TRIS Rating has assigned the company rating of Tipco Tower Co., Ltd. (TIPCO TOWER) at “BBB-” with “stable” outlook. The rating reflects TIPCO TOWER’s stable cash flow from rental and service income derived from its high-quality office building in Bangkok's non-central business district (non-CBD) area and the potential support from its major shareholder. However, the rating is constrained by the company’s small revenue base and reliance on one asset and a few key tenants. The rating also takes into consideration the company’s plan to build a new office building adjacent to the existing one.
The “stable” outlook reflects the expectation that TIPCO TOWER can maintain its sound operating performance. The company’s existing office building should continue to generate stable cash flow, driven by the high OR and high rental rate.
TIPCO TOWER’s credit upside is limited while the new office building is under construction. In contrast, the company’s rating and/or outlook could be revised downward if the operating performance of the existing office building drops below expectations. A rating and/or outlook downgrade could also arise if TIPCO TOWER’s capital structure deteriorates significantly, possibly due to cost overruns or construction delays.
TIPCO TOWER was set up in July 2014 by the Supsakorn family to own and operate the Tipco Building, an office building of the Tipco Group. The Tipco Group has several lines of business such as food and beverages, asphalt products, construction, and rental properties. Two companies under the Tipco Group, Tipco Foods PLC and Tipco Asphalt PLC, are listed on the Stock Exchange of Thailand (SET). The major shareholder of the companies under the Tipco Group is the Supsakorn family. As of June 2016, the Supsakorn family held a 100% stake in TIPCO TOWER.
The Tipco Building is a Grade A office building, aged 18 years since 1998. It had been operated by a company under the Tipco Group before TIPCO TOWER was founded. The Tipco Building is located on a four rai plot of land on Rama VI road, Samsen district, Bangkok. Though this area is classified as the non-CBD area, the building’s location is very convenient. It takes just few minutes to go in and out of the city centre. The Tipco Building is easily accessed by cars or mass transit railways as it is located 500 metres from the expressway, approximately two kilometers (km.) from the Ari BTS station and one km. from the Bang Sue MRT station.
The Tipco Building has total lettable area of about 26,000 square meters (sq.m.). About 25,000 sq.m. is lettable as office space and 700 sq.m. is lettable as retail space. TIPCO TOWER is exposed to tenant concentration risk. As of June 2016, the three largest tenants occupied about 60% of the total lettable area; the top 10 tenants occupied 95%. Companies under the Tipco Group occupied 20% of the total lettable area. However, due to its good location and well-managed facilities, the Tipco Building has recorded a high occupancy rate (OR) of more than 95% over the last 10 years. The average rental rate has grown by about 3% per annum over the same 10-year period. At the end of June 2016, the average rental rate was Bt639 per sq.m. per month.
TIPCO TOWER plans to build a new office building adjacent to the existing office building. The new office building will be located on a three rai plot of land and will have a total lettable area of about 15,000 sq.m. The construction budget is approximately Bt1 billion and it will take almost three years, starting from the end of 2017. TIPCO TOWER plans to fund the construction with project loans and residual cash flow derived from the existing office building. The new office building is expected to generate rental and service revenue of about Bt100 million and earnings before interest, tax, depreciation, and amortization (EBITDA) of Bt14 million in 2021, assuming an OR of 50% and an average rental rate of Bt750 per sq.m. per month. The rental and service revenue generated from the new office building is forecast to increase to about Bt200 million per annum, while EBITDA will rise to about Bt100 million per annum from 2023 onwards, when the OR rises to 90%.
TIPCO TOWER’s sound operating performance is attributable to the high OR, which stood at 97% at the end of June 2016. Based on pro forma financial statements, TIPCO TOWER’s revenue ranged from Bt330-Bt350 million during 2013-2015, while EBITDA ranged from Bt160-Bt180 million. TRIS Rating’s base case forecast assumes TIPCO TOWER’s revenue will rise, ranging from Bt350-Bt380 million over the next three years. TIPCO TOWER’s profitability is solid and stable. The operating profit margin, defined as operating income before depreciation and amortization as a percentage of revenue, stayed at 47%-49% during 2013 through the first half of 2016. The company’s ability to increase rental rates, maintain the OR, and control operating costs, helped keep profitability strong. TRIS Rating’s base case forecast assumes TIPCO TOWER’s operating profit margin will stay above 45% over the next three years.
TIPCO TOWER’s leverage is moderate. The total debt to capitalization ratio stood at 56% at the end of June 2016. However, the construction of the new office building will raise the company’s leverage. TRIS Rating’s base case forecast assumes the total debt to capitalization ratio will peak at about 60% during 2019-2020, before steadily declining from 2021 onwards. TIPCO TOWER’s cash flow protection is acceptable, despite a recent drop. The funds from operations (FFO) to total debt ratio was above 30% during 2013-2014, but fell to about 20% during 2015 through the first half of 2016. TIPCO TOWER funded part of the land purchase with debt during the business transfer in mid-2015. TRIS Rating’s base case forecast assumes the FFO to total debt ratio will stay above 15% during 2016-2018, but decline to almost 10% in 2019. The FFO to total debt ratio is forecast to recover, rising to above 20% from 2023 onwards, after the OR of the new office building reaches 90%. TIPCO TOWER has limited financial flexibility due to the single asset nature of the company. However, TIPCO TOWER is expected to receive financial support from the Supsakorn family if the company faces financial difficulties.
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