This marks IOI Properties’ third acquisition from Tropicana in the last eight months, in deals totalling RM1.12 billion.
It snapped up the W Kuala Lumpur Hotel (W Hotel) for RM270 million in February and Courtyard by Marriott Penang for RM165 million in July. The W Hotel deal was first announced last December.
In addition, IOI Properties announced last month that it was acquiring 9.9 acres of freehold land in Pantai Kok, Teluk Burau, in Langkawi from Pantai Kok Resort Development Sdn Bhd (PKRD) for RM90.1 million. The land is slated for a new hotel development.
Interestingly, Tropicana founder and group executive vice-chairman Danny Tan is also the major shareholder of PKRD. The 69-year-old tycoon, the brother of Berjaya Corp founder Vincent Tan, holds a direct 77.3% stake in PKRD, and a 19.23% direct and 33.1% indirect stake in Tropicana.
In a statement on Tuesday, the group said proceeds from the sale of TGM will be used to substantially reduce its debt, thereby improving its cash flow position and reducing interest expenses.
“This sale also marks Tropicana’s efforts to maintain financial discipline and enhance our financial stability. With substantial strategic land banks across the Klang Valley, Johor, and Genting Highlands, Tropicana has the flexibility to reposition its asset and debt portfolios effectively,” it said.
With the disposals, its pro forma gearing ratio, or debt-to-equity ratio, is expected to drop from 0.54 times as at end-December 2023 to 0.39 times, it said.
The developer said the transaction aligns with its ongoing strategic initiatives to monetise its low-yielding land banks and investment properties, providing the financial flexibility necessary to support future growth.
As of March 31, 2024, Tropicana’s total borrowings stood at RM2.86 billion, down from RM3.16 billion as at end-2023, against total equity of RM5.79 billion.
Not a good deal for Tropicana?
However, while the disposals to IOI Properties help Tropicana stabilise its finances, it has had to sell the assets at a significant discount.
Tropicana said the divestment of TGM is expected to result in an estimated net pro forma loss on disposal of RM267 million, given that the building cost of the mall amounted to RM867.28 million while the land cost was RM2.72 million.
In a note yesterday, TA Securities said the acquisition price of RM680 million is notably below the mall’s net book value of RM944 million, representing a 28% discount.
It also reflects a RM10 million discount from the RM690 million market value as appraised by CBRE WTW Valuation & Advisory, the independent property valuer appointed by the vendor.
Hong Leong Investment Bank said IOI Properties was able to secure the purchase at a discount due to its en-bloc purchase of several large assets from Tropicana.
In the case of W Hotel, Tropicana did not fully recover its RM364 million cost of investment when it sold the hotel for RM270 million.
Debt piling up for IOI Properties
For IOI Properties, the three assets from Tropicana, along with other recent acquisitions, will bump up its gearing ratio further.
Its balance sheet as at March 31 revealed total borrowings of RM18.85 billion, of which RM9.46 billion was short-term borrowings, against total equity of RM22.8 billion.
TA Research estimates the group’s net gearing will increase from 0.73 times in Q3 FY2024 to 0.92 times, assuming the acquisitions of Shenton House Singapore (RM3.5 billion), TGM (RM680 million), and the Langkawi land (RM90.1 million) are financed entirely through debt.
Last month, IOI Properties’ group CEO Lee Yeow Seng offered the group to participate in a related-party joint-venture to redevelop Shenton House, a commercial property in Singapore, which he successfully tendered for S$538 million (RM1.9 billion) last November.
“Assuming redevelopment accounts for 30% of project value, we estimate that Shenton House’s gross development cost could reach S$1.4 billion (RM5 billion),” AmInvestment Bank said in a note yesterday.
It said the total cash outlay of RM5.2 billion from these acquisitions and redevelopments will raise IOI Properties’ end-FY2025F net gearing from 0.69 times to a high 0.92 times versus an average of 0.4 times for the property developers under its coverage.
Nevertheless, TA believes IOI Properties is poised to establish a real estate investment trust (REIT), given its increasingly mature investment properties portfolio.
It noted the carrying value of the group’s investment properties stands at RM18 billion, according to its FY2023 annual report.
“By creating a REIT, IOI Properties can unlock value from its investment properties, reduce debt, and improve its balance sheet, thereby mitigating the impact of these acquisitions on its net gearing ratio,” TA added.
Yeow Seng along with his elder brother Yeow Chor control conglomerate IOI Corp Bhd and IOI Properties, which were founded by their late father Lee Shin Cheng.
The brothers had a joint net worth of US$5.35 billion (RM25 billion) as of April 15, 2024, according to Forbes’ Malaysia’s 50 Richest list, where they are in fourth spot.
In contrast, Tan has a net worth of US$615 million (RM2.87 billion) as of April 15, 2024, according to the same Forbes list.