Hektar REIT (RM1.37) was among the earliest real estate investment trusts to be listed on Bursa Malaysia — in December 2006 — and the first that focuses on properties used primarily for retail purposes.

However, its attractiveness to investors may have been diminished with the subsequent listings of larger retail-focused REITs such as Sunway REIT, CapitaMalls Malaysia Trust (CMMT) and most recently, Pavilion REIT. These three REITs boast of assets worth over RM11 billion combined. And with significantly bigger unit holders’ capital (total number of units in circulation), they offer investors greater liquidity.

Underscoring their appeal, all three REITs are currently trading well above their net asset valuations — with price-to-net assets multiples ranging from 1.19 to 1.32 times. By contrast, Hektar is trading below its net assets of RM1.48 per unit.

Perhaps in recognition of the growing disparity, Hektar recently proposed the acquisition of two shopping malls in the trust’s first expansion since 2008.

The Landmark Central Shopping Centre and Central Square Shopping Centre are both located in Kedah, in Kulim and Sungai Petani respectively. The shopping malls are valued at a combined RM181 million and have net lettable area totalling more than 580,000 sq ft.

Upon completion, targeted by 2Q12, Hektar’s total assets will be boosted to just under RM1 billion. To part-finance the acquisition, the trust has proposed a rights issue to raise some RM98.4 million. This would expand its total units in circulation to an estimated 400 million or so — assuming the rights issue is made on a basis of about one-for-four. The bigger unit holders’ capital would also help improve liquidity for the trust.

Unit prices for Sunway REIT, CMMT and Pavilion REIT have all done quite well as defensive investments amid uncertainties in the broader market and global economy. As a result of their prevailing premium valuations, yields have narrowed. Based on our forecast, gross yields are estimated to range from as low as 5.2% for Pavilion REIT to a higher 6% for Sunway REIT. The yield for CMMT is estimated at 5.5%.

In this respect, Hektar is expected to give better returns to investors. Its units will trade ex-entitlement for a final income distribution of three sen per unit on Feb 24. For the current year, we estimate total income distribution of roughly 10.6 sen per unit, up slightly from the 10.5 sen unit in 2011. That translates into a yield of 7.8% at the prevailing price of RM1.37, which compares favourably against the estimated yields for its three larger peers.  

To recap, Hektar’s existing portfolio consists of three suburban shopping malls, Subang Parade in Subang Jaya, Selangor, Mahkota Parade in Malacca and Wetex Parade in Muar, Johor. The three investment properties — with total net lettable area of some 1.1 million sq ft — are valued at a combined RM822 million.

Despite rising competition, all three shopping malls appear to be holding their own. Occupancy rates for the malls range from 95% to 100% and averaged 97.5% at end-2011. Total revenue was up 4.4% last year to RM94.9 million, thanks to positive rental reversions and the creation of new retail spaces.

Quill Capita is also trading well below net asset valuations
Quill Capita Trust’s yields are also relatively attractive, on the back of prices that are well below its net asset valuations. Net assets stood at RM1.29 per unit as at end-2011 — more than 16% above its current price of RM1.11.

Quill Capita’s income distribution has risen steadily through the years, from 6.5 sen per unit in 2007 to 8.3 sen last year. We estimate income distribution to total roughly 8.4 sen per unit in the current year. That translates into yields of about 7.6% at the prevailing price.

Concerns over the oversupply in office space and pressure on rentals are likely the key factors weighing on its unit price. On a positive note, the demand-supply situation for office space in Cyberjaya, where half of Quill Capita’s commercial/office buildings are located, is expected to remain fairly upbeat.

In addition, though generally associated with commercial properties, about a quarter of Quill Capita’s properties (in terms of valuations) are in fact retail-related, primarily Plaza Mont’Kiara and the Tesco building in Penang.

Quill Capita’s turnover grew a modest 1.4% to RM70.3 million last year while net profit (excluding fair value adjustments) was up by about 5.4% to RM34.3 million on the back of lower operating expenses.

The trust has not been as active in terms of assets acquisitions as some of the other listed REITs. Its last purchase was completed in 2008. Currently, the 10 properties in its portfolio are valued at a combined RM815 million. Gearing stood at some 37% as at end-2011.


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, February 22, 2012.