This article first appeared in The Edge Malaysia Weekly on May 4, 2020 - May 10, 2020

REAL estate investment trusts ­(REITs), often regarded as a safe haven for investors, have not been spared the Covid-19 pandemic. Retail REITs, especially mall owners, have been hit hard as tenants face difficulty paying rent because of shutdowns during the Movement Control Order.

Most retail REITs saw their net property income (NPI) plummet during the first quarter of this year as a result of the initial impact of the pandemic, but KIP REIT bucked the trend by posting a 42% year-on-year rise in NPI to RM14.56 million while gross revenue rose 24% y-o-y to RM19.42 million.

It was a case of buying an asset at the right time for the REIT. The outperformance was mainly due to the contribution from the acquisition of AEON Mall Kinta City in Ipoh, Perak, for RM208 million in July last year.

“This acquisition came at the right time as AEON Mall Kinta City will boost KIP REIT’s earnings for the financial year ending June 30, 2020 (FY2020), unlike the previous financial year when we did not undertake any new asset acquisitions,” says Datuk Chew Lak Seong, co-founder and managing director of KIP REIT Management Sdn Bhd, the manager of the REIT. The company’s gross rental income for FY2020 will incorporate an 11-month contribution from the mall.

It helps that AEON Mall Kinta City has a long-term master lease with AEON until 2025, with an option to renew it for another five years, providing stable income especially in these uncertain times, he adds.

KIP REIT’s NPI rose 40% y-o-y to RM42.79 million in the nine-month period ended March 31, 2020 (9MFY2020), while gross revenue grew 23% to RM57.64 million.

Apart from AEON Mall Kinta City, KIP REIT’s portfolio of assets comprises six KIP Malls, located in Bangi in Selangor, Tampoi, Kota Tinggi, and Masai in Johor, Senawang in Negeri Sembilan and Melaka. A KIP Mall is a community-centred shopping centre whose tenants are generally local traders who provide daily necessities such as fresh produce, general merchandise and food and beverage, and run pharmacies and optical shops.

Some of the small and medium enterprise tenants have been impacted by the MCO, but none have ceased operations so far, says Chew. In 9MFY2020, KIP REIT’s the overall average occupancy rate of the portfolio stood at 91.2%.

“We foresee that some of the smaller tenants may still find it difficult to overcome this challenging period, so the occupancy rate may decrease if the MCO is prolonged,” he tells The Edge in an email interview.

“We are still assessing the full impact of Covid-19 on the company in FY2020 as the situation is still evolving. We are unable to reasonably estimate the full financial impact at this juncture, given the uncertainty over the duration of the MCO as well as consumer sentiment after the shops reopen for business.

“However, rest assured that management will listen and work together with our tenants during these difficult times,” Chew says.

Nevertheless, KIP Malls are expected to emerge with less disruption post-MCO compared with high-end malls. “We foresee businesses will be impacted in the coming quarters but the recovery may be at a faster rate than malls that focus on luxury items.

“As all our malls are anchored by a supermarket, namely Pasaraya Hwa Tai, Pasaraya Songmart, TF Value-Mart, Bachang Family Store, Giant Hypermarket and AEON Mall, the customer traffic should stay relatively relevant. A total of 31% of our occupied net lettable area is utilised by tenants providing essential services,” he adds.

Rental relief for tenants

Following the announcement of the MCO period from March 18 to April 14, the company rolled out rental rebates amounting to RM2.5 million for its tenants that are in non-essential services.

“For Phase 3 and 4 of the MCO (scheduled to end on May 12), we are processing the requests by tenants on a case-by-case basis. We do not have the exact figure (of rental rebates to be incurred) for now. We will only know the total cost for the entire duration when the MCO is lifted.

“Tenants are not requesting for a long-term rebate or cut. They are only asking for assistance to help ride out these difficult times. With the virus outbreak, it is imperative that we work together to overcome the challenges and better position ourselves post Covid-19,” says Chew.

He warns, however, that KIP REIT is likely to face near-term income distribution pressure arising from revenue disruption. The total income distribution declared for 9MFY2020 stood at RM23.5 million or 4.65 sen per unit.

At end-March 2020, KIP REIT had RM25.42 million cash and total borrowings of RM310 million, resulting in a gearing ratio of 36.37%.

“Our borrowings are fully funded through medium-term notes (MTNs). We have no plans to defer these payments. The bulk of the borrowings were used to fund the acquisition of AEON Mall Kinta City and the cash flows from the mall are used for servicing the MTNs,” says Chew.

He adds that 67% of the company’s borrowings are on a fixed-rate basis, while the remaining 33% are on a floating rate. “Bank Negara Malaysia is expected to cut the overnight policy rate by 25 basis points in May in response to the Covid-19 outbreak. Hence, we can expect some savings in interest costs.”

Noting that liquidity and cash flow management are essential moving forward, Chew says the company will seek to rationalise costs during this period and minimise the impact on revenue.

“The AEON Mall Kinta City acquisition was in line with our plan to grow our total asset under management size to RM1.5 billion within the next five years (from RM852.3 million currently). However, due to Covid-19, we have temporarily put on hold the offers we currently have on our table as we channel our focus to implementing measures to lower our costs and provide assistance to our existing tenants who are facing difficulties in these challenging times caused by the pandemic.

“Of course, we are mindful that opportunities may also arise during this period and if a yield-accretive property emerges, be it a multi-tenanted or single-tenanted mall, we will assess the cost benefit accordingly.”

The REIT will continue to look for assets that are focused on providing daily necessities to the local communities in suburban areas.

Chew says future acquisitions will be funded by a mix of debt and equity, although it has no plans to raise money from the capital markets or issue new MTNs under its RM2 billion perpetual MTN programme for now.

Changing business norms

“The way we do business will certainly change following this pandemic. This means imposing social distancing rules well into the year and promoting public hygiene,” says Chew, who had a 26.6% stake in KIP REIT as at March 24, 2020.

“However, we are hopeful that this period of time will also present opportunities for us to improve and grow. We can use this time to seek out partnerships with new tenants and look into other opportunities for growth as well.”

He sees KIP REIT facing two big challenges — bringing back the crowd quickly post-MCO and maintaining the same level of income distribution to unitholders in the immediate quarters.

“After the MCO is lifted, we foresee that the retail landscape will not be the same, as shopping and dining experiences may be different. It may take a while for demand to return to normal,” he says.

KIP REIT units closed at 81.5 sen last Wednesday, giving it a market capitalisation of RM411.82 million. Its unit price has fallen 6% during the last year.

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