Hektar REIT is one of the first retail REITs in Malaysia but with the emergence of other bigger retail REITs like Capita Malls Malaysia Trust and IGB REIT, it often get overlooked among many investors. I personally think it deserve more attention, given its current yield which is not as compressed compared to other retail REITs. It is not a REIT with the largest market cap or TAV, but it does come with a proven track record. Disclaimer: Long in Hektar REIT. My thanks to Melaine Ong for coordinating this.
1. How is the management strategy and unique positioning of Hektar REIT different from retail REITs when it comes to managing suburban malls under its portfolio?
Hektar REIT was the first pure-play retail REIT to be listed in Bursa Malaysia. Its strategy from inception has always been to focus on investment in neighbourhood retail assets. Since its initial public offering in 2006, Hektar REIT has grown its portfolio from two to five shopping malls strategically located across the key growth areas in Peninsular Malaysia. As at 31 December 2012, the total gross asset value of Hektar REIT is about RM1.1 billion with a total retail net lettable area of 1.7 million square feet.
Hektar’s five shopping malls are strategically located in five key cities over four states in Peninsular Malaysia. Its portfolio of shopping mall is therefore geographically well diversified. Each shopping mall commands strong presence in each of their respective catchment areas or neighborhood. Hence they are also known as neighborhood malls. Subang Parade, our flagship neighborhood mall is located in the highly matured and prosperous township of Subang Jaya whilst Wetex Parade in Muar and Landmark Central in Kulim command a strong local presence as they are the only purpose built shopping malls in their immediate catchment areas. Mahkota Parade is strategically located in the middle of the tourist section of the city of Melaka whilst Central Square is located in the thriving city centre of Sungai Petani.
We will continue to pursue this strategy of targeting neighborhood malls in key growth areas as they are proven to be defensive in nature providing stable and secured income stream. Despite the onset of the financial crisis in 2008/2009, Hektar REIT has continued to maintain its uninterrupted track record of distributing quarterly dividends to its unitholders.
Hektar REIT has a successful track record of turning around shopping malls by implementing international best practices in shopping mall management and asset enhancement initiatives (“AEIs”) in order to remain relevant in the retail scene. All five of the shopping malls in the portfolio have enjoyed significant improvements in their retail mix as well as increase in the lettable space over various point in time over the last 7 years. As Hekar REIT’s portfolio is also well diversified in terms of its income generating capability, the major AEI programs for each mall could be implemented on piecemeal basis. The portfolio as a whole had sufferred minimal impact caused by the execution of the various AEI programs in the past.
2. What is the gross property yield and marginal annualized DPU contribution of the newly acquired Kedah Malls?
Hektar REIT acquired the 2 Kedah Malls at a blended property yield of around 7%. It completed the acquisition of the two Kedah Malls on 2nd October 2012 last year and the FYE 2012 results had included one quarter of the two Kedah Malls results.
Hektar REIT recorded 8.8% growth in its gross rental revenue and corresponding 9.4% growth in the net property income for FYE 2012, when compared to the preceding financial year. Apart from the positive rental reversion and increased casual leasing contribution from all our existing 3 malls, these growth numbers are mainly driven by one full quarter of financial contributions from the 2 new malls in Kedah.
The DPU for the financial year ended December 2012 has been maintained at 10.5 sen post-acquisition and post-rights issue, notwithstanding that the number of units in circulation has increased by 25% (from 320,001,000 units to 400,634,117 units).
3. Most M-REIT have their DPU yield compressed due to run-up in the shares price last year but for Hektar REIT, its share price remains relatively stable close to its NAV/unit of RM 1.48 – 1.49. With the Manager commitment to maintain at least 10.5 sen DPU, the gross yield is very attractive at 7%. Good for yield-hungry investors, but capital-gain seeking investor might look elsewhere. Can you comment on this?
If you had invested in Hektar REIT since January 2012 and hold the units until the year ended 31 December 2012, you would have gained a total return of 21%. This is still attractive rate of return for our REIT unitholders.
REIT investors are mainly looking for stability of income distribution to the unitholders with potential for sustainable long term distribution growth. Hektar since its IPO in 2006 has maintained its uninterrupted track record of paying quarterly DPUs whilst achieving the targeted organic growth and yield accretive acquisitions.
Hektar REIT portfolio value has been growing at Compounded Annual Growth Rate (CAGR) of 12% annually since its IPO in 2006. We are of the opinion that such growth rate is sustainable over a longer term basis.
4. In 2012 report, there is a lot of focus on tenant remixing effort. What is the metric or benchmark for successful tenant remixing strategy?
Before we embark on each remixing and refurbishment activity, market research and exit surveys are carried out to understand better the trends, demographics, interest and likings of the shoppers in the catchment neighborhood.
We place strong emphasis on this as our malls often serve as a community centre for the surrounding neighbourhood, a place that brings together people who come to shop, dine and to relax with families and friends. We believe understanding the preferences of our shoppers and the surrounding neighbourhood is key in improving our malls and to remain relevant.
We will also monitor the success of our asset enhancement initiatives (AEIs) with our Footfall system. It is a tracking system that measures the number of visitors to our malls. From our experience, the increase in the Footfall numbers from the execution of particular AEIs could assist us to negotiate for better rental reversions with tenants. At Subang Parade, the entry of MBO Cinemas in 2011 has tremendously increased the Footfall. This phenomenon has a positive impact of improving rental rates for our retail lots located in close proximity to the cinema.
5. What is the current sentiment of local and foreign institutional investors in Hektar REIT? As in, are they buying/holding/selling?
Lately we have observed increased interest from foreign funds. We believe they are attracted to our stable and yet attractive dividend yield.
The growth in our nation’s economy bodes well for retail REITs as a whole as Malaysian consumers have continued to fuel the retail sector growth in 2012.
Also read my previous interviews below: