February 16, 2017 / 8:04 AM / a year ago

Fitch Affirms Hongkong Land at 'A'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, February 16 (Fitch) Fitch Ratings has affirmed Hongkong Land Holdings Limited's (HK Land) Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed HK Land's senior unsecured rating at 'A'. The affirmation reflects the stable rental income from HK Land's investment properties in prime locations in Hong Kong's Central district, which provide strong rental income coverage ratios. Its limited exposure to property development has also provided stability to HK Land's liquidity and leverage levels. KEY RATING DRIVERS Prime Assets, Tight Vacancy: HK Land owns 12 buildings with resilient rental income streams that are all in Hong Kong's Central business and shopping district. The portfolio's rental income rose 1% to USD977m in 2015, due to strong demand from mainland Chinese financial services firms, lack of substitutes and tight vacancy ratios in the area. According to Jones Lang LaSalle, the vacancy rate for Hong Kong Central Grade A offices was 1.7% in 2016 compared with around 3% in 2008-2014. HK Land's office and retail vacancy rates remained stable at 3.1% and 0%, respectively, at end-June 2016. Resilient Rents, Positive Rental Reversion: HK Land's leases expiring in 2016 and 2017 have average rental of HKD104 per square foot (psf) per month, which is below the average office rent in Central district of HKD107 psf per month at end-2016. Fitch expects the company to secure higher rents for leases up for renewal in its Central office portfolio, which should generate around USD700m in rental income in 2017. Fitch also expects rental income from HK Land's retail space in Central to remain flat at USD250m in 2017 due to weakening demand for luxury goods. HK Land's rental-yielding investment property portfolio, which has yield of 4%, was valued at USD24bn at end-2015. Strong Interest Coverage, Low Leverage: The resilient rental income supports the company's stable and strong interest coverage. Fitch expects HK Land's investment-property EBITDA interest coverage ratio to stay at around 6x for the medium term. HK Land's operating profit from rental income remained stable at USD410m in 1H16 compared with USD405m in 1H15. This income stream provided the company with strong recurring income interest coverage of 6.7x for 2015 and 7.1x for 1H16. HK Land also has a conservative capital structure. Net debt/investment property has been around 10% through different business cycles. Volatile Property Development Caps Rating: HK Land's rating will continue to be capped at A, due to the volatility in the property development business. Property development revenue dropped 30% to USD292m in 1H16 in the absence of revenue from development activity in Singapore. However, HK Land's attributable contracted sales in China increased by 39% in 9M16 to USD654m, which Fitch expects to support the company's development revenue in the next two years. In addition, Fitch expects property investment to still dominate HK Land's balance sheet (90% of gross assets at end-June 2016) and profits (over 80% of operating profit in 2016-2018) in the long term. DERIVATION SUMMARY HK Land's rating is driven by its resilient rental income from its investment properties in Hong Kong's Central district. HK Land's recurring EBITDA from investment property is lower than that of Swire Properties Limited (Swire; A/Stable) and Sun Hung Kai Properties Limited (SHKP; A/Stable). However, its investment-property EBITDA interest coverage of 6.7x at end-2015 and 7.1x in 1H16 is higher than SHKP's 4.6x at end-2015 and Swire's 5.6x at end-2015. HK Land also has the lowest leverage among the three at only 10% at year-end 2015, compared with SHKP's 16% and Swire's 15%. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Total investment-property revenue to grow by 0.5%-1.5% in 2016-2018. -Capex budget of 11% of total revenue per year. -Attributable contracted sales in China at USD1bn in 2016, USD900m in 2017, and USD800m in 2018. RATING SENSITIVITIES Positive action is not envisaged for the next 12-18 months until its exposure to the volatile property development segment is reduced. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Investment-property EBITDA/ gross interest expense sustained below 4.0x (end-2015: 6.7x, end-1H16: 7.1x) - Net debt/investment property asset sustained above 25% (end-2015: 10%, end-1H16: 9%) LIQUIDITY Healthy Liquidity: HK Land has ample liquidity to cover maturing debt in the next three years. Long-term fixed-rate bonds make up 56% of its debt, and it has a high amount of undrawn committed facilities. At end-June 2016, HK Land had cash balances of USD1.6bn and committed undrawn credit facilities of USD2.4bn against short-term borrowings of USD19m. Contact: Primary Analyst Rebecca Tang Associate Director +852 2263 9933 Fitch (Hong Kong) Limited 19/F, Man Yee Building 68 Des Voeux Road, Hong Kong Chloe He Associate Director +86 21 5097 3015 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1019074 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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