Dear valued Unitholders,

Financial review

2016 marked the 10th anniversary of Hektar REIT as a public listed real estate investment trust on Bursa Malaysia. Hektar REIT has shown a decade of stability, providing unitholders with solid performance and undisrupted quarterly income distributions. Hektar REIT has maintained its high distribution yield of approximately 7% since listing (10 years average distribution yield = 8%). However, as we cautioned in last year’s annual report, 2016 has proven to be Hektar REIT’s toughest year in its 10-year existence.

A combination of a weak economy and increased competition have resulted in Hektar REIT’s realised net profit decreasing from RM44.7 million in 2015 to RM41.5 million in 2016, a reduction of 7%. Realised earnings per unit decreased from 11.16 sen to 10.37 sen. However, net income increased from RM4.8 million to RM43.2 million, as there were fair value loss recorded in FY2015, arising from revaluation of investment properties.

Operating environment and market update

Our flagship mall, Subang Parade, which has been our bedrock since Hektar REIT’s listing on Bursa Malaysia in 2006, has taken the biggest hit from the soft retail sentiment and increased competition from existing and new malls. Its revenue dipped by 5% from RM52 to RM49 million. For Subang Parade, we had to make a difficult choice of either allowing for rental reductions for selected retailers or face the reality of increased vacancies. On the bright side, occupancy remains high at 93%, consistent with historical trend and affirming that Subang Parade’s position as a premier neighbourhood mall has not changed.

Retail space in Kuala Lumpur has doubled since last year from 7.6 square feet per capita to 16.7 square feet per capita, whilst retail space in Klang Valley has grown from 6.7 square feet per capita to 7.9 square feet per capita. This means that retailers now have better negotiating leverage. Coupled with a soft retail market where shoppers are more prudent in their spending, rental rate now is suppressed. Retail Group Malaysia had downgraded most of their quarterly forecast in 2015 and 2016, and has also indicated that 2017 will continue to be a challenging year as consumers contend with costlier goods and services amid a weaker ringgit.

Based on feedback we received from industry players, retailers now prefer to enter either new or refurbished malls rather than older but more stable malls. In view of this, we have decided to undertake a RM40 million asset enhancement initiative (“AEI”) for Subang Parade, which will revitalise the mall, as well as increase its net lettable area by 5% (approximately 25,000 sq ft). The new wing will boast an array of new offerings, especially from the food and beverages (“F&B”) segment. Scheduled to complete by mid-2018, we are confident that this will provide Subang Parade with the much-needed boost.

We are pleased to report that in 2016, our malls in second-tier towns in Kedah and Johor have improved their respective revenues which served to mitigate the grey performance in Subang Parade. This validated our belief that malls in second-tier towns are more resilient and the extent of the impact from the global economy is less felt in these areas.

Wetex Parade has achieved full occupancy in 2016 despite challenging retail conditions. Renewals and new tenants at the mall were secured for more than six months ahead of expiries. The mall has also continuously introduced new brands to its shoppers, which include Kenny Rogers Roasters, Jipangi, and Sushi World in 2016. The management is currently in the midst of exploring the recalibration of the retail and hotel area to maximise yield from the asset.

Moving forward, we have commenced the AEI for our mall in Kulim at a cost of RM23 million. Targeted to complete in August 2017, the revamped Landmark Central will have an additional 20,000 sq ft of net lettable area plus refurbished flooring, painting and overall infrastructure improvement of the existing building. Landmark Central is the only purpose-built mall in Kulim and has been showing good reversion rates. The management hopes to bring the mall to new heights with the completion of its refurbishment.

Acquisition plans

As for inorganic growth, we executed a sale and purchase agreement to acquire 1Segamat, located in Segamat, Johor for RM104 million, on 10 June 2016.

At this price, the property yield is 7%. We expect 1Segamat to be our positive story for the year as the mall has a lot of room for improvement. In the short term, we are looking at replacing single-store local retailers with national and international chains which can provide better rentals. Even as we speak, a few reputable international retailers have voiced interest in doing business in 1Segamat. This class of retailers used to be hesitant in coming to secondtier towns. However, our success in bringing retailers like Sushi King and Baskin Robbins to Wetex Parade in Muar, which continue to thrive after many years, has convinced the aforementioned retailers of the viability of doing business in malls in second-tier towns. This bodes well for Hektar REIT as a whole, as our focus now is acquiring more malls in the said second-tier growing towns. In the longer term, we are looking at increasing the lettable footprint of 1Segamat, as well as improving its aesthetics to increase its appeal, revenue and simultaneously, its value.

Undisrupted distribution

Hektar REIT maintains a policy of paying out at least 90% of our distributable net income in four quarterly distribution payments throughout the year. We should clarify that distributable net income is net income excluding non-cash items, such as fair value adjustments and items under MFRS 117, an accounting standard implemented in FY2010 (see notes to the accounts for more details). For FY2016, net income is higher than the net distributable income.

Despite challenges in 2016, our Board has decided to continue distributing 10.5 sen per unit to you, our treasured unitholders, as a reward for your continued belief in us. We now ask for your patience and support in the coming year, as we expect it to be even more challenging than 2016, and the quantum of our future quarterly distribution payout may be affected.

Turbulence ahead

We trust you appreciate that investment in a REIT is a long term game, and to date, the REIT has been providing undisrupted stable distributions for a decade now. However, from now henceforth, we expect some turbulence coming our way as the global political and economic scene has become precarious; we are unsure as to how the macroeconomic changes will affect investor sentiment and the resultant impact on retail sector. We are also keeping a close eye on the mushrooming of retail space, especially in Klang Valley and how this will affect us in the long term. However, rest assured that we are continuously monitoring the changes in the internal and external economic environment and will review and make adjustments which are necessary for us to adapt, survive and continue prospering.

Notwithstanding the above, we expect the economy to recover in 2018 and we remain committed to extract the best values from all our assets in our portfolio.

Acknowledgements

It is a great honour for me to pick up the baton from Dato’ Jaafar bin Abdul Hamid, our former Chairman and founder who passed on in January 2017. Having taken the role of Chief Executive Officer since listing of Hektar REIT until April 2016, he leaves us with a great legacy and a strong team, who will strive to continue the vision and missions that he had set for the company since the incorporation of Hektar Group. His presence and wise counsel will be deeply missed.

On behalf of the Board of Directors, I wish to also thank our management team and staff for their commitment and dedication to their work. Our sincere appreciation is also extended to our retailers, vendors and business partners. Your contributions and support shall ensure that Hektar REIT remains a defensible, safe and preferred investment for our investors.