Wednesday 21 December 2011

Retail-focused REIT fairly resilient

The listing of Pavilion REIT earlier this month is likely to have attracted more investor interest to the entire asset class. Real estate investment trusts (REIT) are widely regarded as relatively defensive investing options, which would be appealing under the prevailing uncertainties over the health of the global economy.

To be sure, a prolonged and severe economic downturn may eventually affect property prices and rental incomes. On a positive note, the property sector rode out the 2008 global financial crisis none the worse for wear. Indeed, many of the listed REIT continued to recognise revaluation gains on their portfolio of assets during this period.

Hence, while there could emerge some rental pressure in select segments of the market, the office segment for instance, overall expectations for property prices remain on a fairly even keel for now. That said, most market observers are fairly upbeat on the prospects for retail properties, particularly for shopping malls that are well managed in choice locations, on the back of expectations that domestic consumer spending will continue to expand.

Hektar proposes new acquisition
Hektar REIT (RM1.30) is one of the earliest REIT to be listed on Bursa Malaysia — back in December 2006 — and the first that is focused on properties used primarily for retail purposes.

Its initial portfolio consisted of two suburban shopping malls, Subang Parade in Subang Jaya and Mahkota Parade in Malacca. Wetex Parade in Muar was added to the trust’s portfolio in 2008. The three investment properties — with total net lettable area of some 1.1 million sq ft — are valued at a combined RM752 million. The average occupancy rate stood at 95.5% at end-2010.


Earlier this month, Hektar proposed to add two other shopping malls to its portfolio - the Landmark Central Shopping Centre in Kulim and Central Square Shopping Centre in Sungai Petani, Kedah. The shopping malls are valued at a combined RM181 million and have net lettable area totalling some 582,000 sq ft. Upon completion, Hektar’s total investment properties will rise to roughly RM933 million.

To part-finance the purchase, Hektar has proposed a rights issue to raise some RM98.4 million. Based on the current unit price, the rights issue will
likely be on a basis of about one-for-four.

The proposed acquisition is expected to be finalised by 2Q12. Post-acquisition, Hektar’s gearing is estimated at around 44% while net asset value (NAV) is estimated at about RM1.29 per unit. Total units in circulation will expand to about 400 million.

Hektar has made three interim income distributions of 2.5 sen per unit each so far this year. Assuming the same level of income distribution as 2010, totalling 10.3 sen per unit, yields are estimated at 7.9% at the current price.

This is higher than yields for the three other retail-focused REITs currently listed on the local bourse, Sunway REIT, CMMT and Pavilion REIT, based on prevailing prices. This could be attributed in part to the relatively larger asset sizes and liquidity for its peers. Indeed, the more recent listings of the similar and larger retail-focused REITs have taken attention away from Hektar.

Newly acquired assets to start contributing positively for Sunway REIT
Sunway REIT remains the largest listed REIT on the local bourse in terms of total assets. Following the successful acquisition of Putra Place, its portfolio of assets has expanded to 11, from eight upon listing in July 2010, valued at a combined RM4.38 billion.

Sunway REIT acquired the three properties, The Mall, Putra Place office tower and the former Legend Hotel, in a public auction in April 2011. However, due to a legal wrangle with the former owner, the trust did not secure full possession and control of the properties until end-September. As a result, earnings in the past two quarters were weighed down by higher expenses, which included interest costs and legal fees, with losses totalling some RM6.6 million.

Now that the issue has been resolved, Sunway REIT expects positive contributions from its latest acquisition for the current financial year ending June 2012. Occupancy for Sunway Putra Mall stood at about 66% at end-September, and is expected to rise to some 82% upon the completion of new leases with the remaining occupants. Meanwhile, the master lease agreement for Sunway Putra Hotel has been finalised and the hotel will start to contribute in the current quarter under new management. Occupancy at Sunway Putra Tower averaged at 90.4% for the quarter ended September 2011, which the property manager expects will inch higher over the next few months.

Thus, we should see improved incomes for Sunway REIT. The trust made a first interim income distribution of 1.75 sen per unit in November. Assuming total income distribution of roughly 7.2 sen per unit for FY12, investors will earn yields of 6.4% at the current price of RM1.13.

With gearing at just about 35%, below the industry guideline of 50%, Sunway REIT’s balance sheet is relatively healthy and would give the trust room to for additional leverage for future acquisitions.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, December 21, 2011.




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