4 Steps To Gauge Hektar REIT

Hektar REIT is a Malaysia-based real estate investment trust managed by Hektar Asset Management Sdn. Bhd. Its portfolio mainly consists of shopping malls such as Subang Parade, Mahkota Parade, Wetex Parade, Central Square and Landmark Central. Since its listing in year 2006, Hektar REIT has maintained high distribution yield of approximately 7%. However, their management team has anticipated that the recent years have proven to be Hektar REIT’s toughest year since its 10-years of existence. Let’s take a deep dive into their management team’s view in terms of the shopping mall’s location, tenant’s quality, leasing expiry and occupancy rates.

#1: Location, Location, Location

Hektar REIT has two prime properties namely the Subang Parade and Mahkota Parade based on its current property valuation and the net property income generated in the year 2016. The Subang Parade is located at the heart of Subang Jaya’s commercial district which is 25 minute drive from Kuala Lumpur. It is neighbourhood-focused and has mixture of tenants that offers value-for-money goods and convenience with a total net lettable area (NLA) of 507,157 sqft. Since Subang Parade was established in year 1988, the management has allocated RM 40 million for the shopping mall to undergo asset enhancement initiatives (AEI) which is expected to complete in 2018. This AEI will also increase its NLA by 5% (approximately 25,000sqft). This means more space for new tenants (more rental income!!).

Mahkota Parade, on the other hand, was the first regional shopping mall located at the heart of Malacca town which is a tourist centre. The mall is currently one of the leading shopping centre in Malacca region that serves as a key destination for major community events and exhibitions with NLA of 519,542 sqft.

Despite both the shopping mall’s location are strategically positioned, visitors have been declining since 2012 to 2016. This is mainly due to weak consumer sentiment and there is also an oversupply of retail space which makes the matter worse.

#2: Tenancy Mix

Both Subang Parade and Mahkota Parade have a diverse tenancy mix (i.e. from fashion, F&B, departmental store to education and leisure). According to Hektar REIT’s Annual Report 2016, Subang Parade’s main rental income is derived from TGI Fridays and Kenny Rogers Roasters (F&B), Bata and Reject Shop (Fashion), MPH Bookstores (Education). While Mahkota Parade’s main rental income is derived from Darling and Reject Shop (Fashion), Seleria, McDonalds and KFC (F&B), Parkson (Departmental Store). With such diversified tenancy mix, it does protect Hektar REIT from being disrupted by e-commerce threat. While e-commerce may disrupt the fashion & footwear industry significantly in near future, both these shopping malls can make adjustments which are necessary and continue prospering given that the fashion & footwear only accounts for 17.7% of total rental income in Subang Parade and while Mahkota Parade’s fashion & footwear only accounts for 27.3% of total rental income.

#3: Tenancy Expiry Date

According to Hektar REIT’s Annual Report 2016, a total of 207 tenancies will expire in year 2017 representing 56% of total monthly rental income and 59% of total NLA. The tenancy expiry is considered highly concentrated due to the expiry of anchor tenants. Besides that, let’s review the Weighted Average Lease Expiry (WALE) for Hektar REIT. WALE is used to measure the likelihood of a property is being vacated. Based on the table below, the WALE for Hektar REIT is 1.44 years. This means that if we have tenant that occupies large NLA and has SHORT leases, the WALE will skew downwards. If the tenant occupies large NLA and has LONG leases, the WALE will skew upwards. Most REIT investors have an opinion that longer WALE is better because it reduces vacancy risks. However, longer WALE also means that property owner will not be able to negotiate rent hikes more frequently.

#4: Occupancy Rates

Out of all shopping malls under Hektar REIT are shown below, Subang Parade being the prime property has suffered from a declining occupancy rates since to 100% to 93% from 2013 to 2016. This huge decline was due to increase in high competition in retail space. The retail space has doubled since last year from 7.6 square feet per capita to 16.7 square feet per capita in Kuala Lumpur. This means that retailers now have better negotiating leverage. Another reason for the continuous decline can be due to tenant’s sentiment in choosing a new mall or refurbished mall rather than old mall such as Subang Parade (established in 1988). On the other hand, the occupancy rates for the rest of the shopping malls stay relatively stable around 96 – 100%. Even though the rest of the malls stay relatively stable, we should take note that the prime property, Subang Parade as it experienced a substantial drop in their occupancy rates.

My Insights

Based on the decline in occupancy rates in Subang Parade, 59% of total NLA expiring in 2017 and lower visitor’s traffic, it clearly shows that Hektar REIT is experiencing some turbulence and might disrupt the future distributable income. In addition, the increased in retail space in Malaysia and threat of e-commerce enable tenants to negotiate better terms for themselves especially in lower rental rates.

“We now ask for your patience and support in the coming year, as we expect it to be even more challenging than 2016, and the quantum of our future quarterly distribution payout may be affected” by Michael Lim Hee Kiang (Chairman) Source : Hektar REIT 2016 Annual Report.

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An equity investor and co-founder of Stocks Insights. Prior to this, he was attached with an International Bank in Private Banking segment serving sophisticated high net worth clients. He has also passed Certified Financial Planner's examinations during his engineering undergraduate degree.

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  1. Norman , what do u think of insight view of MRCB-QREIT performance ? My email is [email protected], i found ur Axis Reit intrinstric value very informatic ,i purchase it before and fortunately never subscribe right issue

    • Hi Dennis,
      Good to know that you find this article informative.

      I’ve just skimmed through MQREIT, hence could not comment much on their business and management. Nonetheless, their average property yield from 2014 to date is 5.9% but 2017 property yield is at 6.5% (a good sign).
      Their finance cost has been increasing from RM 14 mil to RM 40.5 mil (2014-2017) but Interest Coverage Ratio is 3.1 times (need to check with similar peers to see whether 3.1 times is considered healthy or not).

      Valuation wise, the average dividend yield since 2013 to date is 7.3%. Give that, MQREIT has been paying 8.38 sen dividend consistently, we can “assume” upcoming years they would pay the same.
      Hence the intrinsic value is ~RM 1.15. As a typical investors, we are inclined to make mistakes, I would put a 10% discount to my IV – being conservative. Hence IV is ~ RM 1.03.

      Hope this gives you a clearer picture.

      **Disclaimer: This is not a recommendation to buy or sell but merely for educational purposes
      **No vested interest in the company stated.

  2. Norman , can you let me know your formula of counting INTRINSIC Value ? I have read through INVESTOPEDIA howver not so clear about it. Can you share your formula and i do some homework about ur AXREIT AND MQREIT again. Thk

    • Hi Dennis,

      Sorry for the late reply. The calculation of intrinsic value is very subjective and it depends on many variables such as the types of company (i.e. fast grower, stalwart, cyclical, etc.). There are no “one size fits all”. In the case of REITs, we are investing in it because REITs gives a stable dividend payment to the unit holders. In other words, our main investment objective in REITs is dividend. As such, our valuation method will be looking at the REITs’ dividend yield (or distribution yield).

      Hope this clarify your question.

      Thomas Chua =)


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