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This article first appeared in The Edge Malaysia Weekly on November 18, 2019 - November 24, 2019

It is no secret that things have been tough in the retail sector, with Retail Group Malaysia revising downwards its focus retail sales growth forecast for this year to 4.4% from 4.9% previously, due to both the internal and external market environments.

Nevertheless, this has not slowed down Hektar Real Estate Investment Trust (Hektar REIT), the country’s first retail-focused REIT.

It delivered return on equity of 6.58% to its unitholders for its financial year ended Dec 31, 2018 (FY2018) following ROE of 6.5% in FY2017 and 7.1% in FY2016.

It came in tops with a weighted ROE of 6.7% for the period under review winning highest ROE for the REIT sector in The Edge Malaysia Centurion Club Corporate Awards 2019.

Hektar REIT saw a 3.8% year-on-year decline in its distributable income to RM40.48 million in FY2017 but was quick to recover, registering a 3% y-o-y increase to RM41.62 million in FY2018.

Although distribution per unit (DPU) has been on a downward trend (2016: 10.5 sen; 2017: 9.6 sen; 2018: 9.01 sen), Hektar REIT’s annualised distribution yield increased to 8.1% in 2018 from 7.4% in 2017 and 6.7% in 2016.

At 8.1%, its FY2018 distribution yield outpaced the Employees Provident Fund’s dividend rate of 6.15% and the 12-month fixed deposit rate of 3.3%.

Hektar REIT’s portfolio consists of six neighbourhood shopping centres throughout Peninsular Malaysia — Subang Parade in Selangor, Central Square and Kulim Central in Kedah, Mahkota Parade in Melaka, as well as Wetex Parade and Segamat Central in Johor.

Subang Parade and Mahkota Parade were acquired by the REIT in 2006, while Wetex Parade was acquired in 2008. Central Square and Kulim Central were acquired in 2012, and the REIT’s latest purchase, Segamat Central mall, was acquired in 2017.

The total net lettable area (NLA) for the six malls is two million sq ft with 492 tenants. Occupancy for the portfolio declined to 92.1% last year, from 95.1% in 2017. This is mainly attributed to changes in the tenant mix in Subang Parade and Segamat Central. Visitor traffic in the portfolio saw declines in three malls, with the major drop attributed again to Subang Parade’s changing tenant mix.

On a more positive note, its two malls in Kedah — Central Square and Kulim Central — recorded visitor traffic increases of 18.4% and 81.8% respectively. Central Square was refurbished in 2015 and Kulim Central in 2017. Altogether, Hektar’s portfolio traffic was 32 million visitors last year and its portfolio rental reversions recorded a positive 5.4% with 159 new and renewed tenancies.

Kulim Central, the latest Hektar mall to be refurbished, led the way with rental reversions of 16.4%, followed by Mahkota Parade with a positive 15%.

Subang Parade saw only 0.1% positive growth while Segamat Central did not record positive growth — largely due to the ongoing tenancy remixing and planned asset enhancement initiatives for each shopping centre.

The largest rent contributors are tenants from the fashion and footwear segment as well as food and beverage. Both segments contributed a combined 42% to the portfolio’s total rental income.

Parkson department store was its top tenant in FY2018, occupying 12.5% of its NLA and contributing 9.6% of its monthly rental income — the highest for that year. Its second largest tenant was The Store, which occupies 13.5% of total NLA, contributing 5.9% of the total monthly rental income.

A total of 245 tenancies will expire this year, representing about 38% of NLA and 45% of monthly rental income as at Dec 31, 2018.

Between March 31, 2016, and March 31, 2019, Hektar REIT units lost 4.3% of their market value. The price slipped to a low of RM1.01 per unit in November 2017 from RM1.15 on March 31, 2016. However, it regained some lost ground when its unit price increased to RM1.11 in June last year.

The REIT’s cornerstone investor is Frasers Centrepoint Trust, part of the Frasers Property Group, which is headquartered in Singapore.

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