This article first appeared in The Edge Malaysia Weekly on July 29, 2024 - August 4, 2024

THE sale of Tropicana Gardens Mall (TGM) to IOI Properties Group Bhd (KL:IOIPG) for RM680 million in cash last Tuesday may have been another bitter pill for Tropicana Corp Bhd (KL:TROP) to swallow as it came at a loss, but it certainly brings much-needed relief to the seller, which is working hard to lower its gearing ratio.

TGM, which is a seven-storey neighbourhood mall with one million sq ft of retail space, was launched on March 5, 2020, just as the Covid-19 pandemic hit the world and two weeks before Malaysia went into lockdown on March 18.

IOI Properties is buying the mall from Tropicana Indah Sdn Bhd, a 70%-owned indirect subsidiary of Tropicana Corp. Perbadanan Kemajuan Negeri Selangor (PKNS) owns the remaining 30% stake.

In filings with Bursa Malaysia, Tropicana Corp says the divestment is expected to result in an estimated net pro forma loss on disposal of RM267 million, given that the cost of building the shopping mall amounted to RM867.28 million while the cost of the land was RM2.72 million.

As at Dec 31, 2023, Tropicana Corp’s total borrowings amounted to RM3.16 billion (or RM3.5 billion, including perpetual bonds), a 16.18% reduction from RM3.77 billion the year before.

When contacted, Tropicana Corp says it hopes to reduce its total borrowings to about RM2.5 billion by year end, and to RM1.2 billion by end-2025, by which it hopes to conclude the divestment exercise. Note that the borrowings had been trending up between 2017 and 2021.

The developer acknowledges that its cash flow has been rather tight but the slew of asset divestments have brought some much-needed relief.

“RM1.2 billion would be a debt level we would be comfortable with. Of the RM1.2 billion, corporate loans would make up about RM600 million, with bridging loans for property development rounding up the balance,” it explains.

The sale of TGM marks the group’s third sale of its investment assets to IOI Properties within eight months — a strategic move to pare down its debts.

W Kuala Lumpur hotel and Courtyard by Marriott Penang were sold last December and January this year respectively for RM435 million, with the sale of TGM putting the total at just above RM1.1 billion.

Notably, W Kuala Lumpur was also sold at a loss as the original cost of investment in the hotel was RM364.01 million, comprising the purchase consideration of about RM43.45 million for the land, which was completed in year 2010, as well as year-to-date development costs amounting to about RM320.56 million as at Oct 31, 2023.

The asset sales at below cost show the group’s determination to degear its balance sheet, which will in turn reduce its finance costs and improve cash flow.

According to Tropicana’s 2023 annual report, its net gearing ratio as at Dec 31, 2023, stood at 0.46 times, and 0.54 times in the previous year (see table).

“Together with the group’s unbilled sales of RM2.4 billion, Tropicana Corp’s [divestment initiatives] are expected to lower its pro forma gearing ratio to 0.39 times,” says the developer.

That said, Tropicana Corp’s share price climbed to RM1.68 last Friday — the highest since February 2000 — valuing the company at RM3.86 billion. The stock has climbed 43% over the past three months, peaking at RM1.76 last week, a level not seen in a decade.

Tropicana Corp, however, explains that the sale of TGM does not mean that it is exiting the shopping mall segment, although it will not have any malls in its portfolio after the sale.

“We will adapt to business needs and demands. Our developments across the Klang Valley, Johor Bahru in Johor and Genting Highlands in Pahang have great opportunities for retail components. We will roll out the retail [portions] when the time and opportunity is right,” it says.

Another mall that Tropicana Corp developed was sold in 2015. It divested Tropicana City Mall and its office component Tropicana City Office Tower for RM540 million to CapitaMalls Malaysia REIT Management Sdn Bhd, which later sold the office tower portion to Lagenda Properties Bhd (KL:LAGENDA) for RM52 million.

When asked about the group’s learnings from the divestment exercise, it says: “We have to dispose of the mall, schools and hotels to facilitate the degearing exercise. Moving forward, we will focus on our core business, which is property development.”

By the time the divestment exercise concludes, Tropicana Corp will be left with Tenby International School, Tropicana Gardens Office Tower and 1,842 acres of land bank.

