(The following statement was released by the rating agency)
Dec 06 -
-- Hong Kong-based commercial property investor Hysan has increased the quality and scale of its leasing property portfolio following the opening and satisfactory leasing of its new retail and office property, Hysan Place.
-- We expect the company's financial performance to improve materially in the next two years, due to the contribution from Hysan Place and continued positive "rental reversions" in Hong Kong's favorable commercial property market.
-- We are raising our long-term corporate credit rating on Hysan and the issue ratings on its outstanding notes to 'BBB+' from 'BBB'; the Greater China regional ratings remain 'cnA+'.
-- The stable outlook reflects our expectation that Hysan will maintain its solid market position in Causeway Bay and generate increasing cash flows and profits while sustaining low leverage over the next 24 months.
On Dec. 6, 2012, Standard & Poor's Ratings Services raised its long-term corporate credit rating on Hong Kong-based commercial property investor Hysan Development Co. Ltd. to 'BBB+' from 'BBB'. The outlook is stable. We also raised our issue ratings on all the senior unsecured notes issued by Hysan (MTN) Ltd. and guaranteed by the company to 'BBB+' from 'BBB'. The long-term Greater China regional scale ratings on the company and its senior unsecured notes remain 'cnA+'.
We raised the rating on Hysan because we believe the company's cash flows and leverage will materially improve, given a stronger market position and increased rental income following the opening and satisfactory leasing of its new retail and office property, Hysan Place. We assess the company's business risk profile as "satisfactory" and its financial risk profile as "modest," as the terms are defined in our criteria.
In our opinion, Hysan has improved the scale, quality, and tenancy mix of its portfolio following the completion of Hysan Place. The company's competitive position in Causeway Bay, one of Hong Kong's major commercial and retail districts, has also improved with the addition of the large mixed-use building in a prime location. Hysan Place has a total gross floor area of 710,000 square feet, which has expanded Hysan's retail portfolio space by 50.0% and the office portfolio by 12.4%. The company had leased out 100% of the retail space and 43% of office space by October 2012.
We expect Hysan Place's office occupancy rate to gradually improve over the next year, as tenants are likely to seek lower-cost space due to steep rents in Central, Hong Kong's central business district. Hysan will continue to benefit from the tight supply of new office and retail space, particularly in the Causeway Bay area, and our forecast for moderate retail sales growth, which should help to push up spot rental prices.
We estimate that Hysan's financial performance will improve strongly in 2012 and 2013, driven by new rental income from Hysan Place and "positive rental reversions" (or rent increases) when existing leases expire. In our base case, we estimate 25% revenue growth in 2012 and 14.5% in 2013. We expect the company to maintain high occupancy levels averaging about 95%, due to stability in the leasing market. We also estimate that the EBITDA margin will decline to 75.5% from 78.1% in 2011 because of one-off expenses and an increase in overheads associated with the opening of Hysan Place. The margins should recover to about 78.0% in 2013, with an expected improvement in occupancy and full-year contributions from the new building.
We expect Hysan to increase its free cash flows and anticipate that it will use surplus cash to reduce its total borrowings in the next two years. In our base case, we estimate total borrowings will decline to about Hong Kong dollar (HK$) 6.3 billion by the end of 2012 and HK$6.1 billion by the end of 2013 from a peak of HK$7.0 billion in 2011. With improving cash flows and declining borrowings, Hysan's leverage--or the ratio of debt to capital--could fall to 10.8% by the end of 2012 and 10.3% in 2013 from 12.1% at the end of 2011. Cash flow coverage--or the ratio of funds from operations (FFO) to debt--could improve to about 25% in 2012 and 30% in 2013 from 18.4% in 2011.
The peak of Hysan's capital spending program is over. In our base case, we have factored in HK$500 million-HK$800 million in capital expenditure for refurbishment and asset enhancement for 2013-2014. However, the amount will be significantly less than the capital expenditure for the past two years. The company is repositioning its property portfolio to meet growing demand from retailers, which suggests potential expenditure to redevelop some of its older office buildings over the next two to three years.
The rating on Hysan also reflects the company's conservative and consistent financial management and "exceptional" liquidity. In our view, Hysan selects development projects very cautiously and focuses on enhancing asset quality and improving property values rather than on large acquisitions and expansion. The company has a good track record of maintaining low leverage and good liquidity.
Hysan's relative small scale and the high geographic concentration of its property portfolio temper the above strengths. The company has a limited number of properties and the majority of these are small-to- mid sized. All its properties are located in Causeway Bay.
Hysan's liquidity is" exceptional," as defined in our criteria. We expect the company's sources of liquidity to exceed uses by 2.0x or more in the next year. Our liquidity assessment incorporates the following factors and assumptions:
-- Primary liquidity sources in 2013 include cash and cash equivalents that we estimate at HK$2.0 billion as of the beginning of 2013, committed and undrawn bank facilities of about HK$1.0 billion, and FFO of about HK$1.9 billion.
-- Primary liquidity uses in 2013 include debt maturities of HK$700 million, capital expenditure of HK$800 million, and dividends of about HK$800 million.
-- In our view, Hysan has good banking relationships and capital market standing in Hong Kong. The company also has a US$1 billion medium-term note program, which it has intermittently used to raise funds.
-- The company's securities investments, which have a carrying value of about HK$1.6 billion as of June 30, 2012, provide an added liquidity buffer. We did not include these as a liquidity source in our calculation.
-- Hysan has limited and fairly loose financial covenants on its bank loans. The company has good headroom to absorb a low-probability, high-impact event. We estimate that the company will not breach covenant test measures even if our forecasted EBITDA falls by 50%.
The stable outlook reflects our expectation that Hysan will maintain its solid market position in Causeway Bay and generate increasing cash flows and profits in a favorable commercial property market in the next 12-24 months. We also expect the company to maintain low leverage and strong liquidity.
We could lower the rating if the company's cash flow protection and capital structure weakens due to a sustained deterioration in the commercial property market in Hong Kong. We could also downgrade Hysan if the company deviates from its focused and conservative strategy by undertaking large and aggressive debt-funded acquisitions or if its property occupancy drops significantly. An FFO-to-debt ratio of less 15% could indicate that its credit profile has deteriorated.
The potential upside to the rating in the next 24 months is limited due to the high geographic concentration of Hysan's portfolio and its relative small scale compared with peers that we rate 'A-'. We may raise the rating if the company expands and diversifies its income-generating real estate portfolio and improves its asset quality while maintaining strong cash flows and low leverage.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Outlook Action
Hysan Development Co. Ltd.
Corporate Credit Rating BBB+/Stable/-- BBB/Positive/--
Hysan (MTN) Ltd.
Senior Unsecured BBB+ BBB
Hysan Development Co. Ltd.
Corporate Credit Rating
Greater China Regional Scale cnA+/--/--
Hysan (MTN) Ltd.
Senior Unsecured cnA+