Hektar REIT rises on Q4 income surge

Hektar Real Estate Investment Trust rose 1.5 percent to RM1.37 in Kuala Lumpur trading at 9.38am, bound for its highest close since Dec. 7.

Its net income in the fourth quarter grew fivefold from a year earlier to RM57.7 million, according to a filing to the stock exchange. -- Bloomberg



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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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Rights issues by REITs a tough sell?

KUALA LUMPUR: It remains to see whether investors will warm up to recent proposals by Malaysian real estate investment trusts (REITs) to embark on rights issues for fundraising.

This comes as Hektar REIT and AmFirst REIT separately proposed rights issues in recent months. The former is doing so to fund new asset acquisition while the latter is seeking to reduce its bank borrowings. CapitaMalls Malaysia Trust (CMT) also recently told The Edge Financial Daily that it is considering a rights issue to raise fresh capital.

Analysts and market observers said it is generally undesirable for REITs to embark on rights issues as investors expect dividends from REITs instead of having to plough in more capital.

“Effectively, they are asking investors to spend more on their stock in these uncertain market conditions,” said a property analyst.

However, judging from the price performance of both Hektar REIT and AmFirst REIT, investors have not reacted negatively to the news. This, surprisingly, is in contrast to investors’ harsh treatment of Singapore-listed REITs that embarked on rights issues.

According to analysts, the reason why Malaysian REITs are now turning to rights issues to raise funds, instead of the usual way of borrowing or unit placement, could be because their gearing is already near the 50% threshold (of total asset value) permitted for a REIT to borrow, or that the capital they seek to raise is larger than what can be achieved with a placement exercise.

In Hektar REIT’s case, its gearing ratio is 43.4%, just below the 50% limit, based on its total debt of RM347 million and total assets of RM799.47 million as at Sept 30. AmFirst’s REIT’s gearing as at Sept 30 was 39.8% based on total borrowings of RM419.6 million and total assets of RM1.053 billion.

On Dec 8, Hektar REIT proposed a renounceable rights issue to raise gross proceeds of about RM98.4 million. Proceeds from the rights issue will be used to partially fund the acquisition of two shopping malls in Kedah for RM181 million cash.

Hektar REIT added that it would also obtain bank borrowings of up to RM87.1 million to purchase the assets. Note that it held cash and cash equivalents of RM21.3 million as at Sept 30.

The REIT has yet to finalise the actual number of rights units and entitlement basis will be determined later based on the final issue price of the rights unit.
Hektar REIT added that it will procure a written irrevocable undertaking from its substantial unitholders to fully subscribe for their entitlements, failing which underwriting arrangements would be made.

AmFirst REIT’s proposed rights issue, set on a three-for-five basis, is expected to raise gross proceeds of about RM218.8 million, based on an illustrative issue price of 85 sen per unit. The proceeds are to be used to pare down borrowings.

CapitalMalls Malaysia Trust, which also manages The Mines shopping mall, recently said it is also considering a rights issue to raise fresh capital.

AmFirst said the rights unit issue price is expected to be fixed at a discount of no more than 20% to the theoretical ex-rights price of the unit. “The discount on the issue price of the rights unit is intended to reward unitholders for their continuous support of the fund,” AmFirst said.

Thus far, investors have not reacted negatively to the REITs proposal to conduct rights issues. The unit prices of both Hektar REIT and AmFirst REIT are still traded near their peaks.

“It could be because the unit prices are currently near historical highs, and more interestingly, at the current high prices they still offer rather good yields as well [Hektar REIT at 7.6% and AmFirst at 8.6% historical yield], so unitholders are happy,” said a market observer.

Other than that, he explained that there is still strong demand for REITS in times of market volatility, especially among institutional shareholders.
“Pavilion REIT has gained 13.6% since last week’s IPO to RM1, and the yield is now only 5.7%. So, the management of REITs thought maybe a rights issue is a good idea,” he said.

The scenario is different in Singapore.

K-REIT Asia, a unit of the Keppel Land group, saw its unit priced plunge 9.7% to S$0.857 sen on Oct 18 after it announced plans to raise S$976.3 million (RM2.4 billion) through a 17-for-20 rights issue. Most of the funds raised by the REIT will be used to buy a 87.5% stake in Ocean Financial Centre (OFC) from its parent Keppel Land Ltd.

