2017

Dear Unitholders,

It is my pleasure to present to you the Annual Report for Hektar REIT for the financial year ended 31 December 2017 (“FY 2017”), on behalf of the Board of Directors and management of Hektar Asset Management Sdn. Bhd. (“HAMSB”), the manager of Hektar REIT (“the Manager”).

Chairman's Letter to Unitholders from Hektar REIT's 2017 Annual Report.

Operating environment and market review

The year has been dominated by low consumer sentiment, driven by inflationary pressures. The weakened Ringgit, on a slow albeit sustained recovery trail from its lowest level in 19 years, raised costs for manufacturers and retailers. As consumers anticipated further increases in price levels despite stagnant income, MIER’s Consumer Sentiment Index (CSI) hovered at below 90 throughout the year. 2017 also saw the exit of several well-known international retail brands from the Malaysian market.

The popularity of online shopping, particularly amongst urban Malaysians, has accelerated in 2017. Driven by the allure of convenience and price-sensitive promotions, consumers exchanged traditional brick-and-mortar channels with online ones. In their competition for market share, online retailers have responded to the increased demand by offering deep discounts and flash sales.

Nevertheless, stock of retail space continues to be on the rise, with Bank Negara Malaysia projecting an additional 140 new shopping malls in the country by 2021. Intense competition amongst existing shopping malls, compounded with the prospect of an additional 6 million square feet of retail space entering the market within the next 3 years, gave rise to concerns over impending oversupply of retail space in the country. This eventually prompted the Cabinet to instruct Dewan Bandaraya Kuala Lumpur (DBKL) to temporarily freeze approvals for new shopping malls from November 2017, within the Kuala Lumpur vicinity.

Despite shedding some occupancy due to vigorous changes to the retail mix, the portfolio enjoyed an overall Occupancy Rate of above 95% in 2017.

Whilst challenges continue to persist, the industry remains fundamentally strong with many opportunities available to its players. All in all, Hektar REIT’s properties have been able to weather the challenges handed by 2017 through prudent management and focus on value creation and delivery. Despite shedding some occupancy due to vigorous changes to the retail mix, the portfolio enjoyed an overall Occupancy Rate of above 95% in 2017. This was a result of continued efforts in realigning the retail mix to changing consumer lifestyle and demands. Over the year, we have actively shifted our retail mix to one with a higher emphasis on consumer lifestyle, as we listened and adapted to changes in consumer habits. These were supported by investments made in Asset Enhancement Initiatives, which were aimed at transforming existing assets to improve the shopping experience for customers and the overall business of our tenants.

As of 31 December 2017, revenue stood at RM125.5 million, an increase compared to the same period in the preceding year.

Financial review

Hektar REIT’s financial performance in 2017 was commendable given the tough operating environment. Whilst the effects of the challenging operating environment were felt in the earlier quarters of 2017, the year ended on a highly encouraging note as the benefits of our investments and efforts led results into a positive direction. As of 31 December 2017, revenue stood at RM125.5 million, an increase compared to the same period in the preceding year. With tenant remixing at Kulim Central (formerly known as “Landmark Central”) due to the shopping mall’s additional net lettable area from the AEI which was successfully completed in December 2017, as well as tenant remixing undertaken at Subang Parade in preparation for its upcoming AEI. Total realised income was RM40.1 million for FY2017, a slight decrease when compared to the preceding year of 2016. As these initiatives were employed for the long-term growth of the respective properties, however, realised income is expected to rise as their benefits begin to positively affect the bottom line from 2018 onwards. This shall be supported by the cost and efficiency improvements that have been carried out. The improvements included energy saving initiatives, which have resulted in quick, significant and sustainable reductions in operating costs.

Undisrupted distribution

Hektar REIT continues to maintain its 11-year track record of undisrupted distribution since the IPO in 2006. Despite the fluctuations in today’s retail environment, we have managed to deliver consistent, undisrupted distribution for our unitholders. Behind the history lies our commitment to deliver the best value to you, in good times and tough times. In the face of shortterm challenges, we remain ever focused on forging ahead. The level of distribution represents a balance between good returns today and sensible investment to realise medium- and long-term growth. Whilst much of that growth is expected to be organic via enhancement of current assets, we are also ready to acquire high potential targets, whenever the right opportunities appear.

