IGB Real Estate Investment Trust (IGB REIT) is determined to remain resilient throughout the Covid-19 pandemic despite the grim outlook for the retail industry and many challenges ahead.
Retail Group Malaysia (RGM) has estimated that shopping traffic will decline by up to 50 per cent and the retail industry is expected to post an 18.8 per cent year-on-year contraction for the first quarter of 2020.
RGM had projected the Malaysian retail industry to grow by 4.6 per cent in 2020 at end-2019. However, the situation had since deteriorated significantly.
As a result of the prolonged Covid-19 pandemic and falling domestic demand, the retail industry will contract by 5.5 per cent for the entire year 2020.
IGB REIT's net profit fell 17.5 per cent to RM68.36 million in the first quarter ended March 31, 2020 (1QFY20) compared with RM82.87 million a year earlier.
Revenue declined 11.5 per cent to RM125 million from RM141.2 million in the corresponding quarter of 2019 of RM141.2 million.
In a filing with Bursa Malaysia, IGB REIT said the lower revenue, net property income, and net profit were mainly due to the rental support provided to tenants and lower car park income arising from COVID-19 and the Movement Control Order (MCO) since mid-March 2020.
"The world is in recession. Malaysia is in lock-down following the MCO from 18 March 2020 to 28 April 2020 to contain the Covid-19 pandemic. As a result, all government and private premises are closed except those providing essential services. All other trades and businesses have since ceased trading.
"The MCO and the Covid-19 pandemic have a profound negative impact on the business of shopping malls. Most economists now expect Malaysia's real gross domestic product to contract in 2020, resulting in rising unemployment and lower incomes," it said.
The portfolio of IGB REIT consists of two investment properties, Mid Valley Megamall and The Gardens Mall.
IGB REIT said it has curated the appropriate and targeted action plans including rental support, on a case-to-case basis, after taking into consideration, business tolerance, tenant relationship, impact on a different category of tenancies, variations in rent structures, risk of tenant sustainability and expected business recovery period, to mitigate the current challenges faced by tenants in the two malls.
The malls remain accessible to the public to provide essential services to the community such as pharmacies, clinics, supermarkets, food & beverages with delivery and takeaway services (no dine-in), bakeries, convenience stores, optical stores, money changers, banks, ATMs and other essential services during the MCO period.
The basement car park is open to public and the parking fee is waived during the MCO period.
IGB REIT said based on a preliminary assessment, it is expected that the current situation will have an impact on its earnings for the financial year ending 31 December 2020.
"This is mainly due to the rental support programme and the potential increase in expected credit losses and possible impairment of fair value for investment properties arising from a prolong MCO period."
The market value of Mid Valley Megamall and The Gardens Mall as of March 31, 2020 remained at RM3.665 billion and RM1.295 billion respectively from the previous quarter. This is based on the valuation reports dated April 1, 2020, by an independent registered valuer, said IGB REIT.
Hong Leong Investment Bank Research (HLIB Research) has downgraded its call on IGB REIT to "hold" from "buy" while cutting its target price (TP) to RM1.76 from RM1.83 previously as the retail industry's outlook remains grim in the face of the Covid-19 pandemic.
In a note, the research house said that IGB REIT's 1QFY20 results came in below expectations.
While both The Gardens Mall and Midvalley Megamall enjoy high occupancy rates of nearly 100 per cent due to their strategic location, the research house said it will continue to monitor IGB REIT's earnings as the Covid-19 and the MCO have impaired consumer sentiment and the retail industry.
"While we favour IGB REIT for its concentration of prime retail assets as well as its strong balance sheet, we reckon that its short-term earnings will likely be impacted due to lingering concern of Covid-19 and MCO arising from rental pressure of its retailers," it said.