It was reported that investors didn’t like the pricing for the OFC deal, and the fact that it was a related party deal. It wasn’t entirely because K-REIT Asia had proposed to acquire it via rights issue funding.

“At the end of the day, REIT managements have to justify why they have to do a rights issue to ask for more money from the unitholders. While institutional shareholders are okay with a rights issue, it could be a turn-off for minority shareholders,” said a market observer.



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REITs attractive in turbulent market

KUALA LUMPUR: As market volatility drive investors toward defensive stocks, real estate investment trusts (REITs) have come under renewed interest as investors look to reduce risk of capital loss and seek stable returns.

Among the Malaysian REITs that have seen better days since the global market selldown in early August are Sunway REIT (SunREIT), Axis REIT and CapitaMalls Malaysia Trust (CMMT).

The three REITs have seen higher volumes traded since late July with their respective unit prices hitting their peak in August, while still maintaining high level of interests recently.

This appears to coincide with the weak and volatile sentiment in markets worldwide that drove investors to the sidelines.

Yesterday, CMMT’s share price closed at RM1.30 (RM1.95 billion market cap), up from about RM1.02 in the beginning of the year. CMMT is a purely retail properties-based REIT while SunREIT’s portfolio comprises retail, hospitality and office properties.

SunREIT and Axis REIT closed yesterday at RM1.14 and RM2.46, respectively, giving them a market cap of RM3.07 billion and RM924.7 million. The former had gained about 10.7% year-to-date (YTD) while Axis was up about 3.8% YTD.

At yesterday’s prices, CMMT and Axis were traded at about 6% and 7.1% annualised yield for FY11 ending Dec 31, while SunREIT was priced at 5.8% historical yield for FY11 ended June 30.

Nevertheless, not all REITs have fared well, with some registering a drop in their unit prices YTD. While lower unit prices could mean higher dividend yield, note that some have returned flat or lower dividend payments.

Hektar REIT, which owns several small malls, saw its unit price falling 6.7% YTD to close at RM1.26 yesterday. While its annualised dividend yield was widened to 7.93% for FY11 ending Dec 31, its dividend payment for 1HFY11 was flat at five sen per unit.

The unit price of hospital-backed REIT Al Aqar KPJ REIT meanwhile has also fallen about 4.5% YTD to RM1.07 yesterday. The REIT recently distributed 5.17 sen as the first income distribution for FY11 ending Dec 31, despite earlier proposing to pay 3.3 sen.

UOA REIT, which owns several office blocks, had hit a six-month high of RM1.48 on July 26 before market pressures pushed down its prices to RM1.33 yesterday, falling about 11.3% YTD. UOA’s 1HFY11 dividend has dropped to 4.89 sen (annualised yield of 7.4%) from 5.15 sen previously.

Analysts stress that the two most important factors to consider when evaluating the prospects of a REIT are the property segment it occupies and its proposed expansion plan to grow value and dividend returns.

REITs backed by office properties are currently not the flavour of the month due to the oversupply of office spaces and consequently, an expected pressure on earnings growth.

Instead, many analysts prefer retail REITs particularly those that own quality retail malls in good locations.

Although retail REITs are still relatively attractive, analysts warn that this segment could in the longer term face higher supply and increased competition for tenants.

“Retail spaces should see some incoming supply but it will still be a better bet than office REITs,” said a property analyst.

Axis REIT has also been featured as analysts’ top picks for REITs who like its mix of office and industrial real estate.

“Aside from the industrial properties which we like, Axis REIT is secured by strong tenants and have an aggressive expansion plan,” said the analyst.

Maybank IB Research analyst Wong Wei Sum noted that some REITs are currently looking attractive due to their more stable income stream and dividend yield at an average of 6% to 7%.

Nevertheless, as REITs return to focus, a fund manager pointed out that the increased interest can mostly be attributed to funds but not retail investors.

“Retail investors largely lack an understanding of REITs but REITs is quite useful to have in your portfolio when the market is unpredictable,” he said.

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