Tris Rating has affirmed the company rating for Property Perfect Plc (PF), a real estate developer, at BB+, and rated PF's existing unsecured subordinated perpetual debentures at "B+". It also gave PF's proposed issue of 1 billion baht in hybrid debentures a B+.
The rating on hybrid debentures was down three notches from PF's company rating, two notches for subordination and one notch for an option to defer the coupon payment at the discretion of the issuer. The two-notch difference for subordination reflects the low recovery of principal of hybrid debentures issued by a non-investment grade issuer.
The proposed hybrid debentures' qualified for receiving intermediate equity content under Tris' criteria because of subordination, the interest deferral at the discretion of the company, the five-year non-call period, and sufficient permanence.
Tris treats 50% of the principal amount of the debentures as equity and the other 50% as debt when calculating PF's financial ratios. The intermediate equity content will fall to "minimal" at the end of the fifth year from the issuance date, because after five years the remaining effective tenor of the issue will be less than 20 years.
The rating for PF reflects the company's acceptable brand name in the middle- to high-income property segments, predicted higher income from rental assets, and weak finances because of an aggressive expansion into residential properties and hotels, as well as from relatively low profits.
The rating also considers the cyclical and competitive nature of residential property development and concerns about high levels of household debt in Thailand. Household debt mostly affects the ability of middle- to low-income segments to afford homes.
PF had residential sales in the top 10 of Thailand's property developers for the past several years. Landed property generated 6.5-7.5 billion baht in revenue per year from 2015 to 2017. Condominium revenue was 4.8-4.9 billion baht from 2016-2017. Residential sales in the first six months of 2018 grew 50% year-on-year to 6.86 billion baht.
PF had 60 landed property projects ongoing as of September 2018 and 18 active condominium projects, with a total remaining project value of 44 billion baht. PF plans to launch 23 residential projects worth 30 billion baht this year, compared to 14 residential projects last year.
Tris considers PF's financial profile weak. Its large investments in residential projects may increase leverage and weaken cash flows from present levels.
PF's debt-to-capitalisation ratio was 65% in December 2017 and 68% in June 2018. The ratio of funds from operations-to-total debt was 2-3%.
From 2016 until the first six months of 2018, PF's profitability was lower than its rated contemporaries. Its operating income margin was 14-15% over the same period.