The downgrade reflects SHREIT's failure to complete the planned asset acquisitions, which has resulted in a smaller-than-expected portfolio size (three hotels instead of eight) with higher-than-expected asset-concentration risk. SHREIT had initially planned on acquiring five, with a total investment of about THB8 billion.
KEY RATING DRIVERS
Small and Concentrated Portfolio: SHREIT's small asset scale constrains its rating. It has investment properties worth about THB4 billion, consisting of one hotel in Jakarta, Indonesia and two in Ho Chi Minh City, Vietnam. The Jakarta hotel contributes 74%-76% of total revenue.
Less Volatile Occupancy: Most of SHREIT's hotels have moderate volatility in occupancy rates. For its largest asset, the hotel in Jakarta, corporate customers comprise 40%-50% while about 40% are domestic guests who are less influenced by country-specific risks such as terrorism. The Jakarta hotel has had an occupancy rate of 75%-80% over the past two years, higher than its Jakarta peers' average at less than 60%.
Strategic Locations: Most of SHREIT's hotels have no direct competitors in its catchment areas. Its Jakarta hotel, the only five-star internationally branded hotel in the west of the city, is part of a 22-hectare mixed-use project with the largest shopping mall in the area. The hotel is equipped with the second-largest ballroom in Jakarta. Its two hotels in Ho Chi Minh City are also the only two internationally branded hotels that are adjacent to the largest and only international standard exhibition and convention centre in the city.
Moderate FX Risk: We believe SHREIT's moderate foreign-exchange (FX) exposure could cause volatility in its financial profile. Its assets are offshore and generate local-currency revenue while the REIT's loan exposures are in euros with about 50% hedged against US dollars. In addition, its dividend payments are in Thai baht. The REIT has no policy at present to hedge the FX loans against local currencies. In light of the recent sharp depreciation of the Indonesian rupiah against the US dollar in 2018, it can be shown that SHREIT's FX risk could be mitigated to some extent by adjustments in room rates from time to time - to reflect the exchange-rate fluctuations between the dollar and local currencies.
Moderate Financial Leverage: Fitch expects SHREIT's net debt to investment-property value (LTV) to be at 39%-40% over the next one to two years, assuming no additional investment. The LTV has increased from our initial expectation at about 35% due to FX translation of the appraisal values of assets in local currencies into dollars. The financial leverage in terms of LTV could also increase if the REIT uses higher debt financing for new asset acquisitions, as it operates a policy of maintaining the LTV at 35%-45%.
DERIVATION SUMMARY
SHREIT is the only hospitality REIT in Thailand that has all its assets located offshore. SHREIT's portfolio size and EBITDA are significantly smaller than those of Frasers Property Thailand Industrial Freehold & Leasehold Real Estate Investment Trust (FTREIT, A(tha)/Stable) (formerly, TICON Freehold and Leasehold Real Estate Investment Trust, TREIT), the largest industrial REIT in Thailand. SHREIT also has lower earnings visibility, given the nature of the hospitality sector, than FTREIT, which has medium- to long-term contracts with its tenants. SHREIT has a higher financial leverage both in terms of net debt to EBITDA and LTV. These factors justify a higher rating on FTREIT.
SHREIT has a smaller portfolio and generates lower EBITDA than Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community-mall developer in Thailand. SHREIT's properties are located in two countries while almost all of SF's assets are concentrated in Bangkok and its suburbs. However, SHREIT's asset concentration is significantly higher, and it has a smaller number of assets. SF has better earnings visibility than SHREIT, from medium- to long-term contracts with its tenants. Both should have a similar level of financial leverage over the medium term. However, SHREIT is more exposed to FX risk. Therefore, SHREIT is rated below SF due to its weaker business profile.
KEY ASSUMPTIONS
- EBITDA to increase slightly, to THB290 million-300 million a year in 2019-2020
- No new investment, new development or significant maintenance capex in 2019-2020
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Fitch does not expect positive rating action until SHREIT achieves a stronger business profile in term of size and asset composition without a deterioration in financial profile.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Aggressive debt-funded investment leading to net debt to investment properties of over 40%;
- Two-year consecutive significant decline in revenue due to a weakening competitive position and/or cost efficiency of the hotels in its asset portfolio;
- EBITDA to interest expense at below 3.0x on a sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Refinancing Risk in 2021: SHREIT will have a large refinancing need in 2021 as its existing term loans of about EUR45.8 million are due with bullet repayment. SHREIT refinanced its 13-year term loan with a three-year grace period on principal repayment with a three-year term loan in June 2018. SHREIT's liquidity over the next two to three years is manageable, assuming no instalment repayment.