12 things you need to know about Hektar REIT before you invest

Yesterday, I was at the Starbucks at Subang Parade – one of the first regional shopping centres in Selangor and owned by Hektar REIT. As usual, I ordered my latte and settled down on my favourite seat. I switched on my laptop and checked the prices of a few stocks before starting work.

Here was what caught my attention:

As recently as 3 May 2017, Hektar REIT was trading at RM1.60 a unit. Up until then, Hektar REIT’s stock prices have been stable and trading around RM1.50-1.60 a unit since 2013. At price of RM1.26, it is over a 20% decline in three months!

I began to look around the mall and asked: “Isn’t this the same bustling mall that I grew up with? Why is it worth 20% less now?”

Intrigued, I started to do some serious digging on Hektar REIT. At times, I felt like I was part of a National Transportation Safety Board team that conducts an all-round investigation to discover the cause of a transportation accident. In this case, I was assessing the fundamental qualities of Hektar REIT to determine whether the 20% decline in its stock price was justifiable or an ‘accident’.

Here are 12 things you need to know about Hektar REIT before you invest:

1. Subang Parade is the trophy asset of Hektar REIT. Located in a matured township known as Subang Jaya, Subang Parade is one of two assets that was included in Hektar REIT’s initial portfolio when it listed on 4 December 2006. The market value of this property is RM427.2 million comprising 39.1% of Hektar REIT’s portfolio in 2016. Parkson, Digital One, and Celebrity Fitness are key tenants in Subang Parade for the past ten years. They accounted for 19.9% of Subang Parade’s total monthly income in 2016. Overall, Subang Parade recorded marginal increases in gross revenues from RM40.9 million in 2008 to RM49.0 million in 2016.

Source: Hektar REIT annual reports

2. Mahkota Parade is the second largest asset in Hektar REIT’s portfolio. It is located in the heart of Melaka town and along with Subang Jaya, one of the assets included in Hektar REIT’s initial portfolio. Mahkota Parade’s market value stands at RM322.4 million comprising 29.5% of Hektar REIT’s portfolio value in 2016. Mahkota Parade derives 19.9% of its total monthly income from two key tenants: Parkson and Seleria. In May 2010, Hektar REIT relaunched Mahkota Parade after its refurbishments. Since then, Mahkota Parade has reported gradual increase in gross revenues from RM34.5 million in 2009 to RM40.2 million in 2016.

Source: Hektar REIT annual reports

3. In 2008, Hektar REIT acquired Wetex Parade and a hotel known as Classic Hotel for RM117.5 million. They are located in Muar, Johor. Hektar REIT has been receiving income from a 10-year fixed-term lease from Classic Hotel since 2008. Wetex Parade is valued at RM135.2 million comprising 12.4% of Hektar REIT’s portfolio value in 2016. The Store is a key tenant at Wetex Parade. It contributed 26.0% of Wetex Parade’s total monthly income in 2016. Overall, Wetex Parade has achieved growth in gross revenues from RM7.1 million in 2008 to RM13.6 million in 2016.

Source: Hektar REIT annual reports

4. In 2012, Hektar REIT acquired Central Square for RM83.0 million. It is located in Sungai Petani, Kedah. Upon acquisition, Hektar REIT undertook an extensive asset enhancement initiative (AEI) on Central Square in 2013/14. Central Square was relaunched in 2015. The Store, Perfect Mobile Village and MBO Cinemas are key tenants which accounted for 40.9% of Central Square’s total monthly income in 2016. As a result, gross revenues have increased from RM7.9 million in 2014 to RM10.3 million in 2016.

Source: Hektar REIT annual reports

5. Also in 2012, Hektar REIT acquired Landmark Central for RM98.0 million. It is located at Kulim, Kedah. Since its acquisition, this property has achieved marginal growth in gross revenues from RM9.6 million in 2013 to RM11.5 million in 2016.

