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Announcement:

Moody's: OUE C-REIT's acquisition of One Raffles Place will add diversification, but rating hinges on balanced funding structure

12 Jun 2015

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
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