TRIS Rating affirms the company rating on WHA Premium Growth Freehold and Leasehold Real Estate Investment Trust (WHART or “trust”) and the ratings on WHART’s senior unsecured debentures at “A” with a “stable” outlook. The ratings reflect the trust’s predictable cash flow from contract-based rental income, its ability to maintain a high occupancy rate (OR), plus the growth prospects of the trust supported by assets from its sponsor, WHA Corporation PLC (WHA). However, the ratings are partially constrained by portfolio concentration risk in terms of tenant base. The ratings also take into consideration the inherent volatility of the industrial property for rent business, which is somewhat linked to economic conditions, consumer spending, and market competition.
KEY RATING CONSIDERATIONS
Favorable occupancy rate
TRIS Rating holds the view that WHART should be able to maintain its strong operating performance in the medium-term, supported by WHART’s properties located in strategic areas including Bangna-Trad road, Ladkrabang, and Rama 2 areas, as well as Ayudhaya, Rayong, Saraburi, Chonburi, and Pathum Thani provinces. Fifty four percent of total leasable space is located along Bangna-Trad road, an alternative business location with access to both Bangkok’s central business areas and the Eastern Economic Corridor.
The trust’s good-quality and prime-located industrial properties reflects in its high OR. WHART has enjoyed high OR of over 90% since its inception in 2014. At the end of December 2019, the average OR was 92%. TRIS Rating expects the trust could maintain an average OR higher than 90% over the next three years, based on the historical performance of replacement and renewal managed by the trust’s property manager and asset enhancement supported by its sponsor.
Stable cash flow from contract-based rental and service income
TRIS Rating expects the trust to be able to generate stable income streams over the next three years based on mostly medium-term lease contracts from tenants. As of December 2019, the leases in WHART’s properties portfolio covered a period of three years, accounting for 59% of the total area. The weighted average lease life stood at 3.8 years. Most tenants are well-known domestic and multinational corporations with high credit quality. Rental collection risk seems minimal, considering the sound financial positions of these reputable companies.
Under current leased occupancy, 24% of total occupied area will expire in 2020, 21% will expire in 2021, 13% in 2022, and the rest will expire thereafter. The lease contract expirations are relatively concentrated in 2020 and 2021. However, WHART’s management normally approaches the lessees in advance to discuss about the contract renewal or expansion plan. Given the strategic location for logistics and quality of the properties, they have the confidence to secure the renewal on most of their contracts. The contract renewal rate of WHART was still good at 71% in 2019.
Growth prospects from assets under sponsor
Given the continued support of its sponsor, we believe WHART has the potential to increase its scale. WHA, the trust’s sponsor, is one of only two major developers of warehouses and factories for rent in Thailand. WHA has regularly transferred built-to-suit and standard warehouses and factories with high OR to the trust every year. In addition, WHA also undertakes to pay rental income to WHART for three years for any vacant space to enhance OR to 100% at the time of sale.
WHART’s investment portfolio consistently grew from Bt4.4 billion at inception in 2014 to Bt30.9 billion in September 2019. In mid-December 2019, WHART acquired additional assets valued at approximately Bt4.9 billion. Going forward, WHA still plans to sell assets to WHART every year. The continually growing size of the quality industrial properties portfolio results in a boost to rental and service income, as well as operating cash flow in the future. WHART’s total revenue is assumed to grow to about Bt2.2 billion in 2019, rising from Bt2.0 billion in 2018. TRIS Rating expects the trust’s total revenue will grow to around Bt2.5-Bt2.9 billion per annum during 2020-2022.
Exposure to tenant concentration risk
WHART is exposed to tenant concentration risk. The top-ten tenants occupied 55% of the total occupied area and contributed 56% of total rental and service income in 2019. However, the tenant concentration risk is partly alleviated by the high credit profiles of its top largest tenants. Moreover, the property manager negotiates lease renewal agreements with tenants about three to twelve months in advance of expiration. Thus, the trust has time to look for new tenants should the lessees decide to terminate their contracts. TRIS Rating expects the tenant concentration risk to gradually dissipate as asset size grows.
Moderate financial leverage
WHART’s financial leverage is moderate. In December 2019, WHART spent Bt4.9 billion for latest asset acquisition with a 100% equity funding. As a result, the loan to fair value of total assets ratio (LTV) is expected to drop to 25% at the end of 2019, from 29% as of September 2019.
