FW: RAM Ratings reaffirms AAA/Stable rating of sukuk issued by KLCC REIT's funding conduit

 

Published on 30 May 2018.

RAM Ratings has reaffirmed the AAA/Stable rating of Midciti Sukuk Berhad’s (Midciti Sukuk) Sukuk Murabahah Programme of up to RM3.0 billion in Nominal Value (2014/2044) (the Sukuk). 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. Midciti Sukuk has no operations of its own and depends on inter-company payments to meet its obligations.

The reaffirmation of the rating is premised on our expectation that the REIT’s performance will stay resilient, underscored by strong and steady assets. As at end-December 2017, the REIT’s net property income (NPI) margin remained superior at 95%. Coupled with a strong operating cashflow of above RM400 million annually, the REIT’s superior coverage ratios, as demonstrated by its fixed charge coverage ratio and funds from operations financing coverage ratio of 7.49 times and 0.38 times, respectively, are among the highest compared to peers. Furthermore, KLCC REIT’s gearing and leverage ratios are still low at 0.17 times and 0.14 times, respectively. Going forward, we expect the REIT’s balance sheet to stay robust, even with the RM500 million principal coming due in April 2019, as the management has expressed its intention to partially or wholly refinance the amount. 

Based on RAM’s methodology for parent-subsidiary rating links, we view the relationship between Petroliam Nasional Berhad (PETRONAS) and the REIT as “close” by virtue of the former’s strategic ownership of the latter’s assets, particularly the PETRONAS Twin Towers. The close relationship is also clearly demonstrated by PETRONAS’s position as the main lessee for PETRONAS Twin Towers and Menara 3 PETRONAS. PETRONAS’s lease agreements are long term and on a Triple-Net-Lease basis. In February 2017, ExxonMobil had renewed its lease for another nine years at the same rental rate, but for a reduced occupied NLA of 60% from 100% previously. The remaining 40% of NLA was taken up by PETRONAS in April 2017, with a favourable head lease term of 18 years. All the REIT’s office properties have remaining lease terms of at least eight years, which provide cashflow stability and visibility in the medium term. They also significantly reduce the risk of negative rental reversion and a prolonged void period, particularly given the current negative outlook on the office sector.

In FY Dec 2017, Menara 3 retail podium’s occupancy rate declined from 89% to 80%, while a two-month temporary vacancy at Menara ExxonMobil had resulted in a marginal drop in the REIT’s gross revenue. The overall impact on the REIT is immaterial as the Menara 3 retail podium and Menara ExxonMobil contribute only 6% and 7% of the REIT’s total revenue, respectively. Going forward, the REIT’s profit is expected to remain resilient, supported by its high asset quality and favourable lease agreements.

The recent revision of the Guidelines on REITs by the Securities Commission Malaysia to allow REITs to conduct development activities does not significantly benefit KLCC REIT. Being part of the KLCC Stapled Group (the shares of KLCC Property Holdings Berhad and the REIT are stapled together by a “stapling deed”) already enables it to undertake development activities via the Stapled Group. This structure gives the REIT a pipeline of future asset developments which support the management’s targeted yield. 

 

Analytical contact
Evelyn Quek
(603) 7628 1095
huijiun@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my