Published on 17 May 2017.
RAM Ratings has reaffirmed the AAA/Stable rating of Midciti Sukuk Berhad’s (Midciti Sukuk) Sukuk Murabahah Programme (the Sukuk) of up to RM3.0 billion in Nominal Value (2014/2044). As Midciti Sukuk is a special-purpose financing vehicle of KLCC Real Estate Investment Trust (KLCC REIT or the REIT), the rating of the Sukuk reflects the credit profile of the REIT.
During the review period, KLCC REIT maintained its leverage ratio at a healthy 0.16 times, underscored by a net property income (NPI) margin that has consistently stayed above 95%, which is reflective of the REIT’s triple-net lease (TNL) arrangements with Petroliam Nasional Berhad (PETRONAS) for most its assets. Given the REIT's strong and stable operating cashflows of more than RM400 million per annum, its coverage ratios are anticipated to remain resilient, with its fixed-charge coverage ratio and funds from operations financing coverage ratio staying at current levels of above 7 times and 0.34 times, respectively. KLCC REIT’s balance sheet remains lowly leveraged at 0.16 times – principal of RM300 million due on 25 April 2017 has been partially refinanced, keeping its annual rollover rate at about 31% over the next 2 years.
The remaining lease terms of more than 9 years of both the PETRONAS Twin Towers and Menara 3 PETRONAS – that are longer than the industry average – mitigate current weaknesses in the office and retail property sectors. Despite increased vacancies in both the Menara 3 PETRONAS retail podium and Menara ExxonMobil within the REIT’s portfolio as at 1Q FY Dec 2017, occupancy rates are envisaged to improve in 2H 2017, given that the management has already identified potential tenants for the vacant space. That said, the loss of rental income in fiscal 2017 is unlikely to be material and will only have a minimal impact on KLCC REIT as respective gross rental revenues from Menara 3 PETRONAS retail podium and Menara ExxonMobil accounted for only about 6-7% of the REIT’s total revenue for fiscal 2016.
Based on RAM’s methodology for parent-subsidiary rating links, we view the relationship between PETRONAS and the REIT as “close”, underpinned by strong parental support from the former and its representation on the boards of KLCC Property Holdings Berhad (KLCCP) and the manager of KLCC REIT. Further, PETRONAS is also the head lessee of most of the REIT’s assets, with long-term, TNL agreements. Going forward, we expect the REIT to maintain its stable earnings growth, supported by its high asset quality backed by long-term lease agreements.
Midciti Sukuk is the financing vehicle of KLCC REIT and has no operations of its own. It depends on inter-company payments to meet its obligations. Following a corporate restructuring by KLCCP that had led to the establishment of the REIT in April 2013, the KLCCP Stapled Group was formed, where the shares of KLCCP were stapled to units of the REIT by a single “stapling deed”.
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