I believe that most people in Malaysia are still not invested in the stock market. At most they are indirect investors through unit trusts and investment-linked insurance products.

For some reason, stocks are seen as risky and for most people rightly so. Compare it with the KL property market in the past few years and you see little reason to be in the stock market.

So how is it that the fund managers can always flip out their charts to show how shares outperform all other asset classes?

There is an interesting article in Yahoo Finance today. It is written in the American context, extracts of an interview with Roger Ibbotson. I had to look up Wikipedia and found out that Ibbotson is a Yale finance professor who is an expert in capital markets. Although Warren Buffett never really thought highly of academics, there are some good observations in the article.

The thing that caught my attention was the comparison between Stocks and Bonds. The extra risk you take when investing in stocks is still the same as before, but what is unusual about the last 30 years in the US is that the bond market often outperformed the stock market over long periods. According to Ibbotson, we won’t see this again.

Why not?

In 1980s the US saw double-digit yields, and when those yields dropped, the prices of bonds went up making it a great period for bond investors. But today yields are 3% to 4%. So we’re starting out with a low yield that is more likely to rise than fall, which means you won’t get any capital gains from owning bonds. Many investors in the US are no doubt disheartened with stocks, causing a flight to safety which will not favour them in the long run.

Ibbotson is putting his money where his mouth is. He manages funds which invest in less liquid stocks, those that trade less frequently:

“But research shows that the stocks that are more liquid historically have lower returns, while those that are less liquid have higher returns. We’re buying companies that have strong fundamentals but are relatively less liquid, companies that there’s less interest in, the ones not talked about in your magazine. Effectively, you get an out-of-favor stock, and if it ever comes into favor, you get a big kick-up in the returns.”

Most fund managers would shy away from this approach but it is the wise contrarian who often has the last laugh.

Photo Credit: http://falcetti.photoshelter.com/image/I0000YIwaIV0Ic44

Whether or not we are in a bear market rally remains to be seen. I must admit I’ve been rather passive throughout the rally, and I’ve held on mostly to my positions with the exception of CIMB which I feel is getting overdone. The CIMB story has run ahead of the earnings and at 4.5x Net Tangible Assets, so has the share price I feel.

If the market does take a dive, the stocks that get hit the hardest will be the large caps on high multiples – CIMB, SIME etc. Be that as it may, I could be wrong. But why take the chance when there are other better buys in the market?

I did do quite a bit of thinking in the past months and I believe Jim Rogers is right when he says:

“Anytime you think you’ve become a financial genius – when, in fact, you simply have had the good luck to turn a profit – it is time to sit back and do nothing for a while. If you stumble upon success in a bull market and decide that you are gifted, stop right there. Investing at that point is dangerous, because you are starting to think like everybody else. Wait until the mob psychology that is influencing you subsides.”
Jim Rogers, A Gift to My Children, P74-75

It made good sense to me, and I re-adjusted my portfolio a little to position better for dividends, bought a few shares in higher dividend and financially strong companies such as Plenitude, NCB, Manulife and Petronas Dagangan.

Who knows whether Charles Nenner will be right this time? But what if he is? Anything is possible! And we as investors need to allow for that possibility.

It is at this point that we would do well to remember Benjamin Graham’s margin-of-safety principle, which is that favourable difference between price on the one hand and appraised value on the other. The margin-of-safety will help us to absorb “the effect of miscalculation or worst that average luck”.

That said, are you ready if we are looking at a 40-50% market decline? If this turns out, a 20-30% decline in your portfolio may not be such a bad thing as it could present the “Intelligent Investor” with another opportunity to make more money. Of market fluctuations, Benjamin Graham has this to say:

“In any case the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third ore more from their high point at various periods in the next five years. A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.”

Sound advice indeed. So does it matter if Charles Nenner is right or wrong?

RHB Research has recently published an interesting report on the life insurance sector in Malaysia.

Currently there are 16 life insurance companies in Malaysia and the major players are Great Eastern, AIA, Prudential and ING. The industry size is around 11.9m policies with annual premiums of RM17.4 billion. RHB Research expects insurance premiums to grow by 12-13% per annum for 2010 to 2012.

