KUALA LUMPUR: Analysts from two research houses – AMReasearch and OSK Research are maintaining their “buy” calls (AMResearch – RM1.23 fair value; OSK – RM1.29 target) on Hektar Real Estate Investment Trust (REIT), which derives its income from the retail sector because of dividend yields and prospects moving forward. Hektar owns three malls in Malaysia – Subang Parade (Subang Jaya, Selangor), Mahkota Parade (Melaka) and Wetex Parade (Muar, Johor).

AMResearch upgraded its target price because: “At current share prices, Hektar is providing a yield of 10% to its FY2010F DPU, or a difference of 570 basis points against 10-year MGS bonds.”

OSK’s rationale for an upgrade is due to improving valuation on M-REITs. M-REITs are now trading at an average forward dividend yield of about 8.4% versus 8.9% previously. The company’s realised income before tax increased by 8% in the same fourth quarter in the previous financial year from RM8,512,644 to RM9,170,064, mainly due to higher rental rates in Subang Parade.

AMResearch told theedgeproperty.com that it also expects Mahkota Parade to fetch higher rental rates once the refurbishment of the mall is completed like for Subang Parade after its renovation.

Both research houses said Mahkota Parade’s weaker performance, which posted a -23% rental rate reversion and a slightly lower occupancy rate, was attributed to its ongoing refurbishment, which is expected to be completed in April.

However, OSK Research said the weaker performance of Mahkota Parade was hardly surprising because of the absorption risk that the Melaka retail market is facing since early last year from some of the bigger and newer malls like Dataran Pahlawan amid weaker consumer spending. Analysts said year-on-year visitor traffic to Makhota Parade also dropped by 5.3% and saw rental revision dropping by 13%.

However, analysts noted that Hektar REIT’s other malls saw improvements.

AMResearch said: “Subang Parade maintains its status as the flagship shopping mall for Hektar with full tenancy.” OSK added that Subang Parade’s occupancy is now at 100%, with an additional 3% in 4Q2009 rental rate reversion (flat for FY2009).

Meanwhile, Wettex Parade saw the most improvement in terms of an increase in occupancy rates. OSK said occupancy rates at Wettex Parade increased to 90.1% from 83.1% with a 20% increase in 4Q2009 rental rate reversion (+8% for FY09).

Overall portfolio occupancy for all its malls are maintained at 95.8% because the weakness in Mahkota Parade was offset by growth in Wettex Parade. Overall rental rate reversion fell 5% in FY2009, mainly due to the weaker performance of Mahkota Parade.

AMResearch said Hektar is in talks to buy two more retail malls in suburban areas in Peninsular Malaysia. There was also mention in an analyst’s briefing that the group was in talks with township developers and other asset managers.

OSK said it is confident of Hektar’s sound business model because of its healthy distribution of tenancy expiry portfolio, which will cushion any potential weakness from the weak retail market and pallid consumer spending. AMResearch said going forward, 72% of Hektar’s rental income is secured with 28% or about 260,000 sq ft of rental space up for renewal this year.