Remain Stable Amidst Acquisition, HOLD Rating Maintained

Performance Highlights

A leading retail REIT reported its 9MFY25 distributional income to be within expectations, recording a significant 9.8% year-on-year increase to RM311 million. This performance constitutes 68.1% of AmInvestment Bank’s full-year projection and 76.8% of the consensus estimate. The robust growth was primarily fueled by a 6.2% YoY rise in gross revenue and an 8.6% YoY improvement in net property income (NPI) to RM377.9 million. This NPI uplift was notably supported by a modest 0.9% YoY decline in property operating expenses, indicating effective cost management. However, the third quarter of FY25 saw a slight quarter-on-quarter dip in distributional income by 2% to RM102.6 million, mainly attributable to manager’s fees being paid fully in cash during the quarter, unlike previous periods where partial payments were made via units.

Operational Review

The REIT maintained strong occupancy rates across its key assets, with Mid Valley Megamall (MVM) at 99.8% and The Gardens Mall (TGM) at 98.6%. The slight dip at TGM from 99.9% in the prior quarter was due to ongoing renovations, with management anticipating a swift recovery. Management projects a mid-single-digit rental reversion for FY25, reflecting a stable outlook for its retail portfolio.

Future Outlook and Strategic Moves

Distributional income for 4QFY25 is anticipated to improve, driven by a one-month rental contribution from the Mid Valley Southkey Mall following its acquisition completion. The transaction for this new asset is expected to finalize by the end of November 2025, with full-quarter rental contributions commencing from 1QFY26. The REIT’s gearing is projected to increase from a healthy 23% as of end-3QFY25 to 28.4% to accommodate the funding requirements for the Mid Valley Southkey Mall acquisition, underscoring a strategic expansion.

Analyst’s Recommendation

AmInvestment Bank maintains its “HOLD” rating on the REIT, with an unchanged target price of RM2.81. The bank noted that the market has largely priced in the potential benefits from the Mid Valley Southkey Mall acquisition, given the share price has already climbed 15.8% since the announcement. This rally has also led to a compression of the FY26F distribution yield to 5.1% from an earlier 6.0%, narrowing the spread over the 10-year Malaysian Government Securities (MGS).

Key Risks

Potential risks identified include a possible spike in the 10-year MGS yield, driven by persistent high US interest rates post-election, which could narrow the distribution yield spread and dampen investor interest. Additionally, slower economic growth and government subsidy cuts could lead to weaker consumer spending, negatively impacting rental reversion and occupancy rates across the malls.