Malaysia has a relatively low market penetration rate, with premiums to GDP ratio of 3%. This compares to 7.9% for Singapore, 13.9% for Taiwan and 9.1% for South Korea.

Rising healthcare cost and the use of life insurance as a savings plan will play an increasingly important role to up the penetration rate in Malaysia. It is believed that Muslims consider life insurance to be “haram” or sinful and this has somewhat inhibited the growth of life insurance in Malaysia. However with the introduction of Family Takaful, there is now a strong potential for the life sector to grow.

In addition the government has continued to support the sector in its 2010 Budget. The income tax deductible amount was raised from RM6k to RM7k per annum. This is to encourage greater savings and protection among Malaysians and reduce burden on the government as our population ages.

If you are interested to profit from this growing sector, most Malaysian banks can offer some sort of exposure to the life insurance market. However, some other purer plays listed on Bursa Malaysia include:

* Total Assets includes policyholder funds

LPI Capital (which owns Lonpac Insurance) trades at a huge premium, much like its parent company Public Bank Bhd. On Bursa Malaysia, we can’t really buy exposure to the leading life players such as Great Eastern, AIA and Prudential. So looking at this, Allianz and Manulife are both decent bets for long term exposure to the Malaysian Life Insurance market. Both are controlled by leading global life companies and have the expertise to build their operations over here. In addition, Manulife has just formed an asset management division which is currently managing unit trust funds and seeking client mandates for managing equity funds in the Asia region. It would give exposure to the Malaysia funds management market in the longer term.

Bursa Malaysia stock codes shortnames:
- Allianz Malaysia Berhad (ALLIANZ)
- LPI Capital (LPI)
- Kurnia Asia (KURASIA)
- Manulife Holdings Berhad (MANULFE)
- MNRB Holdings Berhad (MNRB)

Disclosure: The author holds shares in Manulife Holdings Berhad.

In a somewhat unexpected development, Starhill REIT is proposing to sell its Starhill Gallery and Lot 10 properties to Starhill Global REIT (which is listed on SGX).

YTL is looking to position Starhill REIT as a pure Hospitality play, while Starhill Global REIT will be a Retail play.

Starhill Global REIT is around 29% owned by YTL Corporation. This is an extract from the announcement to Bursa Malaysia:

The Proposed Rationalisation will enable Starhill REIT to concentrate on the acquisition of the prime hotel properties located both in Malaysia and internationally, in areas including Phuket, Bali, Saint Tropez and other global destinations, subject to attractive valuations which will provide yield accretive returns to the unitholders of Starhill REIT. The hospitality assets that have been identified for potential injection into the Trust would expand Starhill REIT’s portfolio to approximately RM1.6 billion.

The Heads of Agreement between vendor & purchaser provides for a proposed sale price of RM629 million and RM401 million for Starhill Gallery and Lot 10 respectively to be satisfied by cash and/or Convertible Preference Shares in Starhill Global REIT. The selling prices are pretty near current book value. This is what the Manager says:

The adjusted net book value of the Properties based on the audited financial statements as at 30 June 2009 and after adjusting for the value of 42% or 490 of the existing car park bays in Starhill Gallery to be retained by J.W. Marriott Hotel Kuala Lumpur is RM1,055.5 million. Accordingly, on completion of the Proposed Disposal, Starhill REIT is expected to realise a net loss on disposal of RM25.5 million for the financial year ending 30 June 2010. The original cost of investment of Starhill Gallery and the Lot 10 Property by Starhill REIT was RM480.0 million and RM341.0 million, respectively. Starhill REIT completed the acquisition of the Properties on 16 December 2005 on the listing of Starhill REIT on the Main Board of Bursa Malaysia Securities Berhad. The Proposed Disposal will unlock the value of the Properties as it is expected to realise an estimated distributable income of RM228.9 million for the financial year ending 30 June 2010.

Following disposal, Starhill REIT will be just left with its JW Marriot Hotel & The Residences @ Ritz Carlton Service Apartments. With all that proceeds, I hope they will buy some hotels at decent prices. I presume some of them will be YTL connected assets, I’m always concerned when it comes to related party transactions.

But at the same time, I don’t want to end up with another cash vehicle in my portfolio… got enough of this with my overly conservative investment strategy.

