OREANDA-NEWS. Fitch Ratings has affirmed Hong Kong-based Hongkong Land Holdings Limited's (HK Land) Long-Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Fitch has also affirmed HK Land's senior unsecured rating at 'A'.

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

KEY RATING DRIVERS

Prime Assets in HK: HK Land's rental portfolio has demonstrated resilience in the past four years, and was robust even during the weaker economic conditions of 2008. HK Land owns 12 office buildings with a total lettable area of 386,000 square metres (sqm) in Central, making it the largest office landlord in the district. Its Central leasing portfolio accounted for over 50% of underlying profit in 2014 and 1H15. The Central district has been the area of choice for the financial services sector and Fitch expects this to continue to be so in the foreseeable future. For 1H15, HK Land achieved marginally positive rental reversion, with the average rent of its Hong Kong portfolio remaining largely stable at HKD101 per square feet (psf) per month.

Resilient Recurring Income: Fitch expects HK Land's investment property EBITDA interest coverage ratio to stay around 6x for the medium term. HK Land's rental income EBITDA remained largely stable at USD405m in 1H15 compared with USD407m in 1H14. This income stream provided the company with strong recurring income interest coverage of 6.1x for 2014 and 6.3x for the 12 months to end-June 2015.

Slow Rental Reversion in 2016: Fitch expects the new rents for HK Land's expiring office lease portfolio to increase at a slow pace of less than 1% for 2016. Leases expiring in 2016 and 2017 have average rental of HKD105 and HKD104 psf per month respectively, which are slightly above the average office rent in Central district of HKD102 psf per month at end-2015.

Volatile Chinese Property Sales: Property investment will still dominate HK Land's balance sheet (89% of gross assets in June 2015) and profits (over 80% of operating profit in 2015-17) in the medium to long term. HK Land's contracted sales from development properties in China were flat in 2014 compared with the year earlier, but in 9M15, its contracted sales increased 13% yoy to USD469m.

Strong Funding Profile: Fitch expects HK Land's leverage (net debt/investment property value) to be below 10% in 2015-17, leaving plenty of headroom with the 25% level at which Fitch may consider negative rating action. It enjoys diversified debt funding sources. HK Land had an average debt tenor of 7.0 years in 1H15, and 70% of its debt are long-term bonds. Its cost of debt of 3.2% in 1H15 is one of the lowest among its peers.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for HK Land include:
- Positive rental reversion in 2015 (7.4%), 2016 (0.5%), 2017 (4.6%) for the Hong Kong office portfolio
- Steady rental income for the non-Hong Kong portfolio
- Capex budget of USD170m-180m per year
- Annual contracted sales from the property development business averaging USD700m-900m

RATING SENSITIVITIES

Positive action is not envisaged for the next 12-18 months until its exposure to the volatile homebuilding segment is reduced.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Investment property EBITDA/ gross interest expense sustained below 4.0x (2014: 6.1x)
- Net debt/investment property asset sustained above 25% (2014: 11.6%)

LIQUIDITY

Healthy Liquidity: HK Land has ample liquidity to cover maturing debt in the next three years. Most of its debt consists of long-term fixed-rate bonds, and it has a high amount of undrawn committed facilities. At end-June 2015, HK Land had cash balances of USD1.7bn (end-2014: USD1.6bn) and committed undrawn credit facilities of USD2.7bn against short-term borrowings of USD280m.

FULL LIST OF RATING ACTIONS

Hongkong Land Holdings Limited
Long-Term Issuer Default Rating affirmed at 'A'; Stable Outlook
Long-term senior unsecured rating affirmed at 'A'
Ratings on senior unsecured notes affirmed at 'A'