Source: Hektar REIT annual reports

6. As at 31 December 2016, Hektar REIT has expanded its portfolio to five retail properties worth RM1.09 billion in market value. It has maintained above 90% in occupancy rate and grown its pool of tenants from 315 in 2008 to 450 in 2016. This means, Hektar REIT has become less reliant on a single tenant for rental income.

Source: Hektar REIT annual reports

7. Hektar REIT has achieved a compound annual growth rate (CAGR) of 5.03% in group revenues over the last eight years. It has increased from RM84.1 million in 2008 to RM124.6 million in 2016. The growth was directly contributed from acquisition of three retail malls and marginal growth in gross revenues from the five retail malls mentioned above.

Source: Hektar REIT annual reports

8. Since 2013, Hektar REIT has reported marginal declines in realized earnings falling from RM46.1 million in 2013 to RM41.5 million in 2016 – a 10% drop. This was due to higher property operating expenses and higher financing costs as a result of an increase in bank borrowings.

Source: Hektar REIT annual reports

9. Still, Hektar REIT has maintained its income distribution at RM42.1 million and distribution per unit (DPU) at 10.5 sen over the last four years. According to the Section 109D(2) Malaysian Income Tax Act 1967, REITs are exempted from income tax on the corporate level if they distribute at least 90% of its taxable income to unitholders. The proceeds received by unitholders will be subjected to withholding tax. For retail investors, like myself, the tax rate is 10%. If you are a Singaporean investing as an individual, the tax rate is also 10%.  Thus, the net DPU received by individual unitholders was approximately 9.45 sen over the last four years. If Hektar REIT is able to maintain its DPU, its expectednet dividend yield is 7.5%.

Source: Hektar REIT annual reports

10. In the first half of 2017, Hektar REIT reported a marginal decline in occupancy rate to 94.8% and negative rental reversions of 7% for its portfolio. Subang Parade reported its lowest occupancy rate of 92.2% in Q2 2017. The occupancy rate for Landmark Central was also affected by its ongoing refurbishment activities which started in 2016. Hektar REIT expects the occupancy rate for Landmark Central to improve when refurbishments are completed in September 2017. This will create an additional 20,000 square feet of net lettable area. To date, 85% of the new lots created have been secured by tenants.

Source: Hektar REIT annual reports

11. In 2017, Hektar REIT is acquiring 1Segamat Shopping Centre (1Segamat) for RM104 Million. Presently, 1Segamat enjoys an occupancy rate of 95.93%. Hektar REIT is financing this acquisition with a combination of RM39.48 million in bank loans and raising RM64.52 million through a rights issue. Upon completion, Hektar REIT is estimated to have:

 NAV per unit (RM)Gearing ratioNet Realised
Income (RM ‘000)
Realised
EPU (Sen)
Existing portfolio1.4645%41,54610.37
Post-acquisition1.4144%49,55310.73

12. In Q2 2017, Hektar REIT declared 4.0 sen in DPU. This includes financial results for July 2017 and August 2017 which was in line with the completion of the rights issue as I write. Over the five-month period, the DPU averaged 0.8 sen per month. It is lower than the 0.875 sen per month recorded from 2013 to 2016. If Hektar REIT maintains DPU at 0.8 sen per month, it would declare 9.6 sen in DPU for the next twelve months. After the 10% withholding tax, net DPU would be 8.64 sen. At RM1.26 a unit, I could expect 6.9% in net dividend yields which is lower than 7.5% calculated in Step 9.

The fifth perspective

Since 2006, Hektar REIT has built a track record for delivering stable income distributions. In 2017, it reported a lower occupancy rate and negative rental reversion. Still, the board remains proactive as it expects to relaunch Landmark Central and complete the acquisition of 1Segamat in September 2017. Both initiatives are expected to contribute positively and, thus, enable Hektar REIT to meet its primary objective of providing sustainable dividend income to its unitholders.

Ian Tai is the founder of Bursa King, a data platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that helps investors unearth consistently profitable stocks from a database of over 900+ stocks listed in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

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