TRIS Rating has affirmed the company rating and the rating of outstanding debentures of Hemaraj Land and Development PLC (HEMRAJ) at “BBB+” with “stable” outlook. The ratings continue to reflect the company’s proven record in industrial estate development and its substantial base of recurring income from the sale of utility services and dividend income from investment in power business. The ratings are partially offset by the volatile nature of the industrial property market. HEMRAJ’s ratings are also capped by company rating of WHA Corporation PLC (WHA), which held a 98.54% interest in HEMRAJ, according to TRIS Rating‘s Group Rating Methodology.
The “stable” outlook reflects the expectation that HEMRAJ can maintain its leading position in the industrial property industry. The recurring income from the sale of utility, power projects, and rental properties will provide a cushion for the company to weather the sluggish economic condition. As rating of HEMRAJ is capped by WHA’s credit profile, any change in WHA’s credit rating will affect HEMRAJ’s rating accordingly. The rating upside would be likely if deleveraging plans are successful and WHA’s financial profile improves on an extended period. A rating downside could occur, should WHA’s financial profile deteriorate on a sustainable basis from weaker-than-expected operations or balance sheet. Downward pressure on the ratings would also emerge if HEMRAJ’s business risk profile or financial profile shows a significant and sustained deterioration.
HEMRAJ is one of the leading industrial estate developers in Thailand. It was established in 1988 and listed on the Stock Exchange of Thailand (SET) in 1992. WHA acquired HEMRAJ by making voluntary tender offer in March 2015 and delisted HEMRAJ from the SET in March 2016. WHA is one of the leading providers of built-to-suit warehouses. WHA was established in 2007 by Dr. Somyos Anantaprayoon and Ms.Jareeporn Jarukornsakul. WHA was listed on the SET in November 2012. Before acquisition, WHA engaged in providing built-to-suit warehouse, ready-built warehouse and ready-built factories (RBF) for rent, offices for rent, and solar roof projects. As of September 2016, the leased area managed by WHA and HEMRAJ totaled 1,483,557 square meters (sq.m.), comprising 865,730 sq.m., owned by property fund and real estate investment trust (REIT), 314,596 sq.m., owned by WHA itself, and 303,231 sq.m. owned by HEMRAJ.
HEMRAJ owns and operates eight industrial estates in Thailand. Its estates are located in Rayong, Chonburi, and Saraburi provinces with a total gross area of 47,558 rai. Of the 683 customers in HEMRAJ’s estates as of September 2016, 34% were in the automotive industry and 14% were in the consumer product industry. HEMRAJ had 10,923 rai of land available for sale, as of September 2016. Of the total saleable area, approximately 82% was located in Rayong province. During 2011 through 2015, sales of industrial land and property accounted for 60%-70% of the revenue each year. Recurring income, mainly from utility services and rental income, comprised 30%-40% of total revenue annually.
The sale of industrial land nationwide remained stagnant in 2015-2016. According to a report from CB Richard Ellis (CBRE), Thailand industrial land sales declined from 4,746 rai in 2013 to around 2,000 rai per year in 2014 and 2015. The sluggish economy has discouraged investment demand and hampered the sale of industrial land nationwide. Land sales slipped to 629 rai in the first half of 2016, down from 1,053 rai during the same period of 2015.
HEMRAJ outperformed its peers in 2015 by selling 1,043 rai of land in 2015, up from 665 rai in 2014. The increase was largely driven by one sizable land plot sold to a car manufacturer. For the first nine months of 2016, HEMRAJ’s land sales improved moderately, rising to 654 rai from 511 rai during the same period of 2015 underpinned by some expansion of customers in petrochemical industry. In terms of market share, HEMRAJ was the top seller of industrial land sale during 2013 through the first nine months of 2016. Its market share has averaged 32% during the past ten years, based on the total amount of industrial land sold, and around 56% in the first half of 2016.
