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

RAM Ratings has reaffirmed the AAA/Stable rating of Midciti Sukuk Berhad’s RM3.0 bil Sukuk Murabahah Programme (2014/2044) in view of KLCC Real Estate Investment Trust’s (KLCC REIT or the REIT) superior financial profile and stable operating performance. Midciti Sukuk, incorporated as the funding conduit of KLCC REIT with no operations of its own, depends on inter-company transactions from the REIT to meet its obligations under the Sukuk Murabahah Programme.

KLCC REIT is the largest Malaysian REIT by asset size and market capitalisation, comprising the iconic PETRONAS Twin Towers, Menara 3 PETRONAS and Menara ExxonMobil. We view the quality of these assets to be exceptional, backed by long-term triple-net lease agreements signed with Petroliam Nasional Berhad (PETRONAS) that provide the REIT with earnings certainty and a robust net property income margin of 95.15%. KLCC REIT’s lowly leveraged balance sheet and sturdy finance service coverage afford considerable room to withstand the adverse impact of continued uncertainty amid the pandemic, especially on the retail side. 

Although the rental reversion rate was flattish, the average occupancy rate at Menara 3 PETRONAS’s retail podium was unchanged at 92% in FY Dec 2021, attributed to the property’s strategic location, manageable lease maturity profile and tenant assistance measures. While we expect occupancy and rental growth for the near term to remain subdued given the still cautious business sentiment, the retail segment constitutes only a small portion (less than 6%) of the REIT’s revenue, property value and net lettable area. 

As at end-December 2021, KLCC REIT’s total financing was largely unchanged at RM1.38 bil, keeping its gearing and leverage ratios stable at 0.17 times and 0.14 times, respectively. While the REIT’s earnings were marginally affected by accounting adjustments arising from the extension of the triple-net lease agreements on 18 November 2020 and rental rebates given to retail tenants, lower finance costs led to an improved fixed charge coverage ratio of 8.31 times as at end-December 2021 (end-December 2020: 7.93 times).

The rating also considers the close linkage between KLCC REIT and its ultimate parent, PETRONAS, based on RAM’s methodology for parent-subsidiary rating links. KLCC REIT is part of the KLCCP Stapled Group in which PETRONAS has a total direct and indirect stake of 66.94%. Extraordinary support from PETRONAS is highly likely owing to its shareholding and role as master lessee for the bulk of the REIT’s assets. PETRONAS accounts for over 90% of the portfolio’s revenue and net lettable area.

Analytical contacts
Liew Kar Ling
(603) 3385 2586

Tan Han Nee
(603) 3385 2529