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Fitch Affirms SHREIT at ‘BB+(tha)’ and Withdraws Rating

          Fitch Ratings - Bangkok - 04 April 2019: Fitch Ratings (Thailand) Limited has affirmed Strategic Hospitality Extendable Freehold and Leasehold Real Estate Investment Trust's (SHREIT) National Long-Term Rating at 'BB+(tha)' with Stable Outlook. Fitch has simultaneously withdrawn SHREIT's ratings for commercial reasons.
          The ratings were withdrawn with the following reason:
          - For Commercial Purposes

          KEY RATING DRIVERS
          Small and Concentrated Portfolio: SHREIT's small asset scale constrains its rating. It has three hotels worth about THB4.4 billion: one in Jakarta, Indonesia and two in Ho Chi Minh City, Vietnam. The Jakarta hotel contributes about 76% of total revenue.

          Less-Volatile Occupancy: Most of SHREIT's hotels have moderate volatility in occupancy rates. For its largest asset, the hotel in Jakarta, corporate customers comprise 40%-50% of the guest base while about 40% are domestic guests who are less influenced by country-specific risks, such as terrorism. The Jakarta hotel had an occupancy rate of 75%-80% over the past two years, higher than its Jakarta peers' average at less than 60%.
          Strategic Locations: Most of SHREIT's hotels have no direct competitors in their catchment areas. Its Jakarta hotel, the only five-star internationally branded hotel in the west of the city, is part of a 22-hectare mixed-use project with the largest shopping mall in the area. The hotel is 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.
          Moderate FX Risk: SHREIT's foreign-exchange (FX) exposure could cause volatility in its financial profile. Its assets are offshore and generate local-currency revenue while the REIT's loan exposures are in euros with about 50% hedged against US dollars. In addition, its dividend payments are in Thai baht. The REIT has no policy at present to hedge the euro loans against local currencies. SHREIT showed that it could partly offset the FX risk by adjusting room rates during the sharp depreciation of the Indonesian rupiah against the US dollar in 2018.
          Moderate Financial Leverage: Fitch expects SHREIT's net debt to investment-property value (LTV) ratio to be at about 38% over the next one to two years, assuming no additional investment. The LTV ratio increased from our initial expectation of about 35% due to the conversion of the appraisal values of assets in local currencies into US dollars. The financial leverage in terms of LTV ratio could also increase if the REIT uses higher debt financing for new asset acquisitions due to the REIT's policy of maintaining the LTV ratio at 35%-45%.
          DERIVATION SUMMARY
          SHREIT is the only hospitality REIT in Thailand that has all its assets located offshore. SHREIT has a smaller portfolio and generates lower EBITDA than Siam Future Development Public Company Limited (SF, BBB(tha)/Stable), a leading community-mall developer in Thailand. SHREIT's properties are located in two countries while almost all of SF's assets are concentrated in Bangkok and its suburbs. However, SHREIT's asset concentration is significantly higher, and it has a smaller number of assets. SF has better earnings visibility than SHREIT from medium- to long-term contracts with its tenants. Both should have a similar level of financial leverage over the medium term. However, SHREIT is more exposed to FX risk. Therefore, SHREIT is rated below SF due to its weaker business profile.

          KEY ASSUMPTIONS
          Fitch's Key Assumptions Within Our Rating Case for the Issuer
          - EBITDA to slightly increase to about THB280 million a year in 2019-2020 
          - No new investment, new development or significant maintenance capex in 2019-2020

          RATING SENSITIVITIES
          Rating sensitivities are no longer relevant given today's rating withdrawal.

          LIQUIDITY AND DEBT STRUCTURE
          Refinancing Risk in 2021: SHREIT will have a large refinancing need in 2021 as its existing term loans of about EUR45.8 million are due with bullet repayment. SHREIT refinanced its 13-year term loan with a three-year grace period on principal repayment with a three-year term loan in June 2018. SHREIT's liquidity over the next two to three years is manageable, assuming no instalment repayment.

          SUMMARY OF FINANCIAL ADJUSTMENTS
          We have reverted all the auditors' adjustments, i.e. adding back deferred transaction costs and deducting the adjustments to reflect the effective interest rate, to have the loan amount shown at its face value.