Fitch Assigns SHREIT Expected National Rating of 'BBB(tha)(EXP)'

          Fitch Ratings (Thailand) Limited has assigned Strategic Hospitality Extendable Freehold and Leasehold Real Estate Investment Trust (SHREIT) an expected National Long-Term Rating of 'BBB(tha)(EXP)'. The final rating is subject to the completion of the company's planned asset acquisitions. The failure to complete the acquisitions may result in a final rating that is multiple-notches below the expected rating.

          KEY RATING DRIVERS
          Small and Concentrated Portfolio: Fitch believes SHREIT's small asset scale constrains its expected rating, even after considering its plan to acquire five hotels with total investment of about THB8 billion within 3QFitch Ratings8. SHREIT has investment properties worth THB4.3 billion, consisting of a hotel in Jakarta, Indonesia and two hotels in Ho Chi Minh City, Vietnam. The Jakarta hotel is the largest asset, contributing about 75% of total revenue. The planned acquisitions will add one hotel each in Indonesia, Malaysia and Vietnam, and two in Cambodia, which will lower the contribution from the largest asset to about 3the acquisition%.
          Less-Volatile Occupancy: SHREIT's existing hotels have moderate volatility in occupancy rates as corporate customers comprise 4the acquisition%-5the acquisition% of the total. About 4the acquisition% of the Jakarta hotel's customers are domestic guests, who are less influenced by country-specific risks such as terrorism compared with foreigners. Its Jakarta hotel had an occupancy rate of 75%-8the acquisition% over the past two years while the average occupancy rate of its Jakarta peers was less than 6the acquisition%. Its four-star Ho Chi Minh City hotels target a 5the acquisition:5the acquisition ratio of long- (length of stay of more than 3the acquisition days) and short-stay customers. The high proportion of long-stay guests helps to lower the occupancy-rate fluctuation.
          SHREIT's occupancy rate will remain relatively stable after its planned acquisitions, although it would fall to 7Fitch Ratings%-73% from above 75% for the existing portfolio. About 6the acquisition% of the revenue from the new assets will likely come from the hotels in Indonesia and Vietnam that have stable occupancy rates. However, we expect the two five-star luxury hotels in Cambodia to have a more volatile and lower occupancy rate than the rest of the enlarged portfolio.
          Good Locations: SHREIT's existing hotels have no direct competitors and benefit from major attractions in their catchment areas. Its hotel in Jakarta, the only five-star internationally branded hotel in the west of the city, is part of a the companythe company-hectare mixed-use project with the largest shopping mall in the area. The hotel is also 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. Its new hotels are also similarly located to avoid competition from international-branded hotels or to capture growing demand.
          Moderate Financial Leverage: Fitch expects SHREIT's net debt to investment-property value (LTV) to stay at 3the acquisition%-35% over the next one to two years, in line with the trust's financial policy to maintain gross debt to total assets at 3the acquisition%-35%.
          Moderate FX Risk: We believe SHREIT's large foreign-exchange (FX) exposure can cause volatility in its financial profile. SHREIT's assets are offshore and generate local-currency revenue. On the other hand, the REIT's loans are in US dollars and its dividend payments are in Thai baht. The FX risk is partially mitigated by adjustments in room rates from time to time to offset the exchange-rate fluctuations between the US dollar and local currencies. The REIT manager has entered into an FX forward contract for its dividend payments but only for one year.

          DERIVATION SUMMARY
          The comparisons are based on SHREIT's profile after the acquisitions. 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 TICON Freehold and Leasehold Real Estate Investment Trust (TREIT, A(tha)/Stable), the largest industrial REIT in Thailand. SHREIT also has lower earnings visibility, given the nature of the hospitality sector, than TREIT, which has medium- to long-term contracts with its tenants. SHREIT and TREIT have a similar range of financial leverage with LTV at 3the acquisition%-35%. These factors justify rating TREIT higher than SHREIT. 
          SHREIT is likely to have a slightly larger portfolio and generate higher EBITDA within the next six months compared with Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community-mall developer in Thailand. However, SHREIT's asset concentration is slightly higher and it has a smaller number of assets. SHREIT's properties are nevertheless located in four countries while almost all of SF's assets are concentrated in Bangkok and its suburbs. SF has higher earnings visibility than SHREIT from medium- to long-term contracts with its tenants. SF's development exposure over the next two years is likely to drive its LTV to 35%-4the acquisition% while SHREIT does not have such exposure. Therefore, SHREIT is rated at the same level as SF due to their comparable business and financial profiles.

          KEY ASSUMPTIONS
          Fitch's Key Assumptions Within Our Rating Case for the Issuer
          - Investment of THB8 billion in new properties in 3QFitch Ratings8 with about 35% debt financing, according to SHREIT's plan
          - Revenue to increase to about THBFitch Ratings billion a year in the companythe acquisitionFitch Ratings9-the companythe acquisitionthe companythe acquisition with full-year contribution from new assets
          - EBITDA margin to increase to 93%-94% in the companythe acquisitionFitch Ratings9-the companythe acquisitionthe companythe acquisition due to economies of scale
          - No new investment, new development or significant maintenance capex in the companythe acquisitionFitch Ratings9-the companythe acquisitionthe companythe acquisition

          RATING SENSITIVITIES
          Developments That May, Individually or Collectively, Lead to Positive Rating Action
          Fitch does not expect a 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
          - Failure to complete asset acquisition plan of about THB8 billion in the companythe acquisitionFitch Ratings8; 
          - Aggressive debt-funded investment leading to net debt to investment properties of over 35%; 
          - 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 3.8x on a sustained basis.

          LIQUIDITY
          Manageable Liquidity: SHREIT's liquidity over the next two to three years is manageable as an existing loan of USD47.5 million has a three-year grace period on principal repayment and low principal instalments in the first few years. SHREIT plans to refinance the existing loan with three- to five-year bonds in the companythe acquisitionFitch Ratings8. SHREIT's refinancing risk over the long term is likely to be mitigated by its larger cash inflow from an enlarged portfolio as well as its ability to access capital markets. At end-March the companythe acquisitionFitch Ratings8, SHREIT also had an undrawn committed facility of THB36 million.