The removal of the RWP, which had been in place since October 2017, follows the completion of TICON Industrial Connection Public Company Limited's (TICON) merger of its group-sponsored property funds - TICON Property Fund, TPARK Logistics Property Fund and TICON Industrial Growth Leasehold Property Fund - under TREIT. TREIT's upgrade reflects the results of the merger, which led to a transformative increase in the company's scale, raising TREIT's portfolio significantly to over THB30 billion, and greater tenant diversification. We expect TREIT to maintain its moderate financial leverage with net debt to investment property value at lower than 30% and net debt to EBITDA at below 5.0x over the next two to three years, given TREIT's financing policy and investment plan.
KEY RATING DRIVERS
Significantly Larger Portfolio: TREIT invested THB23 billion at end-2017 in the property funds' assets, enlarging its property portfolio to more than THB30 billion from THB7.3 billion at end-September 2017. The newly acquired properties are ready-built factories and warehouses with a similar quality to TREIT's existing assets. TREIT plans to acquire another THB3.9 billion of investment properties in 2018, mainly from the TICON group. TREIT expects to invest about THB3 billion a year in new assets in 2019-2020.
Improving Tenant Diversification: TREIT's larger property portfolio improved its tenant diversification significantly with the 10 largest tenants contributing around 22% of total revenue, from 50% previously. The tenants are well-balanced among the electronics (22%), automotive (28%), logistics (21%) and consumer and retail (10%) industries. TREIT's geographical diversification has also become more balanced among the three strategic locations for industrial properties in Thailand i.e. the eastern seaboard (45% of total leasable area), eastern Bangkok (29%) and north of Bangkok (27%).
Increasing Financial Leverage: Fitch expects TREIT's financial leverage, measured by net debt/investment property value, to stay below 30% over the medium term, increasing from about 14% at end-2017. This is not a significant change from our previous expectation as TREIT has maintained its financing policy with gross debt to total assets at below 30%. Correspondingly, net debt to EBITDA is likely to be at 4.6x-4.8x over the next two to three years.
Low Refinancing Risk: Fitch believes TREIT's refinancing risk is low, given its large unencumbered assets and net debt/investment property value of 14%-15% at end-2017. TREIT plans to refinance a secured bridging loan of THB3.7 billion maturing in the next six months in mid-2018 with senior unsecured bonds with an average term to maturity of 4-4.5 years. The bridging loan was used to partly finance the asset acquisition in 2017.
Quality Assets: The majority of TREIT's assets are developed by the TICON 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 the enlarged portfolio to be about 80% over the medium term.
DERIVATION SUMMARY
TREIT is the largest industrial REIT in Thailand, whose properties are mainly sponsored by the TICON group. TREIT now 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. TREIT has a significantly higher EBITDA margin of 75%-80%, compared with SF's 40%-45%. In addition, SF has development risk exposure while TREIT does not. TREIT also has lower financial leverage than SF. Therefore, TREIT is rated higher than SF.
TREIT has a similar EBITDA size and predictability as two Thai companies in the concession business - 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, and BTS Group Holdings Public Company Limited (BTSG, A-(tha)/Negative), the operator of Bangkok's skytrain network. All three companies are highly capital intensive. However, TREIT's assets are more liquid as they are standard industrial properties while the assets of BAFS and BTSG are specifically for their businesses, including some intangible assets.
BAFS's financial leverage over the next two to three years is likely to increase due to its large investment plan but will still be lower than that of TREIT. BAFS has, therefore, a higher rating than TREIT. On the other hand, BTSG has a significantly higher financial leverage than TREIT from a recent investment. As a result, BTSG's rating is lower than TREIT's.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Additional investment of THB3.9 billion in 2018 with 90% debt financing, THB3 billion in 2019 mainly financed by debt and another THB3 billion in 2020, 30%-33% financed by debt. No issuance of new units is assumed in 2018-2019.
- Occupancy rate at 80%-82%.
- EBITDA margin of about 80% in 2018-2020.
- No development or significant maintenance capex over 2018-2020.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
Any positive rating action is unlikely over the next 12-18 months unless
- The occupancy rate improves to 90% on a sustained basis; and
- Net debt/investment-property value decreases to below 25% with net debt/EBITDA at below 3.5x on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Sustained weakening in the occupancy rate to below 80%.
- Net debt/investment property value increasing above 30% (end-September 2017: 20.8%), net debt/EBITDA above 5.0x (end-September 2017: 3.5x) or FFO fixed charge coverage below 3.5x (end-September 2017: 9.3x) on a sustained basis
LIQUIDITY
Comfortable Liquidity: Fitch expects TREIT to have enough liquidity in the next two to three years to comfortably cover interest payments, with EBITDA/interest expense expected at above 6.0x. TREIT expects maintenance capex to be minimal for the next two to three years. Liquidity for new investment is likely to be supported by its ability to access the capital market for both debt and equity.