Singapore, June 12, 2015 -- Moody's Investors Service says that OUE Commercial Real Estate Investment
Trust's (OUE C- REIT, Ba1 stable) proposed acquisition
of an effective interest in One Raffles Place will increase its asset
base significantly and add diversification to its portfolio.
However, the trust will need to fund the acquisition with an equal
proportion of debt and equity to keep its financial metrics within the
parameters of its Ba1 rating.
"Upon completion of the acquisition, OUE C-REIT's asset
portfolio will more than double in value and its total net lettable area
will increase significantly," says Jacintha Poh, a Moody's
Assistant Vice President and Analyst. "The trust's
asset and income diversification will also improve."
OUE C-REIT's reliance on its largest asset, OUE Bayfront
— which accounted for 69% of its total asset value at 31
March 2015 — will fall to around 33%, once the acquisition
completes.
Moody's expects that if the acquisition is successful, the
gross rental income contribution from OUE Bayfront will fall to approximately
40% from the 68% maintained during the period starting from
the trust's listing date of 27 January 2014 until 31 December 2014.
While the acquisition will increase OUE C-REIT's asset concentration
in Singapore to 85% from 69% at 31 March 2015, One
Raffles Place is a good quality and strategically located asset that will
strengthen the trust's competitive position as a landlord in the
Singapore office market.
In addition, the increase in gross revenue contribution denominated
in Singapore dollars will reduce the impact of foreign exchange fluctuations
from its ownership of Lippo Plaza in Shanghai.
While OUE C-REIT plans to fund the proposed acquisition through
a combination of debt, equity and convertible perpetual preferred
units (CPPUs), it is unclear as to what proportion will comprise
debt. In addition, because the terms and conditions of the
CPPUs have not been finalized, it is unclear as to whether or not
the CPPUs will receive equity treatment under Moody's methodology for
hybrid instruments issued by speculative grade non-financial entities.
"Based on OUE C-REIT's total deposited assets as of 31 March
2015, we expect that the trust can raise its debt levels by around
SGD890 million before reaching 45% leverage; which is our
maximum tolerance level for its Ba1 rating category," says Poh,
who is also the Lead Analyst for OUE C-REIT and other Singapore
real estate investment trusts.
Poh explains that leverage is measured by adjusted debt/total deposited
assets.
As of 31 March 2015, OUE C-REIT's adjusted debt/total deposited
assets stood at 38% and its adjusted EBITDA interest coverage ratio
was at 4.4x.
OUE C-REIT announced on 10 June 2015 that it would acquire an effective
interest of between 61% and 68% in One Raffles Place through
the indirect acquisition of a 75% to 83% interest in OUB
Centre Limited (OUBC, unrated). OUBC is the registered owner
of One Raffles Place, and owns an 82% stake in the property.
One Raffles Place is an integrated commercial development comprising of
two Grade A office towers -- One Raffles Place Tower 1 and
One Raffles Place Tower 2 -- with a total net lettable area
of approximately 760,000 square feet and a six-storey retail
podium -- One Raffles Place Shopping Mall --
with a net lettable area of approximately 100,000 square feet.
The property is located in Singapore's central business district
and is connected directly to the Raffles Place Mass Rapid Transit interchange
station.
OUE C-REIT's rating outlook is stable, reflecting Moody's
expectation of predictable cash generation from its current portfolio,
driven by healthy occupancy levels and organic growth from positive rental
reversions.
The rating could be upgraded if OUE C-REIT: (1) demonstrates
a longer track record of maintaining occupancy rates through a cycle at
its largest asset, OUE Bayfront; (2) maintains its financial
metrics, such that adjusted debt/total deposited assets does not
exceed 45% and adjusted EBITDA/interest coverage exceeds 3x;
(3) improves its liquidity and financial flexibility by reducing its encumbered
assets ratio and its reliance on secured borrowings; and (4) demonstrates
consistent access to funding through strong banking relationships and
the capital markets, particularly in support of acquisitions.
A successful acquisition of a pipeline asset, if prudently financed,
would be viewed favorably by Moody's, because such an acquisition
would add to the diversification of the trust's asset portfolio
and increase its asset base.
However, OUE C-REIT's rating could be pressured downwards
if: (1) the operating environment deteriorates, leading to
higher vacancy levels and declines in operating cash flows; (2) the
trust's financial metrics deteriorate, with debt/total assets exceeding
45% and EBITDA/interest coverage falling below 3x on a consistent
basis; and/or (3) the trust cannot term out its debt maturity profile
well before 2017.
In addition, future acquisitions without long-term committed
funding in place and decreased access to funding could pressure the rating.
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.
OUE Commercial Real Estate Investment Trust listed on the Singapore Stock
Exchange in January 2014. Its property portfolio comprises the
OUE Bayfront in Singapore and Lippo Plaza in Shanghai. The properties'
appraised value totaled SGD1.6 billion at end-2014.
The trust is sponsored by OUE Limited (unrated); which owns a 48%
stake in the REIT
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Jacintha Poh
Asst Vice President - 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: (852) 3551-3077
Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
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: (852) 3551-3077
Moody's: OUE C-REIT's acquisition of One Raffles Place will add diversification, but rating hinges on balanced funding structure