Fitch Affirms Cathay No.2 at 'A(twn)'; Outlook Stable
20/11/2018 09:42
(The following statement was released by the rating agency) Fitch Ratings-Hong Kong-November 20: Fitch Ratings has affirmed Cathay No.2 Real Estate Investment Trust Fund's (Cathay No.2) National Long-Term Rating at 'A(twn)' and National Short-Term Rating at 'F1(twn)'. The Outlook is Stable. KEY RATING DRIVERS Consistent Asset Performance: Cathay No.2 has generated rental yield based on property market value of around 3% and rental yield based on property cost of around 5% since 2008. The average occupancy rate has remained above 95% since 2010 and was at 98.6% in 1H18. The occupancy rate remained healthy at 92% in 2008 and 87% in 2009 during the trough of the economic downturn. The resilient occupancy rate and stable rental rates generate sufficient liquidity, as reflected in the stable EBITDA margin of more than 80% in the past decade. Net Cash Position Supports Rating: Cathay No.2's rating is premised on the company sustaining its net cash position. It had no outstanding debt and had available cash of TWD475 million at end-1H18. The REIT has a limit on the ratio of total debt to total asset value of 35% for investments, but it has not used any debt to date, and it does not have any investment proposal on hand that would require it to raise debt. Fitch does not rule out the possibility of acquisitions in the next 18 months as property values in Taiwan have risen only mildly in the past 18 months. The company has been reviewing potential assets for acquisition, but economic uncertainty, a requirement that new assets meet a minimum return on investment (annual rental income/total assets), and competition from local insurers that have a lower minimum return threshold than Cathay No.2 have made the company cautious about new investments. Solid Asset Pool: Cathay No.2 has three office buildings in Taipei, with operating histories of 30-40 years. All are located in the city's traditional prime downtown area. The market value of the three buildings increased by 60% in 2008-2018 (CAGR of 5.3%). Annual rental income steadily rose to TWD419 million in 2017 from TWD379 million in 2008 (CAGR of 1%). Although we do not expect the pace of increase in market value to continue in the next two years, the central location of the buildings will ensure rental income and market value are resilient, which strongly supports the credit profile. Small and Concentrated Property Portfolio: The scale of Cathay No.2 is limited, with assets valued at TWD14.5 billion (USD475 million) as of end-June 2018, compared with the asset sizes of USD1 billion-4 billion for Asian peers. The limited scale and concentration in Taipei significantly constrain the rating. DERIVATION SUMMARY Cathay No.2's ratings are supported by its prudent financial management and resilient rental income from its investment properties, which are in Taipei's mature CBD area and well-served by public transportation. Cathay No.2's ratings are constrained by its small scale as reflected in its investment property EBITDA of USD12 million and property asset value of only USD475 million. Cathay No.2, is one notch lower than Taipei Financial Center Corporation's (Taipei 101, AA-(twn)/Stable) standalone credit profile of 'A+(twn)'. Taipei 101 has a much larger scale with an EBITDA of USD122 million from USD2.4 billion in assets. Taipei 101's location and building quality is also better than that of Cathay No.2. However, Cathay No.2 has not incurred any debt since inception and its net-cash position strongly supports its ratings. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Rental growth of 1 % in 2018-2020 - Management fee and other costs remain flat in 2018-2020 - Occupancy rate of 99% in 2018-2020 - Growth in investment property value of 3% a year in 2018-2020 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Negative Rating Action - Sustained decline in rental yield on cost of property to below 5% (2017: 5.8%) - Sustained weakening of its operational metrics including occupancy rate and EBITDA margin - Substantial asset acquisition - Incurrence of any debt Positive rating action is unlikely in the next 12 months due to the small scale of Cathay No.2's portfolio. LIQUIDITY Sufficient Liquidity, No Debt: Cathay No.2 has very sound financial performance. At end-June 2018, the fund had no outstanding debt and had available cash of TWD475 million. All cash balances are available cash. The REIT's maximum leverage is generally 35% of total asset value. Leverage may exceed 35% and be up to 50%, provided the REIT discloses its credit rating from a major rating agency. Contact: Primary Analyst Ricky Lam Associate Director +852 2263 9991 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Edwin Fan Director +852 2263 9958 Committee Chairperson Su Aik Lim Senior Director +852 2263 9914 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023785 National Scale Ratings Criteria (pub. 18 Jul 2018) https://www.fitchratings.com/site/re/10038626 Additional Disclosures Solicitation Status https://www.fitchratings.com/site/pr/10052265#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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