Sunday, 19 May 2013

Hektar REIT quietly carving a niche market

SAFE havens like real estate investment trusts (REITs) are always in demand during tumultous times, but let's face it, it will never be as sexy as growth and penny stocks. In fact, the instrument itself was never attractive but just stable until the emergence of mega REITs that dominated the local scene.

One of these local REIT players, Hektar REIT has been silently but surely carving a niche for itself.

Controlling its three-plus-two malls currently at its headquarters nestled in Solaris Dutamas in Kuala Lumpur, Hektar REIT is going on a defensive stance to fortify its resilience even further by going for neighbourhood malls that nobody sees value in.

Speaking to StarBizWeek recently, executive director and chief financial officer Zalila Mohd Toon says it is just the starting point for Hektar although it has recorded a set of improved numbers for its first quarter, after recognising the additional rental rates from its newly-acquired two Kedah malls, namely Central Square in Sungai Petani and Landmark Central in Kulim.

“The bumped up revenue are based on legacy rental rates and the rental rates would definitely be higher after we complete our asset enhancement initiatives (AEI),” she says.

Looking at a timeframe of one-and-a-half years to complete its AEIs, she says the rental rates could be bumped up significantly like how the company had rebranded the relatively small Wetex Parade mall in Johor.

“Currently, the majority of tenants in the two Kedah malls comprises of mom and pop retailers, and our ambition is to replicate the success of our earlier malls. We plan to attract more international and national retailers who have the appetite for higher rentals,” she says.

Taking a feather out of its earlier success like Wetex Parade, she says Wetex was among the smallest out of its five malls, but it has been a case study for the company.

“Wetex is like a baby to us, and when we bought it in 2008, it was already 10 years old. It was pretty runned down and filled with tenants like bootleg DVD operators, but once we conducted our AEI, the rental rates had gone up substantially,” she says.

She says with capital expenditure of about RM25 per sq ft for its AEI, it is the optimal amount for the company to create the essential positive spillover effects that would generate shopper traffic and also attract international and national retailers to the malls.

Based on the net lettable area (NLA) of 300,046 sq ft and 281,716 sq ft of Central Square and Landmark Central, it would entail the company to fork out about RM15mil to conduct its AEIs.

“Once we conduct our AEIs, we believe we can double up the rental rates from the existing rates we are collecting right now. The previous owners were mostly just property developers with no experience in handling a mall. For us, we have the network, expertise and the value added advantage to turn these malls around,” she says.

Specifically for Central Square, she says the AEIs would entail the remixing of tenants, and also to upgrade the mall's facilities and infrastructure due to the age of the mall, while the focus on Landmark Central would be to expand its NLA as the mall is still new.

According to her, getting the right tenant mix is fundamental in attracting shopper traffic, which for instance, the aging Central Square has a cinema with just three screens, and expanding it to nine screens would pull shopper traffic similar to its flagship mall Subang Parade that has doubled its shopper traffic after the introduction of cinema operator MBO.

“The population catchment for Central Square is about 400,000, while Landmark Central is similar to Wetex Parade with a catchment of about 200,000. We are positive that these two malls would fly just like what we have done in Muar,” she says. Although the company is pumping more cash to transform its malls, it has pledged to shareholders that it will at least maintain its dividend per unit, as there are concerns that the company would encounter some sort of income disruption with the downtime in the malls and also its high gearing ratio.

Based on its dividend payout of 10.5 sen per share last year, it is still giving a commendable yield and is among the top-yielding REITs on Bursa Malaysia. It is the highest yielding when compared to the other REITs focused on the retail sector.

“There would be no major disruption to the operation of the mall as we are prudent that the AEIs would not interrupt the malls' operations. These initiatives can be executed at night after business hours,” she says. Its current gearing ratio stood at 41%, which is above the recommendation of analysts and fund managers, but still below the 50% threshold set by the Securities Commission.

“The gearing ratio is at an acceptable level. And we gear up relatively more than other REITs instead of issuing new units simply because it is more cost effective and more efficient. Over the last six years, Hektar REIT's EBITDA has improved year-on-year due to our leasing strategy, tenancy remixing and scheduled asset enhancement initiatives. With a stable cap rate of an average of 7%, the value of Hektar REIT's assets is expected to rise steadily in the coming years,” she says.

On consumer patterns, she says that one should never underestimate the spending power of people in small towns, as what has happened in Wetex Johor, where the company tried to introduce international retailers like Baskin Robbins, which is well-received by the local community.

“It was a gamble that paid off when we offer giveaway rates to Baskin Robbins on the terms of an additional turnover rent provision. It was similar when we introduced Sushi King,” she says.

She says the company is also encouraging local entrepreneurs to step up the value chain and set up their own franchises that can rival the quality of international and national retailers.

Hektar currently has a total NLA of 1.7 million sq ft with an occupancy rate of 96.3% coming from 506 tenants throughout its malls.

It derives 40% of its net property income from its flagship mall Subang Parade, by virtue that it is located in the Klang Valley, which commands a higher rental rate. The rest are from Mahkota Parade, Wetex Parade and the two new Kedah malls.

It has not stopped in its expansion after its recent acquisition.

“While we are busy with our AEIs, we are constantly looking at proposals. There's a misconception that Hektar will be in the mood for acquisition every three years, but it doesn't work that way. The proposals are opportunistic in nature, and if we see a potential mall that meets our criteria and promises good yield, we will go for it,” she says.

“We took six years to reach RM1bil in terms of asset size under our management, and our next target is to expand this to RM2bil. I definitely hope we would be able to achieve this in a shorter time,” she says.

With its strategy to spread its wings throughout the country, Zalila says not only would this carve out its own niche, it would also spread out any risk of income disruption.

For its first quarter ended March 31, 2013, the company recorded a higher net profit of RM11.06mil from a revenue of RM30.07mil compared to RM9.72mil from a revenue of RM24.45mil recorded in the previous corresponding quarter. It closed 10 sen higher at RM1.62 on Friday.

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