[RAM] RAM Ratings assigns preliminary AAA rating to KIP REIT Capital's RM240 mil 2024-Issue 4 Class A MTN

RAM Ratings has assigned a preliminary rating of AAA/Stable on KIP REIT Capital Sdn Bhd’s commercial real estate-backed RM240 mil 2024-Issue 4 Class A Medium Term Notes (MTN) under its RM2.0 bil MTN Programme (Perpetual) (the Programme). KIP REIT Capital is purely a funding conduit of KIP Real Estate Investment Trust (KIP REIT) to facilitate the fundraising exercise under the Programme. 



The 2024-Issue 4 MTN will be secured against KIPMall Tampoi (KMT), KIPMall Masai (KMM) and KIPMall Bangi (KMB) (collectively, the KIPMalls) and AEON Mall Kinta City (AMKC) (collectively, the Properties or the Portfolio). 

RAM views the overall quality of the Properties as above average, anchored by each asset’s competitive positioning in terms of location, target market, tenant diversification with respect to revenue contribution and trade sector mix, the seasoning of its lease profile and variability of its income profile. The transaction is backed by a diversified portfolio and asset base. The KIPMalls house more than 500 tenants across 11 trade segments. Their relatively high exposure to essential services (including a prominent fresh market division) makes them less susceptible to economic downturns and current retail sector headwinds, anchoring their resilient performance.

Following the completion of an asset rejuvenation exercise for KMB, the Portfolio’s revised blended capitalisation rate (8.76% from 8.81%) and our revised portfolio net property income (NPI) translated to an adjusted market value of RM610.4 mil (from RM570.8 mil), or 81% of its last appraised value of RM744 mil. The transaction’s resultant loan to value ratio of 39.3% and stressed debt service coverage ratio of 2.62 times are supportive of the AAA preliminary rating.

RAM’s revised portfolio stabilised NPI of RM53.5 mil considers the scheduled rental hike at AMKC and the strong recovery post-Covid performance at KMT and KMM, as well as the gradual earning rebound post-facelift at KMB. The Portfolio’s annualised NPI for 9M FY Jun 2024 rose to RM52.1 mil (+3% y-o-y), with the largest y-o-y growth charted by KMB. 

The transaction also benefits from the triple-net lease arrangement with AEON Co., (M) Berhad (AEON) which provides better cash flow stability and certainty. RAM has an AA2/Positive rating on AEON’s senior debt instrument, reflecting its strong counterparty profile. We understand that AEON has initiated early discussions for lease renewal, which would at least double the Portfolio’s weighted average lease expiry to 2.5 years.

The preliminary rating also considers the transaction’s structural features and financial covenants to initiate the disposal of the Properties upon the occurrence of a trigger event. These include performance triggers at both the issuer and REIT levels to pre-empt the risk of a decline in credit support due to sustained deterioration in NPI and material devaluation of the Properties. 

Initial proceeds from the 2024-Issue 4 MTN will be used to redeem 2019-Issue 1 MTN – comprising RM210 mil Class A MTN (rated AAA/Stable) and RM100 mil Class B MTN – on its expected maturity date of 31 July 2024. Overall, the 2024-Issue 4 MTN and 2019-Issue 1 MTN share similar financing terms. We expect to withdraw the rating of Class A 2019-Issue 1 MTN upon its redemption on the expected maturity date, once the 2024-Issue 4 MTN is issued.