The RM1.6 billion mentioned sounds like they will gear Starhill REIT with close to a billion ringgit eventually to buy all those identified assets. But its hard to tell at this stage as we don’t know how much Cash/Convertible Prefs it will be getting from Starhill Global.

This development should be watched closely by Starhill REIT unitholders.

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This post follows our interview post with Al ‘Aqar KPJ REIT. Here is a snapshot of Alaqar REIT’s property portfolio as at 31 December 2008.

KPJ Ampang Puteri Specialist Hospital BuildingAmpang, SelangorN/AN/A
KPJ Damansara Specialist Hospital BuildingPetaling Jaya, SelangorN/AN/A
KPJ Selangor Specialist Hospital BuildingShah Alam, SelangorN/AN/A
KPJ Ipoh Specialist Hospital BuildingIpoh, PerakN/AN/A
Puteri Specialist Hospital BuildingJohor Bahru, JohorN/AN/A
KPJ Johor Specialist Hospital BuildingJohor Bahru, JohorN/AN/A
Perdana Specialist Hospital BuildingKota Bharu, KelantanN/AN/A
Kuantan Specialist Hospital BuildingKuantan, PahangN/AN/A
Sentosa Medical Centre BuildingKuala LumpurN/AN/A
KPJ Kajang Specialist Hospital BuildingKajang, Selangor Darul EhsanN/AN/A
Kedah Medical Centre BuildingAlor Setar, KedahN/AN/A
KPJ Penang Specialist Hospital BuildingBukit Mertajam, Pulau Pinang20,234.317,524.9
Seremban Specialist Hospital BuildingSeremban, Negeri Sembilan16,82314,651.6
KPJ International College BuildingNilai, Negeri Sembilan19,223.811,939.7
Selesa BuildingJohor Bahru5,156.670,691.0
Tawakal Hospital BuildingJalan Pahang, Kuala Lumpur2,827.811,141.4
KPJ Tawakal Specialist Hospital BuildingJalan Sarikei, Kuala Lumpur8,284.031,228.3
Bukit Mertajam Specialist Hospital BuildingBukit Mertajam, Pulau Pinang12,455.93,917.1
Taiping Medical Centre BuildingTaiping, Perak4,439.23,641.8
Damai Specialist Hospital BuildingKota Kinabalu, Sabah3,157.63,713.0
Path:

The Board of Directors of Alaqar KPJ REIT

1. Can you share with us a bit about Johor Corporation, Al-Aqar KPJ Reit (“Alaqar”) and KPJ Healthcare Berhad? – how each member of the group fits together? Does KPJ Healthcare hold any stake in Damasara REIT Managers Sdn Bhd?
Alaqar was set up in June 2006 with KPJ as sponsor. In that year, KPJ sold six assets worth RM 481m to Alaqar, and Alaqar was listed on Bursa Malaysia. These assets were sold partly in cash and partly in units, therefore KPJ received units in Alaqar, amounting to around 49% of Alaqar’s capital.

Alaqar, Damansara REIT Managers and KPJ are different entities under the umbrella of Johor Corporation. Damansara REIT Managers is responsible for managing Alaqar REIT.

2. Do you think KPJ will sell down to below 20%?
This would be up to KPJ. It is not for us to say.

3. For example, KPJ Healthcare announced recently that it was buying Bandar Baru Klang Medical Centre for RM38 million. How does the group decide which vehicle is entitled to buy which hospital?
I can’t comment as this deal is with KPJ and not Alaqar.

4. What will be Al-Alaqar KPJ’s gearing position following completion of the recent acquisitions (ie Seremban Specialist Hospital, Taiping Medical Centre, Damai Specialist Hospital in KK etc)?
Upon completion, the third acquisition amounting to RM394m will result in a gearing position of 44% of total assets.

5. What is your target or optimal gearing level?
This really depends on the expansion strategies that we are undertaking. Gearing may be undertaken where the right acquisition opportunity presents itself. Furthermore, current interest rate cost of around 4%+ is attractive so we also want to take advantage of this opportunity. When we decide to make an acquisition, we will make plans and ensure an adequate buffer for the purchase. But we will try to cap our gearing level at 45%.

