The portfolio has had a mixed year in 2019 with variances among the different malls. Portfolio occupancy remained a high 92% in 2019.
On reflection, the past year has been a challenging one for Hektar REIT. Our management team continued to work hard on efforts to revitalise the portfolio. The initial results have been very encouraging but the period ahead will continue to be a testing time. Nevertheless, we remain confident that our efforts will yield positive outcomes in the long term.
In 2019, we experienced the protracted effects of a US-China Trade War and the uncertainties of BREXIT extending from the previous year. Malaysia’s economy continued to stutter under global uncertainties and external headwinds. The World Bank has forecasted revised GDP growth of 4.5% in 2020. Political uncertainty coupled with growing civil discontent worldwide and a weakening currency has heightened the average Malaysian household’s sentiment towards conservative financial management.
The mall still serves as a platform for the Malaysian community. Due to the tropical climate, the majority of Malaysians spend their daylight hours in offices and their leisure time indoors. Between home, school and the office, Malaysians will likely visit their “third home”, the mall. There, they hope to seek social comforts and entertaining retail experiences complementary to the online world. In general, the retail industry continues to undergo a structural change, with the inexorable growth of online retail activity shifting consumer consumption patterns. We will monitor the digital transformation of retail along with the rise of social influencers which continues to impact certain categories of retailers. Businesses will evolve as they embrace omni-channel platforms to facilitate a seamless experience from online to offline. Well established online brands are opening physical stores. The world’s largest and most famous retail disrupter, Amazon opened physical Amazon stores and bought a premium grocery chain, Whole Foods Markets for US$13.7 billion in 2017. The conclusion is that in the daily life of many, the mall serves as the meeting place for people seeking friends, leisure and enriching experiences. We conclusively believe that the business models of malls will continue to evolve and remain vigilant in observing the trends both in the online and offline world.
The portfolio has had a mixed year in 2019 with variances among the different malls. Portfolio occupancy remained a high 92% in 2019. Subang Parade’s occupancy rebounded to 94% while Central Square and Segamat Central saw declines due to tenant remixing initiatives. Visitor traffic was relatively stable throughout the portfolio, with total traffic reaching 32.3 million visits in 2019. Rental reversions were flat at +0.5% for the overall portfolio, with Subang Parade leading the decline while the other malls posted positive returns including Wetex Parade with an impressive increment of 24.8%.
Our patient approach to Subang Parade has yielded positive prospects for the future. Occupancy rebounded to 94% from 88%. Rental reversions were negative at -13.7%, reflecting our interim strategy of “occupancy first” but with a focus on maintaining a quality tenancy mix. Owing to the challenging conditions in the Klang Valley and Subang Parade’s excellent location and positioning in its respective market, management felt the need to rejuvenate the centre first by bringing in selected quality tenants at a lower rental rate and collecting on the upside through turnover rent when the mall traffic rebounds. Our refurbished Food Garden was opened in 2019, which incorporated more casual dining concepts to accompany our upmarket dining options which opened in Subang Parade.
The revised plan for Subang Parade covers key anchors. Parkson is planning its refurbishment in 2020 to upgrade the department store to reflect the latest contemporary trends. Parkson has been open since 1988 and thus has a dedicated, loyal shopper base. MBO has expanded to nine screens with the opening of the ‘Kecil’ cinema catering towards young families, a key demographic segment. Best Denki will be relocated to the eastern section of the mall, while a brand new supermarket will take its place. An upmarket brand, Village Grocer will open in the third quarter of 2020 and will present a modern grocer of choice to Subang Jaya residents. Overall, net lettable area has increased by another 10,000 sq ft to an-all time high of 521,464 sq ft. These anchor initiatives will re-balance traffic movements and circulation within Subang Parade and will position the mall towards securing new and exciting specialty retailers in the future.
The leading mall of Melaka enjoys its status due to its location in the heart of the tourist district. The management conducted an exit survey in March 2019 and gathered over 1,020 shopper responses to 41 questions. The data is important as we look to analyse the demographics and behaviours of our shoppers. Of significance, Mahkota Parade is the most tourist-centric of our portfolio with one in five of all shopper respondents originating from outside of Melaka. This is significant as it follows that people on vacation are likely to spend more on shopping, which is reflected in the tenant sales records which have been on the uptrend since Hektar started collecting records before the IPO in 2006. The new supermarket anchor, Family Store, a local brand, opened in the fourth quarter of 2019 to much fanfare. Mahkota Parade ended the year 2019 with an occupancy of 96%, visitor traffic of approximately 8.4 million and positive rental reversions of 0.8%.
Wetex Parade & Classic Hotel
Wetex Parade as the only mall in Muar enjoyed another positive year. Similar to Melaka, tenant sales recorded by Hektar posted decent numbers with jewellery stores leading the increase. Rental reversions were an excellent 24.8% in 2019 with occupancy at 96% and traffic at a stable 4.2 million visits. Management also completed the shopper exit survey in August 2019 with over 1,260 responses to derive insights into Muarian shopper demographics and behaviours.
The refurbished Classic Hotel recorded occupancy of 41% in 2019 with an average room rate of RM122. We expect these figures to improve as we invest in an improved repositioning and pricing strategy towards corporate clients in 2020. Muar is home to a few multinationals and a large number of SMEs. It is known as the “furniture capital” of Malaysia with over 700 factories exporting almost half of Malaysia’s exports, according to the Muar Furniture Association.
