Fitch Affirms Cathay No.2 at 'A(twn)'; Outlook Stable
KEY RATING DRIVERS
Consistent Asset Performance: Cathay No.2 has maintained a stable rental yield (rental income/book value of investment property) of over 5% since 2008. The average occupancy rate has remained at above 95% since 2010 and rose to 98.5% in 1H15. 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 EBITDA margin of more than 80% in 2014. Cathay No.2 had the third-highest investment yield among REITs in Taiwan in 2014, following Cathay No.1 (first) and Fubon No.1 (second).
Adequate Net Cash Position: Cathay No.2 has no outstanding debt with available cash of TWD466m at end-1H15. Fitch does not expect Cathay No.2 to have many potential acquisition targets over the next 12 months because the growth in property values in Taiwan has substantially outpaced the rise in rental income in the past five years. As a result, the REIT is unlikely to require external funding in the next 12 months.
Solid Asset Pool: Cathay No.2 has three office buildings with long operating histories (25-35 years) in Taipei. All are located in the city's traditional prime downtown area. The market value of the three buildings increased by 37% in 2011-2014 (CAGR of 8.1%). Annual rental income steadily increased to TWD401m in 2014 from TWD358m in 2009. 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 the rental income and market value remain resilient, which provides strong support to the credit profile.
Small and Concentrated Property Portfolio: The scale of Cathay No.2 is limited, with assets valued at TWD14bn (USD450m) compared with the asset sizes of USD1bn-4bn for Asian peers in the same rating category. The limited scale and concentration in Taipei significantly constrain the rating.
Prospects of Rental Growth Limited: Growth in demand for office space in Taipei is limited due to weak economic performance, and muted expansion and investment by foreign enterprises. With more office supply to be launched in newer districts this year, Cathay No.2's rental rate growth may be impaired in the next 12 months.
Fitch's key assumptions within our rating case for the issuer include:
- Rental growth of 2% a year
- Management fee and other costs increase at 2% a year
- Occupancy rate of 97% in 2015-2018
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained decline in rental yield below 5%
- Sustained decline in occupancy rate below 85%
- Sustained weakening in EBITDA margin below 60%
- Substantial asset acquisition
- Incurrence of any debt
Positive: Positive rating action is unlikely in the next 12 months due to the small scale of its