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July 17 (The following statement was released by the rating agency)
Fitch Ratings (Thailand) Limited has affirmed WHA Corporation Public Company Limited's (WHA) National Long-Term Rating and the National Long-Term Rating on WHA's outstanding senior unsecured debentures at 'A-(tha)'. The Outlook is Stable. Fitch also affirmed the Thailand-based warehouse developer's National Short-Term Rating at 'F2(tha)' and assigned an 'A-(tha)' National Long-Term Rating to WHA's senior unsecured debentures of up to THB1.7bn.
The new debentures will be issued in four tranches due in 2017, 2019, 2021 and 2024. The proceeds will be used to finance WHA's investment plan. The senior unsecured debentures are rated at the same level as WHA's National Long-Term Rating. This is based on Fitch's expectation that WHA's future debt will be on an unsecured basis, rather than on a secured basis as some of its existing debt is. This is because recent project loans granted by its main bankers are on an unsecured basis with negative pledge conditions. At end-March 2014, WHA's secured debt was about 40% of the company's total debt while its unencumbered assets to unsecured debt was 1.2x.
KEY RATING DRIVERS
Increasing Debt Burden: Due to the continuation of its large investment plan over the next two to three years, Fitch expects WHA's net debt to rise to THB7.0bn-THB7.5bn in 2014-2016, from THB5.6bn at end-March 2014. The recent investment of THB2bn in a new office building is likely to further drive WHA's FFO adjusted leverage to 4.5x-5.0x in 2014 from 2.8x at end-2013. The company expects to sell the office building to a real estate investment trust (REIT) that it plans to set up in 2015 and plans to continue annual sales of investment properties. Fitch expects the property sales to help reduce WHA's financial leverage to 3.5x-4.0x in 2015-2016.
Rising Recurring Income: Fitch expects WHA's rental and service income to increase by 42%-47% a year in 2014-2015 to THB1bn, which will contribute 35%-40% to WHA's total EBITDA, in 2015. This compares with rental and service income of THB500m with contribution of less than 20% to EBITDA in 2013. The growth in recurring income is slower than previously expected due to the postponement of some projects as a result of the political instability in Thailand in late 2013-1Q14. WHA's short construction period of 5-10 months and the high take-up rate for its properties will likely support its recurring income growth, even with expected sales of more mature warehouse properties to REITs that it plans to establish in 2014-2015.
Leading Position in Niche: WHA is a market leader in the development of premium built-to-suit warehouses for lease. Given the prime location and unique quality of WHA's warehouses, occupancy has been at 100% for the past five years.
Competition is limited with only a few large players with different product offerings, such as smaller and standard ready-built warehouses. These factors will enable the company to maintain revenue growth and strong margins in warehouse leasing over the medium term.
Pre-Leased Strategy: Despite expanding into warehouse farms, which are projects that combine built-to-suit and standard warehouses in the same site, the company remains focused on a pre-leased strategy in which construction does not start until it achieves a 60%-70% occupancy. WHA's overall occupancy rate, including warehouse farms, was 91% as at end-March 2014. The involvement of potential tenants from the beginning of project development under WHA's built-to-suit concept not only secures the projects' occupancy by pre-leased contracts before the investment, but also creates strong business alliances with tenants.
Strong Tenant Base: WHA's tenants are mainly large multinational companies on long-term lease contracts. More than 50% of leasable area is occupied by tenants in the consumer and healthcare industry, which is low in cyclicality, helping to underpin WHA's cash flow.
Investment in Non-Warehouse Businesses: Expansion into other businesses with large investment cost could increase the company's financial leverage as well as business risk. The company, however, does not plan or foresee the opportunity for large acquisitions or investments in other businesses in the near future.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Aggressive expansion and/or investment leading to FFO adjusted leverage at above 4.5x on a sustained basis
- Failure to increase rental and service income to above THB1bn by 2015
- Change in the company's business strategy towards a pre-built approach from the existing pre-lease approach and/or a significant diversification into other non-warehouse businesses.
Positive rating action over the next 12-24 months is unlikely given the company's expansion plan.