Visitor traffic held steady at 4.5 million visits in Sungai Petani’s leading mall. Occupancy however, dipped to 90%, due to leasing initiatives to refresh and upgrade the tenant mix. A new and refurbished food court, Seleria opened in the first quarter of 2019. Importantly, rental reversions were a solid 9.2% reflecting successful leasing efforts to focus on quality tenants. Management is continuing the initiative to upgrade the quality of tenant mix and positioning of the mall.
The only mall in Kulim continues to record positive growth with visitor traffic at approximately 4.6 million visits in 2019, up 15.0% from 2018. Occupancy improved to 95% up from 93.5% and rental reversions were up strongly at 15.6% in 2019. The positive payoff from the mall refurbishment in 2017 continues till today as new middle-class brands build their interest in the Kulim market.
Both Central Square and Kulim Central completed their shopper exit surveys in late 2019 with over 1,000 respondents each. The data is currently being analysed to create refined strategies to improve the tenant mix and customer marketing approach for their respective markets.
The only mall in Segamat requires patient handling as the management is re-focusing on an “occupancy first“ approach, favouring relevant retailers. Mall occupancy is 77% with visitor traffic at 3 million visits in 2019. The market research results yielded important findings with 69% of shoppers having families and 46.5% of shoppers below 24 years of age, reflecting the large number of tertiary students in the area. Leasing strategies will focus on mid-range brands and a family-friendly environment. New retailers will be enticed to enter the Segamat market at lower rental rates on the back of turnover rent when shopper traffic and sales improve.
The REIT recorded revenue of RM137 million in 2019, up 1.5% over the preceding year. Operating expenses increased 9.3% to RM61.6 million resulting in a Net Property Income of RM75.4 million, down 4.2%. The biggest contributor to expenses was Property Maintenance, up 13.7% to RM43.9 million. Net income before tax was however increased by 19.6% to RM39.6 million, as compared to 2018 due to the fair value increase on the portfolio.
General maintenance of the portfolio has risen, given that the average age of the portfolio is over 20 years – our youngest mall, Segamat Central was opened in 2011 and our oldest, Subang Parade was opened in 1988. Personnel costs have also contributed to the rise in expenses. As a service-oriented business, asset management requires talented people to sustain the business performance over the long run. Hektar is committed to investing in talent.
Hektar REIT’s financing includes debt facilities of up to RM563 million, providing Hektar REIT with a gearing ratio of 44.1%. Of this amount, 92% is due in 2024-2025, leaving RM45 million due in 2021. Management welcomes CIMB Bank Berhad as a new lender to Hektar REIT, where it provided up to RM60 million in facilities for the refinancing of Central Square, of which RM32 million has been drawn down to date. The Board has previously recommended the diversification of financing partners to serve as a foundation for Hektar REIT’s expansion in the future. We look forward to continue building Hektar REIT with our two financing partners, Maybank and CIMB. We appreciate their support as a vote of confidence in our business.
Hektar REIT declared a fourth quarter DPU of 2.00 sen. For the year 2019, total DPU was 7.77 sen, down 15% from 2018, reflecting a total distribution payout of approximately RM35.9 million. Based on the final price of RM0.99 on 31 December 2019, the DPU represents a yield of approximately 7.8%. At the end of 2019, Hektar REIT had over 5,365 investors.
In the past year, we were not able to close our target acquisitions, although negotiations and the lines of communications remain open. In a relatively quiet year with no key catalysts, vendors continue to play a “wait-and-see” approach as to the direction of the economy before making any key decisions, whether divestments or acquisitions. Hektar remains “open for business” however, with a continued focus on neighbourhood malls throughout Malaysia.
Hektar continues to implement initiatives to improve Environmental, Social and Governance (ESG) factors measuring the sustainability and impact of our business. Management believes in the continuous evolution of cost and operational efficiency plans designed to improve profitability in a responsible and sustainable manner. This is also reflected in the governance framework which encourages participation with key stakeholders throughout the organisation.
Awards & Acknowledgments
Hektar was awarded with numerous accolades in 2019. Hektar REIT’s property manager, Hektar Property Services was honoured at the CSR Malaysia Awards 2019 (Company of the Year Award – Property Management Category) and the Asia Top 10 Best Property Management Company Award. Hektar REIT was honoured at the ASEAN Energy Awards 2019, the National Energy Awards 2019 (both Energy Efficient Building – Retrofitted Building categories) and the Asia Corporate Excellence & Sustainability Awards 2019 (Green Initiative Award). Finally, The Edge awarded Hektar REIT with the “Highest Return on Equity Over Three Years” Award at The Edge Malaysia Centurion Club 2019 Awards. We are humbled by these accolades in recognising Hektar’s achievements. We will continue to work hard and strive to enhance the confidence of our unitholders, retailer and shoppers in Hektar REIT.
On behalf of the Board of Directors, I would like to express our thanks and appreciation to Dr. Chew Tuan Chiong who retired from our Board and Frasers Centrepoint Asset Management in the past year. We sincerely appreciate his dedication and support over the years. We also welcome his successor, Mr. Richard Ng and look forward to working with him.
I would like to acknowledge the hard work of our team for their contributions throughout this challenging year and urge them to persevere in 2020 and also wish to thank the Board of Directors for their guidance.
Dato’ Hisham bin Othman
Executive Director and Chief Executive Officer