8 things I learned from the 2020 KLCCP Stapled Group AGM

Listed on Bursa Malaysia, KLCCP Stapled Group is a diversified REIT with a particular focus on offices. It owns a number of iconic and prime assets in the Kuala Lumpur City Centre (KLCC) including Petronas Twin Towers, Suria KLCC shopping mall, and Mandarin Oriental, Kuala Lumpur. Suria KLCC is a well-known tourist attraction in the city that drew more than 48 million visitors in 2019 alone.

The share price of the group was rather resilient in the past few months although the country was caught in a perfect storm of COVID-19, political turmoil, and a crash in oil prices. I attended the KLCCP’s AGM to find out how the REIT planned to navigate the rough waters ahead. Here are eight things I learned from the 2020 KLCCP Stapled Group AGM:

1. The group’s revenue improved marginally by 1.2% year-on-year to RM1.4 billion in 2019. Likewise, profit excluding fair value adjustments increased 1.0% to RM848.1 million over the same period.

The office segment was the major revenue contributor in 2019, followed by the retail segment. Suria KLCC and Petronas Twin Towers are the group’s crown jewels which contributed 33.0% and 29.8% to the group’s total revenue in 2019 respectively.

Source: 2020 KLCCP AGM presentation slides

2. The group has delivered consistent and increasing returns to its shareholders in recent years. In 2019, distribution per stapled security increased further by 2.7% year-on-year to 38.0 sen. Based on the group’s share price of RM7.90 at the end of 2019, the group’s distribution yield is 4.8%.

The average annual total returns over the past five years was about 8.3%. Although CEO Datuk Hashim bin Wahir mentioned that the group is always on the lookout for yield-accretive acquisitions, there were no major acquisitions recently.

Source: 2020 KLCCP AGM presentation slides

3. In 2019, the group’s gearing ratio was one of the lowest among Malaysian REITs at 17.8%. Its total borrowings stood at RM2.3 billion. The average maturity period of financing was extended from 4.1 to 4.6 years in 2019 as the group refinanced two tranches of KLCC REIT’s RM500 million sukuk murabahah programme in April 2019. The CEO replied to a shareholder that the group will continue to maintain 84% of its borrowings at fixed rates despite the current low interest environment as buyback and reissuance costs may outweigh cost savings from lower interest rates.

4. The KLCC precinct is positioned as an integrated oil and gas hub that targets long-term quality tenants. Its good accessibility to public transport helps fend off competition from the impending oversupply of office spaces in the city such as the upcoming PNB 118 skyscraper. In February 2020, the lease of Menara ExxonMobil to ExxonMobil Exploration and Production Malaysia Inc was renewed for another three years at RM8.50 per square foot after the expiry of its nine-year lease.

5. The group secured a new six-year lease with its sponsor, Petroliam Nasional Berhad (PETRONAS), at Menara Dayabumi. The lease can be renewed for another two successive terms of six years each.Construction works of the façade entrance at Menara Dayabumi and a 10-metre pedestrian bridge that connects the building to Central Market began during the year to enliven the retail podium.

The CEO responded to Minority Shareholder Watch Group that an impairment amounting to RM2.8 million was made due to delayed construction works while they finetuned their investment strategy to respond to ‘challenging office market conditions and economic uncertainties’. The redevelopment is expected to be completed by 2023. Further, PETRONAS has identified a number of potential tenants to replace the office space that was vacated by Khazanah Nasional Berhad.

6. Suria KLCC undertook an ‘anchor-to-specialty’ exercise to reconfigure about 120,000 square feet of retail space, that was previously occupied by Parkson, to approximately 80 specialty fashion, food and beverage, and cosmetics stores. Phase one of the reconfiguration exercise was completed and opened to customers in January 2020. The reconfigured space is fully tenanted and the mall’s occupancy rate stood at 98% as of February 2020. Phase two of the exercise is targeted to be completed by the end of this year.

The CEO did not disclose the rental rate previously enjoyed by Parkson but implied that rental rates of anchor tenants are generally lower than those of specialty stores. In my opinion, there is still room for Suria KLCC to grow in the future. He also did not foresee Isetan, another anchor tenant of Suria KLCC, having to leave the mall as this existing outlet is its flagship store in Kuala Lumpur.

7. To achieve an optimum tenant mix and ensure there is ‘Always Something New’ for shoppers, Suria KLCC brought in 33 new tenants and launched the luxury men’s precinct in 2019. The new precinct, that occupies 38,000 square feet, reported more than a 30% year-on-year increase in sales in 2019.

The CEO added that occupancy costs (as a percentage of rent to sales) of tenants in Suria KLCC averaged about 19%.Rental relief has been negotiated with tenants affected by COVID-19 on a case-to-case basis and no further details were provided. The office segment was mildly impacted by the pandemic as four of the group’s office towers were leased on triple net agreements.

8. Mandarin Oriental in Kuala Lumpur was hit hard by the virus and it undertook several cost optimisation measures including a voluntary salary reduction for its employees. The hotel was closed for two months in the first half of 2020 during the movement control order in Malaysia and only resumed its operations in May. To adapt to a new normal, the hotel is actively looking at organising more small and medium-scale events. The hotel is currently promoted to locals and domestic tourists as a staycation destination as the country’s borders are closed to foreigners. The hotel intends to lock in advance payments through enhanced promotions to improve its liquidity.

The near-term future of the hotel is dim as it faces competition from the building of new luxury hotels in the vicinity. Its occupancy rate rose from 55% in 2018 to 64% in 2019, which marked the first full year of operations after the completion of renovations, but the rate should fall in 2020 due to the pandemic.

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Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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