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This article first appeared in The Edge Malaysia Weekly on August 28, 2017 - September 3, 2017

The iconic stature of the Petronas Twin Towers continues to justify its premium rental rates for the owner, KLCC Real Estate Investment Trust (REIT), which, since May 9, 2013, has been stapled to KLCC Property Holdings Bhd, one of the largest companies on Bursa Malaysia with a market capitalisation of RM14.1 billion.

As at Dec 31, 2016, KLCCP Stapled Group’s portfolio of assets had exceeded RM17 billion and its market capitalisation accounted for about 34% of the Malaysian REIT universe.

The stapled structure’s portfolio consists of several buildings that make up the Kuala Lumpur City Centre development — Petronas Twin Towers, Menara ExxonMobil, Menara 3 Petronas, Suria KLCC, Mandarin Oriental Kuala Lumpur, Kompleks Dayabumi and Menara Maxis.

The superior appreciation and premium rental rates of its properties saw KLCCP Stapled Group record the highest return on equity (ROE) among its peers over a three-year period based on The Edge Billion Ringgit Club’s graduated and weighted ROE tabulation that recognises sustained performance as well as the fact that it is harder for large companies to grow versus their smaller peers.

Over the last three years, the adjusted weighted ROE with multiplier effect for the stapled group has been 9.8% — a reflection of the higher average revenue per square foot of the properties in its portfolio. In the financial year ended Dec 31, 2016 (FY2016), the Suria KLCC mall had an average revenue psf of RM396.08 while the office segment had RM115.88. In comparison, the nearby Pavilion Kuala Lumpur Mall and Pavilion Tower had an average revenue psf of RM297.45 and RM76.10.

The group’s revenue remained relatively stable in the last three years, edging up to RM1.34 billion in FY2016 from RM1.28 billion in FY2013. There was, however, a slight decline in its bottom line to RM1.01 billion in FY2016 from RM1.03 billion in FY2013. The performance in FY2016 was attributed to the resilient office and retail segment, which offset the significant decline in the hotel segment in a year of sluggish domestic consumption-led economic growth and weaker demand in the hospitality sector.

In the office segment, there was an addition of 43,184 sq ft of net lettable area to the existing triple net lease agreement with Petronas with effect from September last year following the conversion of four levels of atrium space in Menara Dayabumi into office space.

“The stable cash flow and resilient rental income with 100% occupancy in all our office portfolio continue to underpin the overall performance of the office segment,” a note in the group’s 2016 annual report says.

The group, however, saw a decline in the performance of its retail and hotel segment due to the average occupancy of Suria KLCC dropping from 98% to 96% from an ongoing tenant remixing, particularly on Level 1 of the mall, and the hotel business getting hit by softer corporate demand and increased competition from new luxury hotels.

While some have turned bearish on the retail and hotel segment of KLCCP Stapled Group, Suria KLCC Sdn Bhd CEO Andrew Brien is confident of Suria KLCC’s strong competitive edge, thanks to the Petronas Twin Towers.

“It’s not about cheap rents; it’s about curating the malls in the best possible manner,” he tells The Edge in a recent interview, highlighting the fact that Suria KLCC was the first Malaysian mall to breach the RM2.5 billion level in gross sales turnover as at March 31 this year.

He believes a strong emphasis on generating more sales and value for retailers is crucial for earnings accretive in the long run.

Another positive note is that despite a lower profit in FY2016, KLCCP Stapled Group paid out 95% of its distributable income — higher than its commitment to distribute at least 90%. Its distribution per stapled security grew from 34.65 sen in 2015 to 35.65 sen in 2016, translating into a dividend yield of 4.4%.

After reaching its one-year high of RM8.30 at the end of 2016, KLCCP Stapled Group was on a downward trend, falling 5.9% to RM7.81 on July 31 this year. Nonetheless, it had recovered from its one-year low of RM7.16 recorded in August last year.

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