COMMERCIAL PROPERTY | Staff Reporter, Hong Kong

Swire Properties' net rental income inched up 2.9% to HK$4.6b

Thanks to soaring occupancy rates in office and retail portfolio.

Moody's Investors Service says that Swire Properties Limited's 1H 2017 results are within Moody's expectations and in line with the company's A2 issuer rating and stable rating outlook.

"Swire Properties' key financial metrics improved in 1H 2017 because of the resilience of the company's rental income from Hong Kong, higher revenue from property trading, and lower levels of borrowings. We expect such ratios to stay broadly stable over the next 12-18 months," says Stephanie Lau, a Moody's Vice President and Senior Analyst.

Here's more from Moody's:

Net rental income for 1H 2017 increased moderately by 2.9% to HKD4.6 billion from HKD4.4 billion in 1H 2016, mainly reflecting (1) the stable performance of its Hong Kong office and retail portfolio, as evidenced by 99% and 100% occupancy rates respectively at end-June 2017; (2) a stronger Mainland China performance, stemming from higher retail sales and positive rental reversions; and (3) the increased contribution from the Brickell City Centre in the US.

On the back of mild net rental income increases, as well as lower borrowings and lower average borrowing costs in the 12 months ended June 2017 (LTM June 2017), net rental income coverage of gross interest expenses improved to 6.6x for LTM June 2017 from 5.7x for 2016.

The company's underlying profit from property sales increased 148% year-on-year to HKD1.2 billion in 1H 2017, due to the recognition of its ALASSIO project in Hong Kong. Moody's expects units from its Reach and Rise developments in Miami and WHITESANDS development in Hong Kong to drive a strong level for property sales in 2H 2017.

The company's total adjusted debt showed a slight decline to HKD44.2 billion at end-June 2017 from HKD45.6 billion as at end-2016.

Mainly due to the strong property rental and trading performance that drove adjusted EBITDA up by 12.6% for LTM June 2017, Swire Properties' adjusted debt/EBITDA declined to 4.0x from 4.6x in 2016. Similarly, EBITDA/interest coverage improved to 8.3x from 6.5x during the same periods.

Moody's expects adjusted debt/EBITDA (including the expected profit from the sale of the Kowloon Bay project in 2018) to range over 4.3x-4.8x for the next 12-18 months, reflecting lower property trading revenue, but stable rental revenue from Hong Kong and growing contributions from Mainland China and the US.

We expect the growing rental income from Swire Properties' Mainland China portfolio, including Taikoo Li Sanlitun, TaiKoo Hui, INDIGO, Sino-Ocean Taikoo Li Chengdu and HKRI Taikoo Hui, to complement the stability of its Hong Kong portfolio.

On the other hand, its Hong Kong rental income will see growth beginning in 2019 as One Taikoo Place in Quarry Bay and new projects located in Wong Chuk Hang and Tung Chung begin to contribute.

In this regard, Moody's expects Swire Properties' net rental income to continue to cover 5.5x-6.0x of its gross interest expenses. This reflects our expectation of moderate net rental income and debt growth, as well as lower average interest cost.

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