This year, Hektar REIT has declared a full year Dividend Per Unit of 9.60 sen. With the commitment of delivering sustainable distribution and continuous growth in total return to unitholders, the Management has succeeded in distributing a total of almost RM411 million between 2006 and 2017, including final distributions for 2017. In FY2017, whilst market forces have subdued reversion rates, there have been notable improvements in turnover rent, due to the success tenants enjoyed in our properties.

Staying true to our shopping centres’ motto of “It’s Our Place”, we remain committed to creating retail experiences that meet the expectations of consumers. We understand our role and responsibilities within the various communities we are located, and strive to remain an important component of the Malaysian lifestyle. We shall achieve this by embracing change and continually improving to deliver value to all.

Enhancing our portfolio for long-term growth

The success of Hektar REIT malls depends on our capability to adapt to market trends and stay relevant to our shoppers and the community. In the fourth quarter of 2017, we completed the enhancement of Kulim Central in Kedah. It was an initiative that included conversion of common and car park areas into retail space for a wider range of fashion, household, services as well as food and beverage offerings. This was one of many in our series of initiatives toward driving growth organically. On this note, Subang Parade is currently undergoing a tenant remixing exercise which will be supported by upgrading and expansion works that, when completed, would further solidify its position as a key destination within not only Subang Jaya, but also Klang Valley.

In 2017, we also welcomed Segamat Central (formerly known as 1 Segamat) into our portfolio. We are highly encouraged by the potential of this shopping centre, and its acquisition represents part of our efforts in growing through yield-accretive acquisitions.

Sustainable growth through effective corporate citizenship

We realise that growth created will only be sustainable with high standards of corporate citizenship.

Our workforce continues to be diverse, operating within an environment that is also inclusive and conducive. We have made investments in training and development of our workforce to keep it in touch with best practices, latest and upcoming trends as well as changes in the regulatory, market and technological landscape.

We have also embarked on numerous initiatives in reducing waste, conserving resources as well as minimising our carbon footprint. We have undertaken efforts in raising water management awareness amongst not only our personnel, but also retailers in our properties, whilst installing water-efficient features and continuously scouring for leakages. Through effective management of energy consumption, movement towards an energy-efficient equipment base as well as exploration of alternative sources of energy, we have managed to substantially lower electricity consumption and are confident of even further reductions in the future.

In 2017, we continue to play our part in the respective communities surrounding our properties. When parts of Johor were hit by major floods in early 2017, we partnered with the Red Crescent Society through converting an area within Wetex Parade into a collection centre for public donations and contributions. Taking advantage of our properties’ position as centres within their respective communities, we have also contributed to saving lives by hosting several blood donation campaigns for the National Blood Bank. Furthermore, Subang Parade, Mahkota Parade and Central Square have also provided much festive cheer during the Ramadhan and Deepavali seasons to the needy within Subang Jaya, Melaka and Sungai Petani respectively by reaching out and directly providing much-needed contributions.

The road ahead

We are confident that Malaysia’s turn to emerge as an advanced nation will arrive. Urbanisation is already rapidly changing the landscape across the country, turning towns into cities. With growth, we also expect the emergence of a sophisticated and demanding populace.

Our presence across the west coast of Peninsular Malaysia positions us best for the new urbanised Malaysia. We have faith in the growth of the cities and towns where we operate, and are confident of our ability to meet the demand for worldclass retail experiences in those locations.

Thus, we are continuing to pursue enhancements not only in the physical aspects of our assets, but also in the quality of the retail mix we offer. Investments in these areas shall position us favourably in the hearts and minds of the communities we serve and deliver sustained value to you, our unitholder.

Acknowledgements

To conclude, we are proud to have continued to push forward despite the challenges of 2017. I would like to thank our fellow board members for their wisdom and stewardship in guiding Hektar REIT forward, as well as the management and employees for their dedication and relentless hard work throughout the year. Finally, we would like to express our gratitude to our unitholders, business partners, tenants and shoppers for their continued support and belief in Hektar REIT and its aspirations.

Michael Lim Hee Kiang
Independent Non-Executive Chairman