Investment Highlights

We project higher distributable income in FY25F with new tenants secured for existing shopping malls, coupled with the rent contribution of Kolej Yayasan Saad after completing the acquisition of the asset in July 2024. We maintain BUY on Hektar REIT with an unchanged TP of RM0.86/unit based on DDM with a WACC assumption of 7.4% Current unit price of RM0.53 represents a discount of 47% from our FY25F NAV per unit of RM1.00. Our revised TP has taken into consideration a 3% premium from an unchanged 4-star ESG rating.

• Results within expectation accounting for 70.9% of our estimate. 9MFY24 distributable income of RM19.3mil fell by 16% YoY attributed to higher finance cost, one-off acquisition fees for Kolej Yayasan Saad, Melaka and professional fees incurred for the acquisition. QoQ, 3QFY24 distributional income was lower by 56.8% to RM4.3mil. This was due to a normalized rental revenue from Kolej Yayasan Saad compared to a lumpy 1-year rent recognised in 2QFY24 after the acquisition was completed in July 2024.
• Average occupancy rate of malls dipped slightly to 85.6% in 3QFY24 but is expected to improve in 4QFY24 with new tenants secured. The drop-in average occupancy rate for malls to 85.6% in 3Q24 from 87.2% was largely due to the decline in occupancy of Central Square and Segamat Central. If based on committed tenancies, the average occupancy rate for the malls will be higher at 88.8% in 3QFY24. New tenants have been secured for Subang Parade, Mahkota Parade, Central Square and Segamat Central. These new tenants are expected to increase the overall average occupancy rate of its malls to 92% by end of FY24.
• Majority of tenancies expiring in FY24F have been renewed with a 7.2% positive rental reversion in 3QFY24. From a total of NLA of 592,757 sq. ft due to renewal in FY24F, 73.3% have been renewed with the remaining anchor tenants under the final stage of negotiation.
• FY25F distribution yield projected to rise to 8.9% from 6.5% in FY24F. This has considered the expected improvement in the average occupancy rate of its malls and the rental from the completed acquisition of Kolej Yayasan Saad, an asset secured under a 30-year quadruple net lease agreement with a 2.5% escalation in rent per annum. FY25F distribution yield of 8.9% offers an attractive spread of 5.1% from the present 10-year MGS yield of 3.8%. 

Source: AmInvest Research - 27 Nov 2024