11 things we learned from Hektar REIT’s 2017 AGM

Hektar REIT is Malaysia’s first retail REIT. Its portfolio currently consists of five well-established neighbourhood and regional shopping centres situated around Malaysia in Subang Jaya, Melaka, Muar, Sungai Petani, and Kulim with a combined value of RM1.09 billion.

Hektar REIT’s cornerstone investor is Frasers Centrepoint Trust, part of the Fraser & Neave Group, headquartered in Singapore. The REIT is managed by Hektar Asset Management Sdn Bhd, and was formed with a vision to develop world-class shopping centres for Malaysian consumers based on international best practices.

2016 was a significant year for Hektar REIT as it marked the tenth anniversary of its listing on Bursa Malaysia. It has been a decade of growth and stability for Hektar and unitholders have been rewarded with an average 10-year dividend yield of 8.0% since IPO. However, newly-appointed chairman Michael Lim in his statement mentioned that “2016 was proven to be Hektar REIT’s toughest year in its 10-year existence.” In January 2017, founder and former chairman of Hektar REIT, Dato’ Jaafar bin Abdul Hamid, passed away.

Despite the challenges, Hektar REIT is still growing and in the midst of acquiring 1 Segamat Shopping Mall in Johor. The acquisition is expected to be completed in 2H 2017. Upon completion, the enlarged portfolio will comprise six malls across Peninsular Malaysia, with approximately 2.0 million square feet of retail space.

This is the third Hektar REIT AGM we have attended so far. We raised concerns about the REIT’s high gearing ratio at the last AGM. However, as at 31 March 2017, Hektar REIT is still one of the highest geared retail REITs in Malaysia. The REIT also plans to exercise a rights issue to raise partial funding for 1 Segamat Shopping Mall acquisition. Therefore, at this AGM, we were interested to how the management plans to reduce its gearing over the coming year.

On a side note, we applaud Chairman Michael Lim’s commitment to attend the AGM even though he was unwell (he came in a wheelchair!). With that, here are 11 things we learned from Hektar REIT’s 2017 AGM:

1. Hektar REIT’s strategy is to focus on niche retail assets located across key growth areas in Malaysia such as Subang Parade in Subang Jaya, Selangor; Mahkota Parade in Malacca; Wetex Parade in Muar, Johor; Central Square in Sungai Petani, Kedah; and Landmark Central in Kulim, Kedah. In 2017, Hektar plans to:

  • Implement asset enhancement initiatives to increase net lettable area (NLA) in Subang Parade and Landmark Central
  • focus on completing the acquisition of 1 Segamat Shopping Mall
  • improve efficiency in tenant management to optimise rental returns

2. Hektar achieved an overall occupancy rate of 96.2% (across 450 tenancies) as at 31 December 2016 — a slight decrease of 0.4% from 2015. The occupancy rate of all its malls dropped marginally except for Mahkota Parade (increased 0.9%) and Wetex Parade (increased 2.3%) which, despite the tough retail environment, achieved 100% occupancy in 2016. These neighbourhood malls in second-tier growing towns have proven to be defensive in nature and provide stable rental streams supported by a strong catchment area of consumers.

3. Hektar’s market catchment area is 3.0 million residents while its annual visitor traffic is 30.1 million. Visitor traffic is measured by FootFall, a computerized video-based traffic monitoring system. Visits to Mahkota Parade increased slightly by 3.3% but Subang Parade and Landmark Central saw slight decreases. Shopper traffic at Wetex Parade and Central Square remained stable at 4.6 million and 3.9 million visitors respectively.

4. Gross revenue decreased slightly by 0.1% to RM124.5 million in 2016 and net property income (NPI) dropped 2.8% to RM74.3 million in 2016. The decrease is mainly due to lower rental income from tenancies as an impact of the soft retail market, competition from other retail malls, and a weak economy. Net income increased significantly from RM4.8 million to RM43.2 million. However, this spike was mainly due a fair value loss recorded the previous year in 2015 arising from the revaluation investment properties.

