OREANDA-NEWS. Fitch Ratings has affirmed Hong Kong-based Hysan Development Company Limited's (Hysan) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. Fitch has also affirmed Hysan's senior unsecured rating and the rating on senior unsecured notes issued by Hysan (MTN) Limited at 'BBB+'.

The affirmation reflects the delivery of stable rental income from Hysan's investment properties in prime locations in Hong Kong, which provides strong gross rental income coverage ratios. Its financial position remains prudent with good liquidity.

KEY RATING DRIVERS

Stable Recurring Rental Income: Hysan is one of the biggest commercial property landlords in Hong Kong's busy Causeway Bay district. It owns prime retail shopping centres and Grade A office buildings in the district. Its investment property portfolio generates stable rental income (HKD3.2bn in 2014 and HKD1.7bn in 1H15) and was valued at HKD70bn at mid-2015. Its shopping centres cater to both domestic and mainland China shoppers. Its office buildings, which charge half of the rental rates of top Grade A offices in Central district, attract tenants from diverse businesses, such as insurance, consulting, banking, high-end retail and semi-retail.

Clear Positioning of Each Hub: Hysan has different branding strategies for each of its retail properties - Hysan Place is aimed at the hip and trendy, Lee Gardens targets the luxury shopper and Lee Theatre is geared towards mass market, urban fashion and lifestyle shoppers. Each hub attracts a different set of consumers and expands Hysan potential consumer base for its retail space.

Prudent Financial Management Continues: Hysan does not have secured borrowings on its balance sheet. Hysan increased its fixed-rate debt from 76% of total borrowings in December 2014 to 81% in June 2015. It also maintained a stable long maturity profile of 5.7 years at end-June 2015. Hysan's leverage, as measured by net debt/investment portfolio value, remained low at 3.2% at mid-2015, down from 4.1% at end- 2014. These metrics compare favourably with those of its Hong Kong peers. Fitch expects Hysan's leverage to stay around 5% over the next two years.

Redevelopment on Track: The redevelopment of Sunning Plaza and Sunning Court (Lee Garden Three) started in early 2014. The approximately 460,000 square foot redevelopment requires capex of HKD2.0bn-2.5bn and is expected to be completed in 2018. Around HKD170m (about 6% of Hysan's total revenue) of rental income will be forgone a year during the redevelopment. Fitch believes that the Sunning redevelopment will have minimal impact on Hysan's strong leverage and coverage levels because the company has significant additional rental income from the recently opened Hysan Place.

The enhancement of facilities at Lee Garden One is also on track with scheduled completion in 2H16. The project will improve office and retail area accessibility, and create new shop spaces. Hysan also plans to renovate part of Bamboo Grove.

Scale Constrains Ratings: Hysan's ratings are constrained by its smaller scale compared with other Hong Kong property investment companies in the 'A' rating category. Hysan's investment property EBITDAR of HKD2.6bn in 2014 was much less than Hongkong Land Holdings Limited's HKD8.3bn, Wharf (Holdings) Limited's HKD15.9bn and Sun Hung Kai Properties Limited's HKD28.3bn.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Single-digit increase in rental reversions in 2015;
- Capex around HKD1.1bn-1.2bn to cover general maintenance capex and redevelopment at Sunning Plaza and Sunning Court over the next two to three years
- Occupancy rate of 95% for office, and 96% for retail and residential properties

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating action include:
- Sustained deterioration of investment property EBITDA/gross interest coverage below 4.0x (1H15: 15.3x)
- Net debt/investment property asset value exceeding 30% on a sustained basis (1H15: 3.2%)
- Change in business mix away from investment property

Fitch does not envisage any positive action. Hysan's relatively small and geographically concentrated investment property portfolio constrains its credit rating.