6. Is the income for Al-Aqar KPJ sourced purely from property rental? or the operations of the hospital itself?
90%+ is from property rental and the remaining is from profit sharing of income from fixed deposits. Alaqar only owns the property and is not involved in the operations of the hospitals.

7. Currently KPJ is tenant for all the hospitals under Alaqar. Will all future assets acquired by Alaqar be run by KPJ or can another company be brought in to do so?
We are not restricted to only have KPJ as our tenant. But since they have a history and good track record with us, why don’t we just stick with them? After all, we enjoy a very good partnership with KPJ. However, this will not stop us from exploring opportunities with other hospital operators.

So far, KPJ have been very good tenants and prompt paymasters.

8. How are the property rentals determined – is it by arms-length negotiation with your tenants?
It is based on market price and formula. In the initial stage, the rental is determined at a certain yield, say 7%. Then there is a yearly increment which gives us an increase every year and rental rate will be reviewed every three years.

Our leases go for 15 years with the option to renew another 15 years and every 3 years we have a rental revision based on a formula. It is calculated by Market Value of the Property x (MGS + 2.88 basis points).

Even in the event of an economic crisis, we will still be able to meet our Minimum distribution promise of 6.5 sen per unit to unitholders. Therefore investors are protected during the good and bad times.

We are not so affected because of our tenant nature of business. Regardless of the economy, people will still need healthcare. Also, our assets are rented out on a Gross Floor Area basis, so in this aspect we maximize our rental income. Contrast this to other commercial property where the landlord gets rental on the space they let out, which gives rise to vacancies when times are bad.

9. Does KPJ Healthcare tenant all of your hospitals?
Yes, the KPJ group tenants all our hospitals.

10. Would you look into any other assets other than hospitals?
Actually, our focus is not only on hospitals but on healthcare-related assets. Meaning we could acquire nursing colleges, factories that produce medicine, hotels with syariah compliance operations to cater for health tourism – anything related to healthcare. But we find that among all these assets, hospitals provide the best returns. So we classify hospitals as Class A assets in our REITs.

Currently, we hold 20 assets comprising of 18 hospitals, one college and one hotel.

11. According to your Group Structure, Al-Aqar KPJ REIT pays Maintenance and Management Fees to Healthcare Technical Services Sdn Bhd (HTS) as the “Maintenance Manager”. Who owns this company and what exactly does this company do?
HTS was the property and maintenance manager for KPJ hospitals before the setting up of Alaqar REIT. According to guidelines, if a property falls under the Board of Valuer Act, then we need to appoint a registered valuer to manage it.  However, hospitals do not fall under property governed by the Board of Valuer Act therefore we are required to instead appoint a specific party as property manager. So we appointed HTS because of their vast experience in hospital maintenance.

Not all our assets are maintained by HTS. For example, our hotel and college falls under the Board of Valuer Act, therefore a registered valuer is appointed to manage it.

12. Is HTS a subsidiary of KPJ group?
No, HTS is no longer a subsidiary under KPJ, but they are all within the Johor Corporation group.

13. What are the elements you look for in a property/hospital building before investing in it?
The population catchment is an important factor to consider. The Ministry of Health (MOH) will conduct a market study of an area before approving the construction of a hospital to ensure there is a market need. So we look at this quite carefully.

14. How about looking into factors such as the projected selling price of the asset?
Yes, we do. But in this business, we will hardly sell an asset. The healthcare industry is a long-lasting business and we are more likely to hold our assets. However, we would look into whether the asset has any land which can be further developed such our Ampang Puteri asset, which is a prime area with a large piece of vacant land adjoining it.

15. Are there similar REITs in the Asia region focused on hospitals & medical centres?
I have heard that there are only two in Asia. One is in Singapore and the other is our company. But I believe every REIT has its own special features.

16. Is the market for Hospital properties a large/liquid one? For example, how saleable are your hospitals should you decide to exit an investment?
According to our agreement, the First Right of Refusal goes to KPJ. If we want to buy or sell any asset, we must first offer it to KPJ. If KPJ declines, then we may approach other parties.

17. What is the current Management Fee charged by Damansara REIT Managers following the proposed change late last year?
Previously our Management Fee was based on 0.15% of NAV but this was revised recently. Now we have a new scale which is 0.10% to 0.125% of GAV. I believe we are among the lowest of all REITs managers in the market.

