RPT-Fitch Affirms Cathay No. 2 at 'A(twn)', Outlook Stable
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Oct 4 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Cathay No. 2 Real Estate Investment Trust Fund's (Cathay No.2) ratings at National Long-Term 'A(twn)' and Short-Term 'F1(twn)'. The Outlook is Stable.
KEY RATING DRIVERS
Stable Track Record: While the growth of rental income is limited, the portfolio has been able to maintain healthy rental yield (rental income/book value of investment property) and occupancy at above 5% and 95%, respectively, in the past three years. Even when the property market was at a trough in 2008 and 2009, the fund maintained occupancy and rental yield at above 85% and 5%, respectively. The strong occupancy and stable rental rates have helped the company to maintain sufficient profitability, as reflected by an EBITDA margin of over 80% in 2012.
Net Cash Position: The fund has a sound financial position, with cash of TWD433m and no debt as at end-June 2013. With property values in Taiwan rising at a faster pace than rentals in the past three years and still-slow overall economic growth, there are no acquisition targets that meet the fund's rental yield threshold. Fitch believes the fund is not likely to borrow in the next 12 months.
Strong Asset Pool: Cathay No. 2's commercial buildings are located in traditionally prime locations of Taipei. The buildings' market value has risen by 25% and their tenant mix has remained stable in the past three years, even as new business districts emerged. Although the market value of the properties may not increase at the same rate in the next 24 months, the scarcity of space in the same locations will underpin the buildings' rentals and values.
Limited Scale: The fund is smaller than peers in the same rating category, with only 59,144 square meters (17,891 ping) of leasable area and around TWD12.2bn of assets as at end-H113 all in Taipei. The lack of diversification and limited scale are rating constraints and Fitch does not expect this to change in the next 24 months.
Limited Growth in Rentals: The demand for office space in Taiwan is limited because of slow economic growth and weak foreign investment inflows. At the same time, more offices are expected to come to the market as buildings are completed in newer business districts of Taipei. These will limit the growth of rentals and may put downward pressure on rental yield in next 12 months.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
-Sustained decline in rental yield to below 5%
-Sustained decline in occupancy rate to below 85%
-Sustained weakening in EBITDA margin to below 60%
-Substantial asset acquisition
-Incurrence of any debt
Fitch does not envisage any positive rating action given that the rating is constrained by the fund's limited portfolio size.