KUALA LUMPUR: WCT Holdings Bhd’s Paradigm Mall saw 53 of its tenants close shop and move out about two months ago, leaving behind vacancies that have yet to be taken up in the mall’s first wave of tenancy renewals since it opened for business about three years ago.

Yet the mall’s manager WCT Malls Management Sdn Bhd appears unperturbed, even as it admits that it could take up to five months to find replacements for these units — which make up about 8% of its net leasable area — in a retail market that is being choked by low sales as consumers remain low-spirited.

As it is, the Consumer Sentiment Index reportedly fell further to 71.7 points in the second quarter of this year (2Q15) from its six-year low of 72.6 points, while the Business Conditions Index declined to 95.4 points in 2Q15 from 101 points previously.

Further, Retail Group Malaysia has cut its retail sales growth forecast for Malaysia this year for the third time to 4% from 4.9%, as it foresees that consumers will continue to hold back spending on higher costs of living, coupled with its expectations of higher retail prices on a weaker ringgit, and higher costs of doing business in the second half of the year.

“[It] is a common process undertaken by mall operators and normally occurs every two or three years. A total of 53 units out of 289 units closed at the end of May 2015, due to the expiry of their tenancy tenure,” said WCT Malls Management general manager Vincent Chong, in an email reply to the DigitalEdge Daily.

“In general, the market is becoming more and more challenging. Therefore, to replace tenants, it can range from as quickly as one month to as late as four to five months,” he said.

However, he assured that the mall’s anchor tenants have all renewed their tenancy agreements and are staying put.

While the management is on the lookout for new tenants, he said the mall is also trying to renegotiate with its former tenants from the 53 closed units, to bring them back.

In the mean time, Chong believes that a replacement rate of 5% to 10% of non-performing tenants to “freshen-up” the mall is quite healthy and would help improve the tenant mix. He also stressed that this is a perpetual process to ensure that Paradigm Mall continues to draw consumer traffic.

“During this tenancy renewal and signing-up process, the mall has the opportunity to review and revise its tenant mix in order to better cater to the needs of our visitors and shoppers. Some of our tenants have great success in Paradigm Mall. They are the ones who are upgrading and expanding their stores,” he added.

Paradigm Mall is one of the three retail mall assets currently under WCT’s investment properties portfolio. The group had previously announced its plan to spin off these assets into an estimated RM2 billion retail-based real estate investment trust (REIT).

But on May 19, WCT deputy managing director Goh Chin Liong said the original plan seemed unlikely to be realised this year, due to the more cautious market sentiment. Then on Aug 6, the group’s managing director Peter Taing Kim Hwa told reporters that WCT planned to launch the REIT’s initial public offering by the end of next year.

If so, besides Paradigm Mall, the REIT will be poised to house the new Paradigm Mall in Johor Baru (Paradigm Mall JB) — expected to be operational by September that year — besides WCT’s Bandar Bukit Tinggi Aeon Shopping Mall in Klang and the Gateway Mall in klia2. It operates the latter under a long-term concession agreement with Malaysia Airports Holdings Bhd.

The corporate exercise, should it materialise, will lighten WCT’s financing burden and shareholders will stand to benefit from a possible distribution of the REIT’s units. As at March 31, 2015 (1QFY15), WCT’s total borrowings stood at RM2.41 billion, with cash and bank balances at RM770.62 million, leaving it with a net gearing of 0.71 times.

It should not be forgotten though that WCT on July 8 won an arbitration case, which came with a cash reward of RM1.2 billion. According to analysts, this should bring it a net cash of about RM870 million as some RM330 million receivables related to the litigation have already been booked into the group’s balance sheet — though the group has largely kept mum on the exact amount.

WCT, however, has also not stated how it would be using the proceeds, though analysts largely believe that they would go towards paring its debts, with the remainder possibly to be distributed as a reward to shareholders.

“If we look at their (WCT) balance sheet, which has a high net gearing of 0.7 times as at 1QFY15, we believe WCT could utilise the money to pare down some borrowings, declare a special dividend, and fund land banking capital expenditure,” Kenanga Research analyst Iqbal Zainal said in a July 9 note.

However, it remains to be seen when WCT will be able to enforce the tribunal’s award.

“Looking at past cases such as Honeywell (Honeywell International Middle East Ltd versus Meydan (Meydan Group LLC), it took about 20 months for Honeywell to enforce the award by the tribunal in the United Kingdom courts. Hence, any positive impact from the enforcement of the award will likely [only] be felt in FY16/FY17,” Affin Hwang Investment Bank Bhd analyst Loong Chee Wei said in a report, also dated July 9.

Last Friday, WCT (fundamental: 0.6; valuation: 1.4) closed four sen or 2.94% lower at RM1.32, giving it a market capitalisation of RM1.56 billion. The stock, which was trading at RM1.53 on Jan 2, has fallen about 13.7% since.

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This article first appeared in digitaledge Daily, on August 10, 2015.