18. Would you consider developing your own properties? Would you consider acquiring properties under construction or overseas assets?
According to guidelines, REITs cannot be developers or financiers. But since we have land (eg. Ampang Puteri), perhaps we may consider development through another vehicle.

We will also consider properties under construction; however, we are only allowed to invest up to 10% of our assets, according to guidelines.

19. Does Alaqar have any other expansion plans lined up locally or overseas?
We do have expansion plans in place but are waiting for the economy to pick up before we proceed.

20. How are your hospitals valued generally – is it by Discounted Cash Flow, Yield etc?
Both. We are required by the SC to have our assets valued by an independent registered valuer. And we use both methods as check and balance.

21. Which are some of your assets that require more capex?
Daily maintenance expenses are borne by KPJ. But Total Asset Replacements such as lifts, air-conditioning, would be borne by Alaqar REIT. These are items which affect the overall building system.

As investors, we usually try to get a feel for the future earnings of the company we invest in.

If we can’t predict future earnings, we can at least find out how a company plans to increase its earnings. There are basically several ways:

1. Expand into new markets (eg new country)
2. Sell more of its products in existing markets
3. Coming out with new products
4. Cut costs
5. Turn around, close or sell off a losing operation

As Peter Lynch says, the word most frequently seen with “earnings” is “surprise”. The truth is that we do not need to predict earnings to be a  successful investor.

If you do not know already, check to see how your company plans to increase its earnings. Keep an eye out from time to time to see if such plans are working out.

A company which I follow more closely is AMMB Holdings. It announced its half-yearly results couple of days ago.

- Decent loan growth of 6.1% during the 6 months period (or 9.2% yoy)
- Cost-Income Ratio of 40% is substantially down from last couple of years
- Net NPL ratio of 2.2%
- NTA / Total Assets Ratio of 8.0% is super strong by any global standards
- AMMB is raising its full year Net Profit guidance now to RM920-950 million for its FY2010

AMMB’s management has told us what they are doing to improve their business and so far things are on track. The story in the banking sector reinforces what they are saying.

Even when AMMB share price nears RM5.00 (PE of around 15x), I’m wouldn’t be too quick to cash in just yet because its earnings growth story is very much in tact. There’s talk of a decent dividend payout policy… certainly the bank has more than enough capital for this.

AMMB’s Quarterly Press Release is always worth a read. You can download here.

Hektar is led by its Chairman & CEO, Dato Jaafar Bin Abdul Hamid.

1. What is the percentage of Hektar REIT & Hektar Asset Management owned by Fraser Centrepoint group? How is Fraser Centrepoint involved in the management of Hektar REIT?
Frasers Centrepoint is a Strategic Partner of the Hektar Group. Frasers Centrepoint Trust owns a 31% cornerstone stake in Hektar REIT while Frasers Centrepoint Limited’s subsidiary owns a 40% stake of Hektar Asset Management Sdn Bhd, manager of Hektar REIT. Currently, Frasers sits on the Board of Directors and the Executive Committee of Hektar Asset Management and plays a strategic role in the development of Hektar REIT.

2. In your 2008 Annual Report, you mentioned that there were some 84 tenancies expiring in FY2009, almost 30% of the total tenants in your portfolio (or 11% of NLA). Have most of these been renewed?
As of the second quarter ended 30 June 2009, we have 42 new and renewed tenancies representing about 6% of our Net Lettable Area (NLA).

3. What is the current occupancy rate for Subang Parade & Mahkota Parade?
Currently, the occupancy in Subang Parade is 100.0% while in Mahkota Parade it is 96.6%. Our third property, Wetex Parade has an occupancy of 89.6% which is currently undergoing a tenancy re-mixing exercise, that is, we are changing the tenant mix. Overall, our occupancy average is 97% as at 30 June 2009.

4. How much of Subang Parade does Hektar REIT own (in terms of NLA)?
Hektar REIT’s NLA is roughly 1.1 million square feet, of which Subang Parade’s NLA is 474,612 sq ft as at 30 June 2009. In terms of sold lots, less than 5.9% of Subang Parade has been sold and we have been steadily acquiring back the sold lots.

