Published on 04 Aug 2021.
RAM Ratings has reaffirmed the AAA/Stable rating of KIP REIT Capital Sdn Bhd’s (the Issuer) 2019-Issue 1 MTN RM210 mil Class A Medium Term Notes under its RM2.0 bil perpetual MTN Programme (the Programme). The 2019-Issue 1 MTN is the first issuance under the Programme, backed by KIPMall Tampoi (KMT), KIPMall Masai (KMM), KIPMall Bangi (KMB) and AEON Mall Kinta City (AMKC) (collectively, the Properties; excluding AMKC, the KIPMalls). The Properties’ combined market value stood at RM679.0 mil as at 30 June 2021.
The reaffirmation of the rating reflects the Properties’ strong credit attributes, relatively resilient performance, and our assessment of the transaction’s structure and liquidity position. Relative to bigger lifestyle malls, the portfolio was less affected by the pandemic and movement controls. This is attributable to the KIPMalls’ larger composition of essential services, low tenant concentration risk and minimal variable earnings exposure. AMKC’s fixed long-term lease arrangement with a reputable single tenant, AEON Co (M) Bhd, was also a factor. The Properties’ assessed cash flow of RM50 mil and valuation of RM570.82 mil continue to provide comfortable credit support commensurate with the rating of the Class A Notes, as seen in its loan-to-value ratio of 36.79% and stressed debt service coverage ratio of 2.82 times.
For FY Jun 2021, the Properties’ net operating cash flow (NCF) improved by 8.2% y-o-y to RM50.3 mil. The uptick is driven by a higher rental contribution from AMKC, markedly lower rental relief than that provided by other malls, and leaner property expenses. While KIPMalls are exposed to more vulnerable micro retailers, their overall tenant dropout rate was below 5%, moderated by the ability to secure new tenants. Positive rental reversions on renewed leases, averaging 3%, to some extent negated the impact of lower rental rates commanded by newer tenants. As at end-June 2021, the Properties’ average rental collection days stayed decent in the mid-teens.
Downside risks however remain for the next two years amid ongoing movement restrictions and KMB’s major planned refurbishment, estimated to start in 1Q 2022 and be completed in a year. The renovation plan – contingent on the approval of the authority upon submission – entails a more modern facade and interiors, an additional side entrance, a facility upgrade and reconfiguration of space. The asset enhancement initiative may cause temporary cashflow disruptions but is timely to sustain KMB’s earnings in the longer run. Our cashflow simulation indicates that the portfolio’s NCF will fall below the assessed cash flow in the interim, albeit still covering Class A coupon obligations by around four times.
A wholly owned subsidiary of KIP Real Estate Investment Trust (KIP REIT or the REIT), KIP REIT Capital was set up solely as a funding conduit for the proposed MTN Programme, to be secured against properties owned by the REIT. KIP REIT, which was listed in February 2017, was initiated as a trust, focusing on an investment portfolio of community-centric retail centres. On 29 September 2020, the REIT expanded its investment policy to include commercial and industrial assets for better asset diversification.
Chu Jia Ying
(603) 3385 2519
Tan Han Nee
(603) 3385 2529
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Ratings on KIP REIT Capital Sdn Bhd (Issue 1)