THE Covid-19 pandemic has brought on a fierce challenge to many real estate investment trusts (REITs), as the income they derive from their commercial real estate has shrunk.
With the unprecedented downturn caused by the pandemic, rentals and occupancy rates at their properties like shopping malls and hotels have taken a beating.
The recent ruling by the Securities Comission to temporarily allow an increased borrowing limit for REITs from 50% to 60% is helpful to some.
Currently, YTL Hospitality REIT, where gearing stands at 43.5%, does not need to borrow further.
There are no loans expiring for the next one year and nine months; the next refinancing is for RM75mil in financial year June 30,2022.
Hektar REIT, whose gearing stands at 44.9%, does not intend to borrow more unless it sees “very specific opportunities”.
Hektar REIT’s portfolio consists of mainly neighbourhood malls, three of which are the only malls in their respective towns, and overall occupancy is at 90.7%.
YTL Hospitality REIT, which has prime hotel and hospitality-related properties under its portfolio, is experiencing a strong rebound in its resorts at Tanjung Jara, Pangkor Laut and Cameron Highlands.
“Domestic tourism has held up over the last three months, and our resorts are operating at maximum capacity, ’’ said YTL Hospitality REIT CEO Datuk Mark Yeoh.
The participation by YTL hotels in Sydney Harbour, Brisbane and Melbourne, in the government’s mandated Covid-19 quarantine programme, also helps to bring in some income.
“That has kept us going for the past four months; the rates are not high but margins are quite good, as costs of operations are limited, ’’ said Yeoh.
Meanwhile, business at its AC Hotel in Kuantan is back to normal, while AC Hotel in Penang and the hotels in Kuala Lumpur are mostly busy during weekend staycations.
All the hotels that include the Ritz Carlton, AC Hotel KL, The Stripes and Majestic KL, have re-opened except for JW Marriot where refurbishment is ongoing at the Starhill Gallery.
JW Marriot is planned for relaunch in December, when the transformation at Starhill Gallery is completed.
Located in the heart of the city centre, YTL hotels are in the business center which used to enjoy the patronage of clients from Singapore.
“Foreign business clients may be allowed to enter the country by the end of the year, ’’ said Yeoh.
Under the international portfolio, Niseko Village, one of Japan’s most famous ski resorts, is currently quiet without much travel from international travellers.
The opening of the Ritz Carlton Reserve, the fourth YTL hotel in Niseko, scheduled for Dec 15, will hopefully attract more activities.
Various cost-control measures have been undertaken, including a delay in non-essential capital expenditure, and most importantly, a rental variation programme to help lessees that have been impacted by Covid-19.
While various government support measures have also been sought, payroll costs were brought down by 30% to 40% where staff took two weeks of unpaid leave, and assets currently not in operation were deployed to the resorts.
With China opening up, the return of Chinese tourists would be the next big wave, following the strength of the domestic market.
“We are cautiously optimistic. There is likely to be pent-up demand from Chinese tourists, and nearby places would be easier to reach, ’’ said Yeoh, adding that packages at YTL resorts would be restrategised to include more Western style offerings.
Hektar REIT is hopeful it can maintain its valuation and gearing ratio without too much adverse impact.
The short-term goal is to focus on basics and create confidence that safe shopping is observed.
Three of its malls – Wetex Parade in Muar, Segamat Central in Segamat and Kulim Central in Kulim – are the only malls in town and will offer value, convenience and basic necessities.
“Traffic is back to at least half or three quarters of the normal pre-movement control order (MCO) traffic, with 94% of tenants back in business since July, ’’ said Hektar REIT executive director and CEO Datuk Hisham Othman.
Two malls with slightly lower occupancy rates are Subang Parade which is improving its anchor tenant mix, and Segamat Central, which is trying to bring in more middle-class retailers.
Encouraged by the discipline shown by shoppers, Hektar launched marketing campaigns to promote tenant sales and drive traffic.
Since the start of the MCO period up till mid-year, the hit to revenue of the portfolio is significant, year-to-date at minus 24.8%.
Overall realised income before tax year-to-date is down at minus 52.8%, but this is also due to higher provisions for losses.
“We are anticipating losses from some bad debts, ’’ said Hisham.
Tenants are holding on. The overall occupany rate remains at 90.7%, from 92.5% at the end of 2019.
The tenant support programme is negotiated on a case-by case basis, taking into account track record and potential future performance.
Operations at Classic Hotel, part of the Wetex Parade in Muar, were suspended suddenly during the MCO period. This hotel had contributed RM3.57mil in revenue in 2019, representing 2.6% of the gross revenue of Hektar REIT.
With the boom in domestic tourism, hotel occupancy in August, month-to-date, was higher at 43% at an average room rate of RM126 per room.
In 2019, the average hotel occupancy was 41% at an average room rate of RM122 per room.
“We must be prepared to find new ways to connect with existing customers and grow our customer base, even if a vaccine for Covid-19 is announced, ’’ said Hisham.
Preparedness is the key word as companies wrestle with lingering concerns over any potential flare-up of the coronavirus.
Yap Leng Kuen is the former business editor of StarBiz. Views expressed here are her own.