5. Which centres do you consider to be your key competitors for:
Subang Parade is a neighbourhood mall, in that it is focused on the surrounding neighbourhood. It is half the size of KLCC, so in terms of size, it is appropriate for the markets around Subang Jaya. As the largest neighbourhood mall in that area, it has indirect competition from the regional malls which are usually 1 million square feet. In our last market research, we have found that most Subang Jaya residents would consider MidValley or 1Utama as indirect competitors or alternative for Subang Parade.

Mahkota Parade is the leading shopping centre in Melaka. Within the last 2+ years, a new mall has opened across the street in the form of Dataran Pahlawan. While initially providing some competition in the form of an additional choice for shoppers, keep in mind that both shopping centres are located in the centre of commercial Melaka and adjacent to the historical sites. As such, over time, the area becomes a shopping precinct, similar to the Bukit Bintang area in KL.

Wetex Parade is the only department store-anchored shopping centre in Muar town and as such, does not face any direct competitors in the town. We have therefore invested in Wetex by introducing new and exciting retailers in our current tenant mix make-over.

6. Wetex’s occupancy seems to be quite low (around 83% as at 31/12/08). Are you re-developing or re-positioning the centre to improve this?
As part of any new acquisition, we essentially conduct market research to determine the gaps within the tenant mix. Currently, we are implementing changes in Wetex Parade and introducing new retailers. This process should take about a year. As mentioned earlier, Wetex Parade’s occupancy has moved up to 89.6% as we are steadily changing the tenant mix of the shopping centre. We have introduced new and exciting retailers including the Elephant Bean Kopitiam, The Chicken Rice Shop and other new F&B outlets.

7. How is visitor traffic measured in your centres?
We use a system known as FootFall, a camera-based system from the U.K. It is in use in over 500 shopping centres worldwide and essentially it consists of a dedicated camera at key entrances of the mall linked to a computer server which captures traffic going in and out of the centre. Last year, we recorded 17.9 million visits to our shopping centres using this method.

8. Generally, have rentals in your centres increased in 2009 (compared to 2008)? What is the outlook for 2010?
So far our rental reversions for the year are flattish with roughly 42 new or renewed tenancies with a -2% rental decrease compared to the previous rental period. However, year-to-date, Hektar’s revenue is 10% higher than the corresponding period in 2008. They key to note in our business model is that we have a turnover rent system – almost 89% of our tenancies in Hektar REIT are on some form of turnover rent which means we collect a certain percentage of their retail sales if it exceeds a threshold. As a result, this provides some buffer on the revenue side, particularly if retailers are having a solid year. For example, last year in FY2008, we collected RM1.6 million in turnover rent in addition to our tenancy rental income. More importantly, even if retailers ask for a lower rental period now, if the economy picks up and the retailer sales improve, we can collect turnover rent later.

9. Your current borrowing levels represent around 40% of your total assets, which is higher than most of your peers in the REIT sector? Are you comfortable with this? Any plans to raise more equity in the near future? What is your target or optimal gearing level?
In general, we are comfortable with our gearing level mainly because we are comfortable with our financing. Our debt is financed by an Al-Murabahah instrument which is structured as a fixed-term tenure, annual floating rate term debt. Currently our debt is divided into 2 tranches which expire in 2011 and 2013, so Hektar does not have any refinancing risks in the short term. Our current weighted cost of capital is 4.06% from these 2 tranches. We also have a solid working relationship with our financiers. We will study raising equity in the future for prospective acquisitions, considering the scope for upside of the acquisition and the equity market.

10. Are there any acquisition opportunities for regional shopping centres in the Klang Valley? Would you look at acquiring neighbourhood centres?
We look at both regional and neighborhood shopping centres throughout Malaysia. We believe the best scope for growth lies outside of the Klang Valley as it is the most developed; however, we do study potential acquisitions within the Klang Valley, particularly for opportunities to refurbish old shopping centres. Our Subang Parade refurbishment has been a significant success for the investors, retailers and consumers and we hope to replicate that success in potential turnaround projects.

13. Which part of Malaysia would be a priority for you in terms of acquiring a centre?
As mentioned earlier, we are looking at all types of shopping centres in Malaysia. We can’t specify an area at this time, as we are still in negotiations for a couple of potential acquisitions. I cannot divulge any more details at this time.

