Business

Saturday March 9, 2013

Appetite for KLCC REIT

By TEE LIN SAY
linsay@thestar.com.my


Suria KLCC into KLCC REIT in the future, which could translate into higher dividends as tax savings can be returned to shareholders Suria KLCC into KLCC REIT in the future, which could translate into higher dividends as tax savings can be returned to shareholders

IN times of uncertainty, turn to yield. The appetite for real estate investment trusts (REITs) has been on the rise, even more so with the upcoming general elections. With investors turning defensive as they shun political ambiguity, yields are invariably welcomed with opened arms.

So with the impending listing of Malaysia's largest REIT, KLCC Property Holdings Bhd in April, not surprisingly many are looking forward to be a part of this party. With a strong backer in Petroliam Nasional Bhd (Petronas) anchoring this stapled REIT to be known as KLCCP Stapled Group, institutions are clamouring to own a chunk of it.

“I should have bought it last year. It has done so well. With or without the elections, there will be appetite for KLCC Stapled REITs because of the yields and Petroliam Nasional Bhd's (Petronas) backing,” laments one fund manager.

KLCC Property has appreciated by some 6.83% on a year-to-date basis to the RM6.70 level, while on a six month basis it has increased by some 20%. The appetite for REITs has been robust over this period. On a year-to-date basis, Sunway REIT, IGB Reit and Pavilion REIT have escalated by (minus 1.94%), 4.5% and 15.83% respectively.

“We are getting lots of international investor interest and request to meet management of KLCC Property. The circular calling for an EGM should be out soon,” says one source close to the deal.

KLCC Property, which owns Malaysia's iconic Petronas Twin Towers, is completing a restructuring and is targeting to list in April the country's biggest REIT with an asset size of some RM15.4bil.

The corporate restructuring was unveiled in November, creating a so-called stapled REIT by bundling existing shares of KLCC Property and units of KLCC REIT.

KLCC REIT will take over KLCC Property's listing status and provide investors with an alternative yield play. This trust, which is three times larger than the next biggest Malaysian REIT, Sunway REIT, will not raise new money.

Part of the appeal of KLCC Property, apart from its top-notch assets, high take-up rates for its assets and superior rental yields, is also the company's strategy of adopting a low-risk and non-speculative business model in developing new properties. Basically, it will only secure a tenant first before starting any development.

Under the new stapled securities structure, the asset portfolio that will be included consist the Petronas Twin Towers, Menara ExxonMobil and Menara 3 Petronas. All these assets are wholly-owned by Petronas and have a 100% occupancy rate. Menara 3 has a 100% occupancy rate for its office portion and a 92% rate for its retail portion.

“Under an agreement with the tenants, there will be an upward adjustment in the rentals in every few years for these three assets. So investors can look forward to higher yields in the future,” says one property analyst.

On what is KLCC Property's key selling point when compared to other REITS, she says it will be the backing of Petronas and potential new acquisitions in the pipeline.

“In terms of yields, KLCC Property's share price has run up quite a bit. So the other REITS in the market now may in fact have slightly better yields,” she says.

KLCC Property, which owns Malaysia’s iconic Petronas Twin Towers, is completing a restructuring and is targeting to list in April the country’s biggest REIT with an asset size of some RM15.4bil. KLCC Property, which owns Malaysia’s iconic Petronas Twin Towers, is completing a restructuring and is targeting to list in April the country’s biggest REIT with an asset size of some RM15.4bil.

“A catalyst for the company would be the potential transfer of its assets such as Suria KLCC and Kompleks Dayabumi into the REIT in the future, which could translate into higher dividends as tax savings can be returned to shareholders,” says the property analyst.

Recently, KLCC Property declared a final dividend of 4.5 sen, bringing its dividends for the year ended Dec 31, 2012 to 16.5 sen. The new stapled security structure, KLCC Property, is committed to paying more than 90% of its distributable income as dividends.

“Dividends will be paid very frequently, every quarter. We estimate that dividend per share will jump from 16.5 sen in 2012 to 35 sen in 2014, thanks to tax savings for the 70% to 80% of its earnings that are under the REIT structure, which would be tax-exempt so long as more than 90% of its earnings are distributed as dividends. Its stapled structure thus helps to unlock otherwise trapped value,” says CIMB Research analyst Foong Wai Mun in a report.

“Management has committed to paying more than 90% of KLCC stapled REIT's consolidated distributable income from 40% previously as dividends. Although KLCC stapled REIT will not enjoy the tax incentives of a pure REIT, shareholders will still be able to reap an additional 9 sen to 11 sen dividend per share under the new corporate structure,” says a Maybank analyst.

As of Feb 23, based on the Maybank analyst's estimates, KLCC stapled REIT offers a 2014 net yield of 4.9%, versus Pavilion REIT's 4.5%, IGB Reit's 4.5% and Sunway REIT's 5%. These figures were also as of Feb 22. Since then, KLCC Property's share price has run up from RM6.10 to the RM6.70 level.

At a 35 sen dividend forecast by CIMB Research for 2014, this would translate into a yield of 5.2% for KLCC stapled REIT.

“We believe the KLCC Stapled Group deserves to trade in line with bigger-cap retail REITs such as IGB REIT and Pavilion REIT. This is due to its sheer asset size (RM15.4bil, three times the biggest REIT), largest market cap, most prime locations in Kuala Lumpur's city centre, best-in-class asset quality, best tenant in Petronas and a low-risk profile.

“Gearing is low at 15% with more than RM5bil of debt headroom for acquisitions before hitting the 50% assumed statutory limit. We believe fund managers will not be able to ignore the stock by its sheer size alone, and would want to hold a stake,” adds Foong.

CIMB Investment Bank Bhd and Citigroup Global Markets Ltd are the principal adviser and international financial adviser, respectively, for the deal.

KLCC Property announced results that were ahead of expectations for its fourth quarter to Dec 31, 2012, with its net profit increased by 8.67% to RM99.60mil from RM91.65mil in the previous quarter.

This brought the full-year earnings to RM1.46bil on the back of better performance from the retail and office segments. Revenue for the quarter stood at RM330.99mil, bringing 2012 revenue to RM1.178bil.

In a filing with Bursa Malaysia, KLCC Property said revenue from office rental increased 39.1% year-on-year to RM147.66mil in the fourth quarter, primarily due to the recognition of rental revenue from Menara 3 Petronas and upward rental revisions in Petronas Twin Towers.

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