OREANDA-NEWS. Fitch Ratings (Thailand) Limited has assigned a 'A-(tha)' National Long-Term Rating to TICON Freehold and Leasehold Real Estate Investment Trust (TREIT). The Outlook is Stable.

KEY RATING DRIVERS
Well-Located Assets: TREIT's 'A-(tha)' rating reflects the contractual certainty of its revenue associated with its medium-term lease contracts from its portfolio of factory and warehouse properties in Thailand. The weighted-average lease maturity in terms of leased area was about 3.5 years at end-2015. Fitch expects demand for TREIT's assets to remain satisfactory over the medium term, given the strategic locations in most cases. We expect average occupancy of TREIT's portfolio to remain above 90% over the medium term.

Small Scale / Tenant Concentration: Investment properties of TREIT were THB7.3bn (about USD200m) at end-March 2016, which is relatively small compared with other property investment companies. TREIT's tenant mix is concentrated, with the 10 largest tenants contributing around 50% of revenue at end-2015. This risk is, however, mitigated by some industry diversity among tenants, with logistics providers in the automotive, electronics and food industries representing 37% of revenue.

Strong Financial Profile: Fitch expects TREIT to maintain low financial leverage, even in expansion mode, with net debt / investment property value (LTV) at 22%-24%, and net debt to EBITDA at 3.0x-3.5x when adjusted for 12 months earnings generation of newly acquired properties, given the REIT's conservative financing policy. The earliest debt maturity is in 2021, and as such refinancing risk is low. TREIT's banking facilities allow for seven-year grace period on principal. All of its debt funding is unsecured with strong unencumbered asset cover (as measured by unencumbered assets to unsecured debt) at about 4.0x at end-2015.

Assets to Double: TREIT plans to more than double its portfolio over the next three years. Its medium-term investment plan is supported by its major sponsor, TICON group, a leading industrial property developer in Thailand. Nonetheless, TREIT has no development plan over the medium term, notwithstanding that local regulation allows development exposure of 10% of total asset value of a REIT.

Moderate Renewal Risk: Fitch expects slower economic activity both locally and globally, which could suppress the demand for industrial properties in Thailand. Accordingly, this could constrain TREIT's ability to increase lease rental rates over the next 12-18 months. Furthermore, this presents renewal risk, with about 44% of the existing lease contracts based on leased area expiring by 2017. Importantly, TREIT's high retention rate of factories (25% of TREIT's assets) and the scarcity of locations in eastern Bangkok for warehouses mitigate this risk somewhat.

Manageable Interest Rate Risk: All of TREIT's debt is based on floating interest rates, and TREIT has not hedged any of its interest risk. Fitch expects the ratio of FFO to the sum of interest and rent costs (FFO fixed-charge cover) to remain strong at 5.0x-6.0x over the medium-term, which should mitigate interest-rate risk. TREIT plans to refinance its debt with fixed-interest-rate bonds following the introduction of regulations at the start of 2016 that allowed bond issuance by REITs.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Additional investment of THB3bn-3.5bn a year, with 25%-27% debt financing
- Renewal rate at 85%, with four to six months to seek new lessees
- Stable EBITDA margin at about 80%
- No development and significant maintenance capex over 2016-2018

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- Larger portfolio of investment properties of over THB30bn with higher granularity in term of tenants and geography

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Aggressive debt-funded investment, a substantial weakening in occupancy rate or negative rental reversions which leads to LTV increasing above 30% and/or net debt to EBITDA above 4.5x and/or FFO fixed-charge coverage at below 3.5x, on a sustained basis