• We maintain BUY on Hektar REIT with revised FV of RM0.86/unit from RM0.64/unit based on lower WACC assumption of 7.4% (previously: 8.1%) in our DDM and after incorporating higher occupancy rates for its assets under management. Current unit price of RM0.53 represents a discount of 48% from our FY25F NAV per unit of RM1.10. We see upside potential ahead with yield improvements of existing assets under management from new tenants secured for existing shopping malls which will raise the average occupancy rate coupled with the rent contribution of Kolej Yayasan Saad after acquisition has been completed in July 2024. Our revised FV has taken into consideration a 3% premium from an unchanged 4-star ESG rating.
• Distributable income for FY25F and FY26F has been raised by 13.1% for FY25F and 9.8% for FY26F to factor in higher occupancy rates of malls.
• FY25F distribution yield projected to rise to 9.0% from 6.5% in FY24F. This offers an attractive spread of 4.9% from the 10-year MGS yield of 3.9%.
• Acquisition of Kolej Yayasan Saad is an asset secured under a 30-year quadruple net lease agreement. With a 2.5% escalation in rent per annum, this asset is poised to provide an effective yield 8% over the lease period. The diversification into education asset provides a stability in rental income over a longer lease period compared to shopping malls.
• Management is focused on three-pronged strategy: i) portfolio optimization to unlock value from its existing property portfolio, ii) enhancing yield accretion of assets and iii) optimizating capital from diversification of sources of debt funding and reducing borrowing cost.
• Overall occupancy rate of assets has been stable at 87.2% in 1Q24 and 2Q24. Moving ahead, new tenants have been acquired for Subang Parade, Mahkota Parade, Central Square and Segamat Central. These new tenants will be opening for business in 3Q24 and 4Q24, consequently increasing the overall average occupancy rate of its malls to 92% by end of FY24.
• New tenants (The Farm, Oriental Parade, Game-On and Padi House) secured for Subang Parade will occupy a total floor area of 40,266 sq ft. Meanwhile, Mahkota Parade will see new tenants (Chagee, Dubuyo and Moto Guzzi) leasing a total floor space of 3,752 sq ft, eventually lifting the occupancy rate of the mall to 97.4% from 95%. For Central Square mall in Kedah, a new tenant, WonderPark occupying a substantial area of 31,314 sq ft has been secured, and this will improve the mall's occupancy rate to 90.4% by end FY24. Elsewhere, in Johor, Segamat Central, The Store will be opening at the mall occupying a space of 22,425 sq ft, thus raising the asset's occupancy rate to 88.6% from 75.9%.

Source: AmInvest Research - 11 Nov 2024