14. What are the elements you look for in a property before investing in it?
The target property must have decent fundamentals; as a start, the market catchment must be identifiable with decent prospects in terms of population growth, employment prospects and household spending; second the property itself must have decent physical attributes such as adequate parking and even a simple physical layout.

We then study the tenant mix – whether the current tenant mix is meeting the demands of the target market. If we can identify gaps or deficiencies, we can see opportunities in improving the tenant mix after acquiring the property.

Hektar’s competitive advantage is our access to retailers. We have relationships with more than 300 retailers in our shopping centres and access to more within the region. We have established a track record with these retailer groups and as a result are able to negotiate their entry into new markets and new shopping centres.

When we examine potential property targets, we always look for ways in which we can leverage our retailer relationships and leasing to create value for the shopping centre in the post-acquisition phase. For example, we are executing on this aspect in Wetex Parade currently.

15. Your MER appears to be at the high end of the spectrum compared to other REITs. Any plans to bring this down?
Our MER is 1.37% in 2008. One of the reasons why our fees are slightly higher is that we spend more on market research compared to other REITs. The reason is due to our retail focus.

Hektar is the first retail-focused REIT in Malaysia and therefore has a slightly different business model; one of the differences is that so far, we have acquired multi-tenant properties. We may only have 3 shopping centres in our portfolio, but over 300 retail tenancies in total. Keep in mind, each tenancy represents a growth opportunity in that whenever a tenancy is renewed, it may result in a higher rental rate. For a lot of other REITs, some of their properties are sale/leasebacks in that they acquire the property and lease it back to the same tenant. This means only one tenant per property in most sale/leaseback scenarios. Therefore, when we look at a shopping centre with say, an average of 100 tenancies, there is a lot more research which is required. Part of the administrative expenses for Hektar REIT goes towards market research expenses which we conduct on new and prospective markets.

So long as we are producing results for Hektar REIT, we do not intend to cut down our market research expenses at this time.

16. Is the public spread issue in Hektar REIT now resolved?
Yes, we have resolved the public spread issue through our filing to Bursa Malaysia on 22 May 2009. We stated at that time that 28% of units were held by 1,093 public unitholders.

17. Does Hektar REIT have significant CAPEX requirements on any of your assets in the near future?
We are currently commencing on a RM30 million refurbishment of Mahkota Parade in Melaka. Mahkota is now 15 years old and in need of a revitalisation. We plan a complete makeover of Mahkota Parade including the flooring, ceiling, lighting, signage and customer amenities. We will increase the car park by 12% to accommodate higher traffic and will aim to improve the ambience of the shopping centre overall.

We intend to carry out this refurbishment at night, from 10pm to 7am, so it will not disrupt the operations of our retailers during the day. As a result, we plan to stagger the refurbishment in phases, which is expected to be completed in May 2010.

The project will be handled by the same team which handled Subang Parade and which eventually won a Silver Award in the Development and Design category in the International Council of Shopping Centres Asia Shopping Centre Awards in 2008.

Hektar REIT Financials

Having sank to a low of RM0.73 during last year’s meltdown, its unit price has since gained some 45% to close at RM1.06 yesterday. Even at the current price of RM1.06, Hektar’s distribution yield works out to be 9.6%, a very enticing proposition for yield hungry investors.

Basically Hektar is currently the only Malaysian REIT that is Retail-focused. It is a pure shopping centre play and intends to stay that way. Currently the funds owns 3 shopping centres:

1. Subang Parade, Selangor (NLA 473,611 sq feet)
2. Mahkota Parade, Malacca (NLA 466,527 sq feet)
3. Wetex Parade, Johor (NLA 173,725 sq feet)

In the case of Subang Parade, there are a few lots which are not owned by Hektar but we understsand that Hektar is looking to acquire those lots.

If like me you’ve been to Subang Parade in the 1980s, you will no doubt be amazed at the transformation that has taken place in recent years. Walking into Subang Parade now, you get the sense that it is customer-friendly, well maintained, has a good variety of shops and good access.

This transformation underscores the capabilities of Hektar Asset Management to ADD VALUE to its shopping centres.

