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Following our recent article on Hektar REIT, below are the interview transcripts which provide more insight into some key areas.

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