TEXT-Fitch ups Hongkong Land to 'A'; outlook stable
(The following statement was released by the rating agency)
Oct 16 - Fitch Ratings has upgraded Hongkong Land Holdings Limited's (HK Land) Long-Term Issuer Default Rating (IDR) to 'A' from 'A-'. The Outlook is Stable. Fitch has also upgraded HK Land's senior unsecured rating to 'A' from 'A-'.
The upgrade reflects HK Land's track record of maintaining strong financial metrics since 2009. In addition, its investment property portfolio, focused on Hong Kong's Central district, has been resilient to tenant decentralisation trends out of Central. Fitch believes these strengths are likely to be maintained despite some weakening in spot office rents in 2012, as there will be limited new supply of Grade A office space in Hong Kong over the next three years. This is reflected in the Stable Outlook.
HK Land's investment property EBITDA/gross interest expense ratio has remained consistently above 5x since 2009. Similarly, its net debt/investment property ratio has also remained below 20%. These metrics are supported by a buoyant rental market in Hong Kong, and the company's limited capex. HK Land has maintained an occupancy rate of above 94% in its office portfolio despite a rise in supply of office space outside the Central district during this period.
Fitch expects HK Land's expiring office lease portfolio to still benefit from positive rental reversion through 2013 despite rental rates in the Central area having fallen 10%-15% from their peak in late-2011. Leases expiring over the next 12 months have an average rental of below HKD80 per square foot per month (psf/month), which is below the spot office market rental in the Central district of around HKD100 psf/month. However, the limited new supply of Grade A office space in Hong Kong will likely limit further falls in rent.
Volatility of cash flows is increased by HK Land's property development business. However, the impact on the rating is limited as property investment continues to dominate its balance sheet and profit generation. Commercial property EBITDA, which is derived primarily from investment property, contributed 100% of the total EBITDA in H112 following limited completion of residential projects (2011: 81%). Investment properties also made up 91% of total property assets at end-H112 (2011: 92%).
What could trigger a rating action?
Positive: Positive action is not envisaged for the next 12-18 months as the rating is constrained by its exposure to the volatile homebuilding segment.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Investment property EBITDA /gross interest expense sustained below 4x (H112: 7.6x)
-Net debt/investment property asset sustained above 25%.
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