Hektar Asset Management Sdn Bhd, Manager of Hektar REIT, shares with us Hektar’s Value Creation Model which we summarize as follows:

1. Tenant Re-mixing – By owning an entire shopping centre or a large part of a centre, a shopping centre owner is in a position to decide what type of tenants should be in the centre to best serve the needs of the customer.

In the case of Hektar, tenancies are continually being reviewed (in fact in Hektar centres, most tenancies are only given up to 3 years). Since acquiring Subang parade, Hektar has introduced a number of key tenants such as Celebrity Fitness, Orlando, Voir, SenQ, Kenny Rogers Roasters, Coffee Bean and Starbucks. This has no doubt made the centre more credible and “happening”. Subang Parade is now a Lifestyle plus Convenience value proposition.

2. Tenant Relocation – For example in Subang Parade, Hektar closed the Food Court, relocated Toys R Us to the old Food Court and relocated HSL Electronics to the old Toys R Us lot. By doing so, the shopping centre traffic circulation was improved between the anchor tenants and HSL was able to build a large “Circuit City” concept store.

3. Asset Enhancement – Increasing Net Lettable Area by capital improvements, reconfiguring low-yielding zones into higher yielding lots (eg re-configuring a low rental space in Mahkota Parade and converting it into a new zone with specialty shops which gives higher rental).

4. Refurbishment – Notice the fancy floor tiles, nicer toilets and improved amenities in Subang Parade? All this makes the shopper feel good and want to come back.

Aligning the Interests of Tenants with Shopping Centre owner….

Hektar’s rental model includes a Base and Turnover Rent. Typically tenants pay a base rental and also an amount based on their Sales Turnover. This motivates centre management to “promote sales” for their tenants – the more the tenant gets, the more rental the owner gets.

Pure Retail Play…

Hektar focuses on regional and neighbourhoold shopping centres in Malaysia. Going forward its acquition strategy is as follows:
1. Acquire turnaround shopping centres and add value to them
2. Acquire stabilized shopping centres which are yield accretive to its portfolio

Shopping centres which are well-positioned are highly resilient in any economic condition.

Research in developed countries have shown that high quality Regional and Neighbourhood Shopping Centres typically outperform other property asset classes such as Office and Industrial properties during economic downturns. Such centres also offer exposure to economic growth. Where consumer spending power is improving, it generally translates into higher retail sales and centres which dominate their catchment areas stand most to benefit.

Based on Hektar’s research, there is a huge retail opportunity in Malaysia especially outside KL, Selangor and Penang. KL is a well-supplied market with NLA (Net Lettable Area) per capita of around 14 sq ft.

Comparatively, Johor is at 3.6 sq ft, Malacca is 3.4 sq ft, Perak is 2.1 sq feet, Sarawak is 1.1 sq ft  while Terengganu is only 0.5 sq ft.

Indeed Hektar is serious in its research. It analyses traffic in its shopping centres and undertakes consumer research periodically, analysing its catchment area, shopper preferences, feedback and so on.
 
More Equity would be Nice…

Current net borrowing position of RM283 million works out to be 70% of its total equity of RM402 million (as at 31-Dec-08). Personally I would like to see gearing at a lower level. Even so, Hektar should have no shortage of options in terms of buying shopping centres with part equity-swap and so on.

Duplication… the Westfield way
Hektar models itself partly on the highly successful Westfield Group of Australia. Westfield is the largest REIT in the world and is a pure retail play. CapitaMall Trust, the largest REIT in Singapore is also a pure retail play, while Link REIT of Hong Kong is also largely retail.

This makes Hektar unique in Malaysia. Looking at other successful centres – Mid Valley Megamall, 1 Utama and Sunway Pyramid – these are great centres but the owners have not been able to duplicate their model across multiple locations.

Hektar has the potential to “make it big” in the next 10 years. There will be a time when the market is more conducive to capital raising and Hektar should be able to access the much-needed firepower to grow its asset base. If Subang Parade is an indication to go by, then we have some exciting things to look forward to!

Snapshot
HEKTAR is the eigth largest REIT on Bursa Malaysia with a current market capitalization of RM340 million.

Disclosure: The author holds units in Hektar REIT.