9 things we learned from KLCCP Stapled Group’s 2017 AGM

We always wondered why unitholders love to attend KLCCP Stapled Group’s annual meetings until we attended one for the first time at the Mandarin Oriental this year. The meeting was scheduled to start at 10:30 a.m. but, to our surprise, the venue was already packed when we arrived at 8:15!

What attracts the hordes of unitholders to turn up for the AGM every year without fail? The free flow of food and beverages, and a very sizeable freebie (an RM100 cash voucher this year). We even noticed people bringing their own containers to pack more food after they had their fill. Many continued to eat until 10:30 and left after taking their meal without attending the meeting. Amazing.

KLCCP Stapled Group is a stapled trust comprising KLCC Property Holdings Berhad (KLCCP) and KLCC REIT. KLCCP’s property portfolio includes Suria KLCC (a shopping mall), Mandarin Oriental (a hotel), Kompleks Dayabumi, and Menara Maxis (both office buildings). The company also owns KLCC REIT Management Sdn Bhd (the manager of KLCC REIT) and subsidiaries providing facility management services and car park management services.

KLCC REIT is an Islamic REIT that invests in a Shariah-compliant portfolio of income-producing properties. The REIT currently has three assets under its portfolio: Petronas Twin Towers, Menara ExxonMobil, and Menara 3 Petronas — all of which are office buildings.

Here are nine things we learned from KLCCP Stapled Group’s 2017 AGM.

  1. KLCCP Stapled Group has the largest market capitalisation — RM14.984 billion as at 31 Dec 2016 – of any stock under the REITs sector of Bursa Malaysia. The Group accounts for 34% of the entire Malaysian REIT sector. From 2012-2016, KLCCP Stapled Group has returned a CAGR of 21.2% to unitholders.
  2. 2016 revenue and net profit remained flat year-on-year at RM1.34 billion and RM826.8 million respectively. The group distributed 95% of its distributable income with a distribution per stapled security of 35.65 sen, a 2.9% increase from 2015.
  3. The group’s office segment recorded the highest contribution to total revenue at 44%. All offices in its portfolio maintained 100% occupancy. The properties continued to command top quartile rental profiles and managed to secure high quality tenants on long term tenancies for Petronas Twin Towers, Menara 3 Petronas, and Dayabumi. In line with the repositioning of Dayabumi as a Grade A office, the conversion of atrium spaces at Level two to five of Dayabumi was completed providing an additional 43,000 square feet of office space. This is expected to contribute to a 6% increase in revenue for Dayabumi and a 0.4% increase to the group’s overall office segment.
  4. KLCC REIT secured a new nine-year lease with ExxonMobil Exploration & Production Malaysia Inc that will occupy 60% of Menara ExxonMobil. The management is also in the process of securing a lease with a single tenant to lease the remaining 40% within 1-2 months.
  5. The group’s retail segment remained stable as the second highest contributor at 35% of total revenue. Even though the occupancy rate of Suria KLCC mall dropped slightly from 98% to 96% — due to renovation at the luxury men’s and women’s departments at Level 1 and construction of a high street fashion zone at Level 2 — it was still able to record tenant sales of RM2.5 billion and 48 million in customer footfall. This was mainly due to a strategic focus on bringing key brands on board, refreshing the tenant mix to match current shopping trends, and a reconfiguration of the mall’s layout to enhance leasing opportunities and the customers’ shopping experience. The occupancy rate of Suria KLCC is expected to maintain at 96% or higher, which is significantly higher than the reported retail average occupancy of 89.2% in Greater Kuala Lumpur.
  6. Revenue from the group’s hotel segment declined 4% year-on-year and made a loss before tax of RM3.2 million. The loss was impacted by a one-off RM2.7 million write-off on furniture and fittings. Occupancy rate in Mandarin Oriental dropped slightly from 48% in 2015 to 47% in 2016. This was mainly due to hotel renovations, softer corporate demand, and increased competition from new luxury and boutique hotels. On the whole, the hospitality industry is facing a challenging 2017 as average room rates remain depressed due to competition and an increase in tourism tax.
  7. A representative from the Minority Shareholder Watchdog Group (MSWG) highlighted that revenue from Mandarin Oriental decreased from RM155.8 million in 2015 to RM149.5 million in 2016. In addition, 2016 recorded a loss before tax of RM3.2 million compared to a profit before tax of RM3.9 million. The board replied that the hotel is focusing on food and beverage promotions to drum up demand, and the relaunch of its newly renovated lounge and cocktail bar to attract a younger crowd. The completion of the club room and suite renovations by 2018 will also play a role in improving performance.
  8. A unitholder noted that all the Group’s segments were growing well except the hotel segment. He asked for the occupancy rates of Mandarin Oriental for 2014 and 2015 as the figures were not disclosed in the annual report. Chairman Krishnan Menon answered that the occupancy rate was 63% (2014), 48% (2015) and 47% (2016). He reiterated that the decrease in occupancy rate was due to the hotel rooms undergoing renovation and that the first phase of the renovation will be completed by July 2017.
  9. Another unitholder noted that KLCC REIT had a healthy gearing ratio of 16.2% and asked whether the board intended to acquire more property during the property market downturn. The chairman replied that, in his opinion, the property market is not depressed at the moment as seen by the rising property prices in KL. However, the management will consider buying if they find a worthwhile acquisition.

At this AGM, we witnessed two very different kinds of attitudes. Some unitholders were concerned about knowing more about the business they invested in while others were only interested in the freebies and free food on offer.

Like Benjamin Graham’s famous quote: “Investment is most intelligent when it is most business-like”, we believe that the most successful investors are the ones who take ownership of their investments and take the time to manage them diligently. (But the food and vouchers are still always most welcomed!)

With additional article contributions by Mitra Chen.

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Calvin Soon is a value investor and a partner of Invesmart Network PLT. Away from investing, he owns a consultancy business. Calvin believes that anybody can achieve financial independence if they use the right investment process and understand what they invest in.

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