[ET Net News Agency, 8 August 2019] Moody's Investors Service said that Wharf Real
Estate Investment Company Limited's (WREIC)(01997) 2019 interim results are in line with
Moody's expectations and continue to support the company's A2 issuer rating.
The rating outlook remains stable.
"Moderate growth in WREIC's retail and office rental revenue contributed to its steady
increase in earnings and improvement in financial metrics in 1H 2019," said Stephanie Lau,
a Moody's Vice President and Senior Analyst.
WREIC recorded a 4% year-on-year increase in revenue to HK$8.5 billion in 1H 2019,
largely reflecting a similar rate of growth in rental and related income for its
investment properties segment.
Harbour City -- which accounts for 73% of the group's total revenue, including hotels --
recorded revenue growth of 5% to HK$6.2 billion in 1H 2019. Its other two major investment
properties -- Times Square and Plaza Hollywood -- recorded broadly stable revenue, at
HK$1.4 billion and HK$284 million, respectively.
The strength of its retail rental income was underpinned by a 4% year-on-year increase
in Harbour City's average net rent for its retail portfolio to HK$508 per square foot (sq
ft) per month in 1H 2019, while the occupancy rate remained high and steady at 96% as of
1H 2019.
Although retail sales in Harbour City declined 1% to HK$18.5 billion because of
challenging market conditions, it outperformed Hong Kong's overall retail sales decline of
2.6% in the same period.
After accounting for the mild rental income growth and lower expenses, adjusted EBITDA
increased by 6% to HK$6.8 billion from HK$6.5 billion in 1H 2018. The adjusted EBITDA
margin in 1H 2019 was at 80.5% compared with 79.4% in the previous corresponding period.
On the other hand, total adjusted debt declined to HK$40 billion at the end of June 2019
from HK$44 billion at the end of 2018. Its cash position increased to HK$3.4 billion from
HK$2.7 billion over the same period.
Consequently, adjusted net debt/EBITDA improved to 2.7x for the 12 months to June 2019
from 3.1x in 2018, while EBITDA/interest coverage fell to 15.1x compared to 17.7x in 2018
because of higher borrowing costs.
"Despite a likely modest weakening in WREIC's growth momentum amid a challenging retail
environment, we expect that the company's financial profile will remain robust," adds Lau.
Moody's projected that WREIC's leverage - as measured by adjusted net debt/EBITDA and
EBITDA/interest coverage -- will weaken to 2.9x-3.1x and 12.0x-12.5x, respectively, over
the next 12-18 months. These ratios are in line with its A2 rating category.
Specifically, Moody's projections factor in flat overall rental revenue, and stable
adjusted EBITDA margin of 79%-80% for the next 12-18 months. These assumptions reflect the
resilience of WREIC's retail rental revenue against weaker retail sales, and apply only if
the ongoing protests in Hong Kong do not last over an extended period.
Moody's also expects WREIC's overall average interest cost to rise to around 2.5%-3.0%,
slightly higher than the 2.5% registered in 1H 2019.
Moody's projected that the company's debt will rise modestly to around HK$41-HK$43
billion, after accounting for capital spending of HK$2.5-HK$3.0 billion for the next 12-18
months, in the absence of new acquisition and material development projects. (KL)