However, WHART’s financial leverage is expected to rise given the trust’s investment plan. In accordance with the trust’s financial policy, WHART targets to keep LTV not higher than 30% in the medium- to long-term. TRIS Rating anticipates the trust to fund its future acquisitions using a combination of capital raised and debt, resulting in the LTV to range between 28%-30% over the next three years.
According to its financial covenant, the trust has to keep the LTV ratio below 35% and the interest-bearing debt to earnings before interest, tax, depreciation and amortization (EBITDA) less than 5.5 times. We believe the trust should be able to comply with its financial covenants.
Manageable refinancing risk
TRIS Rating views that WHART’s refinancing risk is manageable given its access to financial markets and availability of back-up facilities for debt coming due in 2020.
As of December 2019, WHART’s outstanding debt was Bt9.5 billion. The trust has scheduled bullet debt repayments of Bt1.5 billion coming due in December 2020. WHART plans to refinance this bullet repayment by using the proceeds from new debenture issuance and/or long-term loans. Moreover, WHART has already prepared a back-up long-term loan with a financial institution to repay the debt maturity in 2020 to mitigate the refinancing risk. TRIS Rating believes the trust to have no difficulty refinancing its debts, given its ability to access financial markets.
BASE-CASE ASSUMPTIONS
• WHART’s assets to increase by around Bt2-Bt3 billion per year during 2020-2022.
• OR to hold around 90% over the next three years.
• Revenue to range between Bt2.5-Bt2.9 billion per annum.
• EBITDA margin to hover around 90%.
• Acquisition of new assets from 2020 onwards to be financed by a combination of debt and equity, with LTV not more than 30%.
RATING OUTLOOK
The “stable” outlook reflects our expectation that WHART’s property portfolio will continue to generate steady cash flow during 2020-2022. TRIS Rating also expects the trust’s assets to sustain high level of OR above 90% with sound profitability. In addition, TRIS Rating expects the trust will be able to keep the LTV below 35% as per the trust’s policy and able to comply its financial covenants.
RATING SENSITIVITIES
WHART’s ratings and/or outlook could be revised downward if the OR meaningfully drops below expectations and/or the LTV ratio stays above 35% for a prolonged period. On the contrary, the ratings and/or outlook could be revised upward if WHART’s capital structure improves notably, leading to higher cash flow protection over an extended period.
COMPANY OVERVIEW
WHART was established and listed on the Stock Exchange of Thailand (SET) in December 2014 as Thailand’s first industrial trust. At present, WHA holds a 15% of WHART’s stake in total. WHART’s REIT manager is WHA Real Estate Management Co., Ltd. (WHAREM) which is 99.9% owned by WHA, the property manager and main sponsor of the trust. WHART has focused on the acquisition of freehold and leasehold rights in good-quality and well-occupied industrial properties, mainly built-to-suit warehouses and factories. More than 96% of WHART’s total revenue comes from warehouses and factories for rent.
WHART’s property portfolio has expanded continually from Bt4.4 billion at its inception to Bt13.1 billion as of September 2017. Its leasable area increased from 167,107 square meters (sq.m.) to 499,236 sq.m. over the same period. In November 2017, WHAPF was merged into WHART. After the conversion, WHART asset size jumped to Bt25.9 billion, comprising 20 properties of warehouses and factories properties with total leasable area of 971,559 sq.m.
At present, WHART is one of the leaders in the warehouses and factories rental business in Thailand. It owns 29 properties, with a total leasable area of 1,283,351 sq.m., located in prime strategic areas including along Bangna-Trad road, Ladkrabang, Rama 2, Ayudhaya, Rayong, Saraburi, Chonburi, and Pathum Thani. About 54% of the leasable properties are located along Bangna-Trad road. 61% of the investment properties are freehold while the remaining are long-term leasehold.
RELATED CRITERIA
- Rating Methodology – Corporate, 26 July 2019
- Key Financial Ratios and Adjustments, 5 September 2018
- Real Estate Investment Trust, 12 October 2016
WHA Premium Growth Freehold and Leasehold Real Estate Investment Trust (WHART)
Company Rating: A
Issue Ratings:
WHART212A: Bt500 million senior unsecured debentures due 2021 A
WHART213A: Bt3,000 million senior unsecured debentures due 2021 A
WHART222A: Bt950 million senior unsecured debentures due 2022 A
WHART22DA: Bt1,000 million senior unsecured debentures due 2022 A
WHART242A: Bt850 million senior unsecured debentures due 2024 A
WHART253A: Bt1,200 million senior unsecured debentures due 2025 A
WHART26DA: Bt500 million senior unsecured debentures due 2026 A
Rating Outlook: Stable