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Announcement:

Moody's: Ascott REIT's leverage rises slightly on acquistions

Global Credit Research - 03 May 2013

Singapore, May 03, 2013 -- Moody's Investors Service says that while Ascott Residence Trust's (Ascott REIT, Baa3 stable) proposed acquisition of interests in three serviced residence properties in China and 11 rental housing properties in Japan, will enhance the quality of the trust's property portfolio, its leverage is expected to increase.

"Because Ascott REIT's leverage is expected to increase only marginally, its rating is unaffected by its planned acquisitions in China and Japan," says Poh.

According to Ascott REIT's announcement on 2 May, the trust has entered into various conditional sale and purchase agreements, to acquire shareholding interests in Citadines Biyun Shanghai for SGD53.8 million, Somerset Heping Shenyang for SGD59.4 million, Citadines Xinghai Suzhou for SGD14.7 million and 11 rental housing properties across six cities in Japan for SGD37.1 million.

The acquisitions are expected to increase the trust's asset base by 11% to SGD3.1 billion from SGD2.8 billion as at 31 December 2012, while its property portfolio is expected to increase by 1,576 apartments units to 8,632 units in over 32 cities, from 25 cities previously.

"Ascott REIT's successful acquisition of the three serviced residence properties in China and 11 rental housing properties in Japan will not only increase the scale of its portfolio, it will also reduce its exposure to the weaker European markets," says Jacintha Poh, a Moody's Analyst.

Moody's notes that with the acquisition, the trust's share of assets in Asia will increases to 63% from 59% as at 31 December 2012.

"The acquisitions will also allow Ascott REIT to deepen its presence in China's growing property market, and expand its footprint in the stable home rental market in Japan," adds Poh.

The three serviced residences in China will continue to be managed by its sponsor, The Ascott Limited (unrated), under existing management contracts, while five out of the 11 rental housing properties in Japan are on master leases with remaining tenures of approximately five to eight years. Generally, the rental housing properties cater to Japanese on long stays of one to two years, and have steady occupancy rates exceeding 95%, as well as resilient rental rates.

Ascott REIT will be funding the total proposed acquisition cost of SGD166.8 million, which includes a transaction expense of SGD1.8 million, partly with the net proceeds from its equity placement in January totalling SGD147.8 million. The remaining SGD19 million will be funded by existing debt facilities.

On a pro-forma basis, assuming that the equity placement of 114,943,000 new units and acquisitions were completed on 31 December 2012, the trust's debt/total assets ratio would increase to 41.2% from 40.1%. Both results are within its current rating parameters.

Ascott REIT's Baa3 rating may be upgraded if the trust: (1) improves its liquidity and financial flexibility by reducing its encumbered assets and lowering its reliance on secured borrowings, and (2) improves its other credit metrics such that its debt/total assets is less than 35%, its EBITDA interest coverage exceeds 3x and its debt/EBITDA ratio is below 7x, on a consistent basis.

On the other hand, Ascott REIT's rating could be pressured downwards if: (1) the operating environment deteriorates, leading to higher vacancy levels and declines in operating cash flows, and/or (2) the trust's financial metrics weaken, such that its debt/total assets exceeds 45%, its EBITDA interest coverage falls below 2.5x and its debt/EBITDA exceeds 9x on a consistent basis.

In addition, further acquisitions made without long-term committed funding in place, and disruptions in its access to funding could place the trust's rating under pressure.

The principal methodology used in this rating was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Ascott REIT is a Singapore-based Real Estate Investment Trust, focusing on income-producing assets such as serviced residences, rental housing and other hospitality properties. The trust operates its serviced residences under the Ascott, Citadines and Somerset brands. It is sponsored by The Ascott Limited (unrated), an indirect wholly owned subsidiary of CapitaLand Limited (unrated). CapitaLand in turn owns 49.4% of Ascott REIT.

Jacintha Poh
Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's: Ascott REIT's leverage rises slightly on acquistions
No Related Data.

 

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