Although Tropicana Corp has sold several parcels of land in Johor Bahru (JB), the southern city is now its focal point for the coming years, besides Genting Highlands and Langkawi Island.

After the land sale in JB and the Klang Valley, the group is left with 1,842 acres of land with an estimated gross development value (GDV) of RM120 billion as at July, from 2,091 acres.

In Johor, it still has several hundred acres of land, and its land bank value has been appreciating fast in recent years.

“Three years ago, our land in Lido was worth RM1.8 billion. Today, it is valued at RM3 billion,” it says.

“We will continue to focus on the Johor market, given the [Johor thematic play on infrastructure development and data centre story]. We are especially confident about the purchase of residences in Johor by the Singapore market or [people living in Johor but] working in Singapore because it is cheaper to live in Johor and the quality of life is good,” says Tropicana Corp.

The developer is among those who believe that with the six-minute journey by Rapid Transit System (RTS) between JB and Woodlands, Singapore will be a major game changer for the southern city.

While declining to divulge details, Tropicana Corp does reveal that it is in talks to sell land to data centre developers.

Before the year end, Tropicana Uplands will launch Fraser Heights, a freehold residential project occupying 35.26 acres of land in Gelang Patah as well as the first phase of serviced residences — The Watermark — at the 163-acre seafront integrated development Lido Waterfront Boulevard.

Over in Genting Highlands, Tropicana Corp owns about 596 acres of land for its integrated township, Tropicana WindCity, which is intended to be developed in phases.

There has been little progress, however. Tropicana Corp says it will launch a retail hub to be branded as Breez Hill Shoppes @ Tropicana Avalon in Gohtong Jaya, Genting Highlands.

“We are open to disposing of about 420 acres of the Genting land or partnering with another property player for its development. These are the hill lots that will incur higher construction costs,” it says, adding that getting bank financing is challenging for the development in Genting Highlands.

One reason being, the banks are reluctant to finance vacation home developments as such projects are seen to pose a higher risk of default as these properties are usually not the buyers’ homes.

Tropicana Corp, however, points out that the high hotel occupancy rate and sharp rise in hotel rates are positive signs of the viability of its development projects there.

Elsewhere, Tropicana Corp will continue with the delivery of vacant possession of six residential developments until the fourth quarter. They are Freesia Residences, Tropicana Aman @ Kota Kemuning; Aster Heights Terrace Homes, Tropicana Uplands @ Johor; Gemala Residences, Tropicana Aman @ Kota Kemuning in the Klang Valley; Tropicana Miyu Condominiums @ Petaling Jaya; SouthPlace Residences, Tropicana Metropark @ Subang Jaya; and Hana Residences, Tropicana Aman @ Kota Kemuning.

Tropicana’s other recent disposals include six parcels of land in Johor to KSL Holdings Bhd (KL:KSL). It also sold Tropicana SJII Education Management Sdn Bhd, which owns the St Joseph’s Institution International School Malaysia in Petaling Jaya, to Taiko Group in October 2023. The fair value of the asset was reportedly RM189.54 million as at Dec 31, 2022.

Tropicana’s net profit, which came in the range of RM91.3 million to RM320.8 million from FY2015 to FY2020, turned into a net loss of RM52.2 million in FY2021.

In a filing with Bursa Malaysia, the group attributed the net loss to the absence of gains arising from the sale of four parcels of freehold land amounting to RM236 million in the previous corresponding period.

“Despite the loss for the period, the group’s property development and property management division still performed strongly with a profit of RM77 million for the period, which was backed by strong sales and cost savings from projects. Excluding the said land disposals, the revenue in the current period would have been higher by RM206.3 million, contributed by higher sales and progress billings across key ongoing projects in the Klang Valley and southern region,” says Tropicana Corp.

For the first quarter ended March 31, 2024, the group’s net loss widened to RM9 million from RM5.2 million in the previous year. Revenue was RM291 million, a 13.3% improvement from RM256.7 million earlier, which the group attributed to higher progress billings achieved across key projects in the Klang Valley and its southern and northern regions.

“Significant losses in the preceding quarter were primarily a result of lower recognition of net property development contribution from a project in the Klang Valley by our group’s 30%-owned associate company, whereby no such losses were incurred in the current quarter,” it says. 

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