In spite of higher land sales, HEMRAJ’s total revenue declined by 19.5% year-on-year (y-o-y) to Bt2,889 million in the first nine months of 2016. The drop in revenue came because HEMRAJ transferred less land to its customers. Revenue from land transfers dropped by 44.2% y-o-y to Bt785 million in the first nine months of 2016. Recurring income, which accounted for 73% of total revenues in the first nine months of 2016, dropped slightly by 2.5% y-o-y to Bt2,104 million. The decrease in recurring income was due to the decline in the sale of utilities owing to a temporary plant shutdown at one independent power producer (IPP) plant while the rental of factory space was relatively flat. Despite a sharp fall in industrial land sales, the resilient recurring income and equity income from power business well supported the earnings before interest, tax, depreciation, and amortization (EBITDA). EBITDA inched up by 2.9% over the same period of the prior year to Bt2,607 million (excluding unrealized gain or loss from foreign exchange) in the first nine months of 2016. Funds from operations dropped by 20.2% over the same period of the prior year to Bt1,375 million in the same period.
HEMRAJ’s balance sheet and liquidity profile weakened in 2016. Total debt significantly increased from Bt14,947 million at the end of 2015 to Bt28,984 million at the end of September 2016. During the third quarter of 2016, HEMRAJ and its subsidiary, took out a new bank loan of Bt12,999 million. HEMRAJ then lent the funds to WHA as an inter-company loan worth Bt12,999 million. As a result, the total debt to capitalization ratio rose to 66.1% at the end of September 2016, up from about 50% from 2011 through 2015.The EBITDA interest coverage ratio dropped from the range of 5.5 times in 2014 and 5.9 times in 2015, to 3.4 times in the first nine months of 2016. A decline in FFO and a jump in total debt cut FFO to total debt ratio to 9.5% (annualized, from the trailing 12 months) in the first nine months of 2016, down from about 22% in 2014-2015. HEMRAJ plans to sell assets to real estate investment trusts (REITs) and spinning-off the utility and power segments to reduce debt, according to WHA’s deleveraging plan. In November 2016, HEMRAJ successfully sold rental space worth Bt8,019 million to Hemaraj Leasehold Real Estate Investment Trust (HREIT). Moreover, HEMRAJ will spin-off its utility and power subsidiary namely WHA Utility and Power PLC. (WHAUP), which owns the assets in HEMRAJ’s utility and power segments. The plans call for WHAUP to be listed on the SET in 2017. Upon the completion of the initial public offering (IPO) of WHAUP, HEMRAJ will hold no less than 70% of its former subsidiary. The proceeds from the IPO of WHAUP and selling properties to HREIT will be partially used to repay HEMRAJ’s debt and WHA’s debt. HEMRAJ’s leverage should improve. However, as a wholly-owned subsidiary of WHA, HEMRAJ’s financial policies and leverage level is expected to align with WHA’s financial profile.
After acquisition of HEMRAJ in March 2015, WHA’s revenues, including HEMRAJ, grew to Bt11,437 million in 2015 and Bt3,840 million in the first nine months of 2016, compared with Bt4,888 million in 2014. WHA’s FFO rose to Bt5,330 million in 2015, up from Bt1,144 million in 2014. During the first nine months of 2016, WHA’s FFO increased to Bt610 million, compared with Bt460 million during the same period of 2015. HEMRAJ contributed around 65%-70% of WHA’s revenues and FFO in 2015. WHA’s balance sheet significantly deteriorated after the acquisition of HEMRAJ. WHA’s debt to capitalization ratio rose to 68.8% at the end of 2015 and 72.5% in the first nine months of 2016, compared with 56% in 2013. The EBITDA interest coverage ratio was 2.3 times in 2015 and 1.5 times in the first nine months of 2016. WHA plans to reduce the acquisition debt by selling to REITs more RBFs and warehouses for rent totaling Bt11,000 million including HEMRAJ’s. The asset sales are planned for the fourth quarter of 2016. A spin-off of HEMRAJ’s power and utility businesses in 2017 will further bring the leverage ratio down in 2017. Under base case scenario, WHA’s total debt to capitalization should improve to approximately 60% if all deleveraging plans are completed. The EBITDA interest coverage ratio should hover around 2-3 times and FFO to total debt ratio is expected to range between 5%-10% in 2017-2019.
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