HIGHEST RETURN ON EQUITY OVER THREE YEARS (JOINT WINNER): REIT: KLCCP Stapled Group - Third Win For REIT With Iconic Assets

This article first appeared in The Edge Malaysia Weekly, on December 17, 2018 - December 23, 2018.
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KLCCP Stapled Group (KLCCP) has won The Edge BRC corporate award for highest return on equity (ROE) over three years in the REIT sector for the third straight year.

From FY2014 to FY2017, the weighted three-year compound annual growth rate (CAGR) of KLCCP’s ROE was the highest single digit among eight BRC members in the REIT sector.

Nonetheless, the group’s net profit was lumpy over the period in review — from RM1.16 billion in FY2014, it rose to RM1.4 billion in FY2015 but dipped to RM1.01 billion in FY2016 before recovering marginally to RM1.013 billion in FY2017.

In terms of revenue, the growth trend was similar to that of net profit. In FY2014, revenue amounted to RM1.35 billion but fell to RM1.34 billion in FY2014. From FY2014 to FY2017, revenue grew in a linear trajectory to RM1.37 billion.

Back in 2013, KLCC Property Holdings Bhd undertook a corporate exercise that restructured the group’s assets into a stapled entity known as KLCCP Stapled Group, in which existing ordinary shares of KLCC Property Holdings were stapled together with units of KLCC REIT.

KLCCP owns a diverse property portfolio largely within the KLCC development, including properties like leading shopping mall Suria KLCC and luxury hotel Mandarin Oriental Kuala Lumpur. It also has 33% equity interest in Menara Maxis.

Outside the KLCC development, KLCC Property owns Kompleks Dayabumi, which is located in the older central commercial area of Kuala Lumpur.

For the cumulative nine months ended Sept 30, 2018, KLCCP saw its revenue increase marginally by 2.5% to RM1.03 billion while net profit grew 1.7% to RM541.25 million. The improvement was attributed to revenue growth in all segments, according to a report by Hong Leong Investment Bank Research. For example, its office segment gained 0.9%, it achieved 100% occupancy rate in Menara ExxonMobil and its retail segment added 2.1% on the back of higher rental rates and occupancy.

KLCCP’s hotel segment grew 6.5%, driven by the return of full room inventory after refurbishments.

Nevertheless, the Malaysian REIT sector remains challenging with oversupply seen in office and retail properties. However, those with sustained occupancy rates, long-term leases, rental step-ups, positive rental reversions and prime assets in strategic locations are still expected to perform well, KLCCP says in its 2017 annual report.

It was also aware that any overnight policy rate (OPR) hike could dampen the appeal of investing in REITs but says that it may also provide investors with an opportunity to accumulate quality REITs.

“Our strategy is to tap market opportunities as they become available, overcome operating challenges, manage our cost structure and drive profitable growth and sustainable value creation in line with our targets,” KLCCP adds in its annual report.

The REIT expects the office segment to remain stable and be primarily anchored to its triple net leases for the Petronas Twin Towers, Menara 3 Petronas and Menara Dayabumi.

The substructure works of its Phase 3 refurbishment of Kompleks Dayabumi was completed last year.

“We will continue to seek quality anchor tenants for our new development and complete the greening efforts of Petronas Twin Towers and Menara 3 Petronas for full Green Building Index Certification by 2018,” KLCCP says.

It is also expecting consumer confidence to be boosted and sees growth in the retail landscape this year.

“Suria KLCC is expected to remain resilient with its strong fundamentals, being a prime shopping mall strategically located within the iconic belt and catchment area of Kuala Lumpur City Centre,” the company says.

Meanwhile, it believes the hospitality segment will continue to face a challenging environment on the back of more competition in the industry.