5. One unitholder raised her concerns about the aging analysis of trade receivables on page 77 of the annual report:

 20152016% change
Past due 0-30 daysRM70,419RM211,830300%
Past due 31-60 daysRM426,791RM880,275206%
More than 60 daysRM1,271,198RM3,554,139280%

The management answered that the increase in receivables was due to their tenants’ cash flow problems as their business has been affected by the economic slowdown. The management decided to extend more days to settle their outstanding rents as many of the tenants have been with them for quite some time. However, the management stated that they have a “robust” system to monitor a tenant’s payment days to avoid bad debts.

6. Total value of Hektar’s portfolio increased 1% to RM1.092 billion in 2016 – which will increase further to RM1.2 billion in 2017 upon the acquisition of 1 Segamat Mall in 3Q 2017. 1 Segamat is a three-storey retail mall with a basement carpark and an NLA of 223,438 square feet. As at 2 May 2016, its occupancy rate was 96.35%. The mall is the only purpose-built shopping centre in Segamat town and is strategically located within close proximity (less than a 10-minute walk) to train and bus transportation hubs in the central business district of Segamat town.

7. For the year ended 31 December 2016, Hektar REIT signed 140 new and renewed leases but with an overall weighted average rental reversion of negative 9%. Its flagship mall, Subang Parade, performed badly as its revenue dropped 5% to RM49 million. The overall negative reversion is caused by the tough retail and macroeconomic environment. The malls in second-tier towns in Kedah and Johor are more resilient and were able to improve their revenues mitigating the grey performance from Subang Parade. Landmark Central maintained a healthy rental reversion due to its monopolistic position in the market.

A unitholder asked how the management planned to improve the reversions. The management answered that they are using a proactive leasing approach by looking at leases expiring six months in advance. At that point, they will start to negotiate new rental rates with existing tenants or source for new potential tenants.

8. Even though net income decreased 7%, Hektar still maintained the same distribution per unit (DPU) of 10.5 sen in 2016. The DPU represents a distribution yield of approximately 7.2% based on Hektar’s closing price of RM1.46 on 15 June 2017.

9. Gearing ratio increased from 44.3% in 2015 to 44.9% in 2016. A unitholder asked the management whether they had any plans to reduce the high gearing ratio. Executive director & CFO, Pn Zalila, said Hektar can borrow an additional RM57 million before reaching the 50% limit permitted under SC guidelines and stated that the management would like to maximize its borrowings. According to her, a third of borrowings are at fixed interest rates with the rest at floating rates.

10. A unitholder asked whether the proposed rights issue to acquire 1 Segamat Mall will affect the DPU. CEO Dato’ Hisham Bin Othman explained that 70% of acquisition will be financed by the rights issue and the balance via debt. For the rights issue, one new unit will be issued for every seven units. The rights price has yet to be determined, however, it would be issued at a discount of not less than 15% to the theoretical ex-rights price. Upon the rights issue, the DPU will be reduced slightly.

11. Hektar REIT is currently undertaking a total asset enhancement initiative (AEI) value of RM62 million where up to 45,000 square feet of NLA will be created. The AEIs are expected to be completed in August 2017 and mid-2018 for Landmark Central and Subang Parade increasing the malls’ NLA by 20,000 and 25,000 square feet respectively.

Landmark Central is the only purpose-built mall in Kulim and has been showing good reversion rates for the past few years. With the completion of its refurbishment by August 2017, the revamped Landmark Central with its additional NLA of 20,000 square feet is expected to bring in higher revenue.  The AEI at Subang Parade will add a new wing,  upgrading of fittings and amenities, and introduce new brands and F&B offerings.

Additionally, the management is about to embark on a large-scale energy savings programme for the purpose of cost savings. They will introduce the energy saving programme in one to two malls first before embarking full scale.

With the acquisition of 1 Segamat Mall and its large-scale AEIs, Hektar REIT looks poised to grow its revenue and NPI over the next couple of years. However, it is saddled with one of the highest gearing ratios among Malaysian retail REITs and the management has stated its plans to maximize its borrowings. Will the gamble pay off? We will find out more at next year’s AGM.

With additional article contributions by Mitra Chen.

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Calvin Soon is a value investor and a partner of Invesmart Network PLT. Away from investing, he owns a consultancy business. Calvin believes that anybody can achieve financial independence if they use the right investment process and understand what they invest in.

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