Bangkok--13 Feb--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Frasers Property Thailand Industrial Freehold & Leasehold REIT's (FTREIT) National Long-Term Rating and its national senior unsecured rating at 'A(tha)'. The Outlook is Stable. Fitch has simultaneously withdrawn the ratings on FTREIT for commercial reasons.
FTREIT was formerly known as TICON Freehold and Leasehold Real Estate Investment Trust (TREIT).
The ratings were withdrawn for commercial reasons.
KEY RATING DRIVERS
Large Portfolio Size: FTREIT is Thailand's largest industrial REIT and the second-largest REIT in terms of asset size after its investment in the assets of FPT group's (formerly, TICON group) three property funds at end-2017. FTREIT's property portfolio was THB35 billion-36 billion at end-2018 and is likely to increase to more than THB40 billion by 2021. FTREIT expects to invest about THB3 billion a year in new assets over the next two to three years. Fitch expects FTREIT's portfolio to generate EBITDA of THB2.0 billion-2.5 billion a year over the next two years.
Good Tenant Diversification: The 10 largest tenants in FTREIT's portfolio accounted for 20.4% of its total revenue in the financial year ended 30 September 2018 (FY18, nine-month long financial year as the company changed from a financial year that ended in December). The tenants are balanced among the automotive (28% revenue contribution), electronics (23%), logistics (22%) and consumer & retail (11%) industries. FTREIT's assets are also well diversified among three strategic locations for industrial properties in Thailand - the eastern seaboard (45% of total leasable area), eastern Bangkok (29%) and north of Bangkok (26%).
Increasing Financial Leverage: Fitch expects FTREIT's financial leverage, measured by net debt/investment property value, to stay at 28%-29% over the medium term, increasing from about 17% at end-September 2018. This is not a significant change from our previous expectation as FTREIT has maintained its financing policy with gross debt to total assets at about 30%. Correspondingly, net debt to EBITDA is likely to be at 4.5x-5.0x over the next two to three years.
Low Refinancing Risk: FTREIT has a large pool of unencumbered assets with unencumbered assets over unsecured debts of over 4.0x, which provides it with financial flexilibility. Also, its gearing, measured by net debt/investment property value, of 21%-22% at end-2018, is low relative to other REITs and property companies in Thailand. FTREIT issued THB1.9 billion of new bonds in mid-December 2018 to acquire investment properties. FTREIT's average bond maturity is 4.8 years while its average lease term to maturity is about two years.
Quality Assets: The majority of FTREIT's assets are developed by the FPT group, which is one of the leading developers of modern industrial properties in Thailand. The group's assets are mostly premium ready-built standard factories and warehouses in strategic locations. The historical retention rate of these assets is 85%-90% with an average occupancy rate of about 80% over the past two years. Fitch expects the occupancy rate of FTREIT's portfolio to be about 80% over the medium term.
DERIVATION SUMMARY
FTREIT is the largest industrial REIT in Thailand, and its properties are mainly sponsored by the FPT group. FTREIT has a significantly larger property portfolio and better tenant diversification than Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading developer of community malls in Thailand. FTREIT has a significantly higher EBITDA margin of about 70%, compared with SF's 45%. In addition, SF has development risk exposure while FTREIT does not. FTREIT also has lower financial leverage than SF. Therefore, FTREIT is rated higher than SF.
FTREIT has a similar EBITDA size and predictability as Bangkok Aviation Fuel Services Public Company Limited (BAFS, A+(tha)/Negative), the sole operator of the fuel depot and hydrant network at the country's largest international airport. Both companies are highly capital intensive. However, FTREIT's assets are more liquid as they are standard industrial properties while the assets of BAFS are specifically for its businesses, including some intangible assets. BAFS's financial leverage over the next one to two years is likely to increase due to its large investment plan but will still be lower than that of FTREIT. BAFS has, therefore, a higher rating than FTREIT. The Negative Outlook of BAFS reflects the potential construction and business risks associated with its new oil pipeline project.
CP ALL Public Company Limited (CP ALL, A(tha)/Stable), the largest convenience store chain in Thailand, does not have as highly predictable earnings as FTREIT. However, CP ALL has a very strong competitive position, with a market share that is significantly larger than that of its closest rival. Moreover, CP ALL sells daily essential goods, leading to low volatility in revenue and margin. CP ALL has a significantly larger operating scale and EBITDA size than FTREIT. CP ALL's financial leverage is currently at about the same level as FTRIET's, but it is on the de-leveraging path. CP ALL's financial leverage should be lower than FTREIT's over the medium term. Therefore, CP ALL and FTREIT have the same rating level.
KEY ASSUMPTIONS
- No additional investment in FY19 after a THB1.9 billion asset purchase in December 2018 and additional investment of THB3 billion per financial year, with 100% debt financing in FY20 and with 40%-45% debt financing in FY21. No issuance of new units in FY19-FY20.
- Occupancy rate at 80%-81%.
- EBITDA margin of about 69% in FY19-FY21.
- No development or significant maintenance capex over FY19-FY21.
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given today's rating withdrawal.
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: FTREIT had total debt of THB6.9 billion at end-September 2018, of which THB1.4 billion was a short-term loan from a financial institution due within the next 12 months. The refinancing risk of this loan should be mitigated by FTREIT's large pool of unencumbered assets and its relatively low gearing. FTREIT expects maintenance capex to be minimal for the next two to three years. Liquidity for new investment and refinancing needs are likely to be supported by its ability to access the debt and equity markets.
SUMMARY OF FINANCIAL ADJUSTMENTS
Net purchase and sale of investments in securities are not included in cash flow changes as all investments in securities are fixed deposits, which we consider as cash and cash equivalents.
Fitch split the net payment for the asset acquisition in 4Q17 that was part of the merger with three other FPT-sponsored property funds, into capex for gross asset acquisition and proceeds from stock issuance. The net payment is included in FTREIT's cash flow statement under net payment for capex.
Additional information is available on www.fitchratings.com