KLCCP Stapled Group is Malaysia’s largest REIT. Its annual general meeting (AGM) is usually one of the more routine ones in Malaysia (in a good way) partly because the REIT is very stable. This means investors holding positions in this REIT can worry less and sleep soundly at night. The group owns good-quality assets in prime locations in Kuala Lumpur such as the iconic and touristy Petronas Twin Towers.
Compared to pre-pandemic levels, the KLCCP’s distribution in 2021 only dropped 11.6% while the distributions of IGB REIT, Pavilion REIT and Sunway REIT declined 34.2%, 48.1%, and 57.6% respectively in 2021.
Although 2021 was fraught with the lingering effects of the pandemic, border closures, and prolonged movement restrictions, the group continues to benefit from the position of Kuala Lumpur City Centre as an oil and gas hub.
Here are seven things I learned from the 2022 KLCCP Stapled Group AGM.
1. Revenue declined 5.5% year-on-year to RM1.2 billion because of the periodic movement restrictions amid several movement control order periods in Malaysia. On the other hand, distribution per stapled security grew 12.0% from 30.0 sen in 2020 to 33.6 sen in 2021 because of lower operating and finance expenses in 2021.
2. he office segment remained the key revenue contributor to the group and was backed by its long-term tenancies. For instance, the triple net lease agreements with Petroliam Nasional Berhad (PETRONAS) at PETRONAS Twin Towers and Menara 3 PETRONAS was extended for another 15 years to 2042 and 2041 respectively. Almost all of the five strategically located offices owned by the group were fully occupied except for the 33%-owned Menara Maxis which recorded an occupancy rate of 97% in 2021. These performances were stellar against the average office occupancy rate in Kuala Lumpur at 70.2% in 2021.
Headwinds in the office industry such as new office supply in the pipeline in the Klang Valley as well as the flexible working arrangements adopted by companies have created downward pressure in office rental rates. Nevertheless, KLCCP Stapled Group is majority-owned by PETRONAS and leases some of its buildings to PETRONAS. The risk of losing its major tenant, PETRONAS, is low.
3. In 2021, the retail segment recorded an occupancy rate of 93%, which was way higher than the industrial average in Kuala Lumpur at 79.9%. In light of the COVID-19 situation in Malaysia, the amount of rental assistance offered to affected retailers grew 36% year-on-year to RM127.1 million in 2021.The amount of rental assistance will taper off in 2022 as business activities regain momentum.
The management also held campaigns to attract and reward shoppers to generate the desired footfall to the mall. Footfall to Suria KLCC has recovered to about 60% of the pre-pandemic level to date. Tenant retention of the mall will continue to be the management’s top priority. The rental reversion is expected to be positive in 2022.
At the same time, the redevelopment of the City Point Podium (an annex to Kompleks Dayabumi) has been deferred due to the unfavourable economic condition. The initial plan before COVID-19 involved the construction of a building with office and hotel elements on top of a retail podium at the site.
4. The performance of the hotel segment continued to be significantly affected by the pandemic in 2021. The occupancy rate of Mandarin Oriental, Kuala Lumpur dropped from19% in 2020 to 16% in 2021 amid an intense price war with competitors. CEO Md. Shah Mahmood added that the hotel’s occupancy rate inched up to 25.3% in March 2022 as business and domestic leisure travel resumed gradually at the end of 2021.
5. The management services segment secured more parking and facility management services in Putrajaya during the year. The CEO expected the new car parks to boost the segment’s profit by 7% in 2022. In 2021, this segment contributed to 16.0% and 2.6% of the group’s revenue and profit before tax respectively. Therefore, the additional contribution is probably insignificant.
Lot D1, the vacant commercial land located in front of Mandarin Oriental, Kuala Lumpur is currently being used as a car park to generate revenue for the group.
6. In terms of COVID-19 stimulus packages, the group received the followings from the government in 2021:
- A 10% monthly electricity rebate of about RM400,000
- Special deduction gazetted equivalent to rental deduction given to the retail tenants
- Wage subsidy
- Service and tourism tax exemption for the hotel segment
7. Construction works for an office tower atop a retail podium at Lots L, L1, and M are ongoing. The lots are situated adjacent to the KLCC Park and will be served by a mass rapid transit station in the future. Any asset injection into the group will be evaluated and may not happen so soon. More than 80% of its financing are on fixed interest rates. The changes in the interest rate will not affect the group much.
On a separate note, the rooftop solar panels at Suria KLCC generates 600 megawatts hours per year. The amount of electricity generated is able to power 250 typical Malaysian households annually. The annual savings in this electricity consumption translates to a reduction of about 360,000 kg of carbon dioxide emissions a year.
The fifth perspective
The business and consumer sentiment continues to rebound from record lows in 2020 and 2021 as Malaysia opened its borders and relaxed movement restrictions. As evident in the minimal changes in DPU from previous years, KLCCP Stapled Group is a solid and ‘boring’ dividend stock that can be added to investors’ watchlists.
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