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Global Credit Research - 29 Oct 2010
Singapore, October 29, 2010 -- Moody's Investors Service has today affirmed the Baa3 corporate family
rating of K-REIT Asia ("K-REIT"). The rating outlook
The affirmation follows K-REIT's recent announcement of its
plan to acquire a one-third stake in Marina Bay Financial Centre
Phase 1 (MBFC) from its sponsor, Keppel Land for S$1,426.8
million, and divest Keppel Towers and GE Tower to Keppel Land for
S$573 million. The entire transaction is expected to be
completed by 31 December 2010.
"The DPU accretive transaction will renew and optimise K-REIT's
property portfolio. Upon completion of the transaction, K-REIT's
exposure to the prime Singapore office market will be enhanced,
with 90% of its Singapore portfolio located in the prime CBD area,
thus resulting in a much strengthened property portfolio. Its portfolio
size will also increase to S$3.4 billion from S$2.4
billion." says Philipp Lotter, a Moody's Senior Vice
President, "In addition, the majority of the tenants
in MBFC had committed to leases with an average of 10 years, which
will improve its weighted average lease expiry to 7.8 years from
"These strengths, however, are offset by the REIT's
employment of leverage to fund the transaction that weakens its financial
profile, which is likely to improve only with an equity raising.
Whilst this can be catered for under the existing rating, it averts
any near term rating upside", says Lotter.
The acquisition will be funded by (1) the divestment proceeds from Keppel
Towers and GE Towers; (2) the balance of the November 2009 rights
issue proceeds; and (3) additional borrowings. As a result
of this exercise, K-REIT's gearing is expected to increase
to 39% from approximately 15%.
"Approximately 57% of the transaction will be debt-funded.
In Moody's view, this level of debt, together with K-REIT's
recent acquisitions, currently constrain ratings at Baa3,
albeit firmly positioned. Since November 2009, K-REIT
has announced a total of S$1.9 billion in acquisitions,
including the MBFC transaction," says Lotter.
Moody's also notes that part of the transaction constitutes the repayment
of its outstanding S$190m CMBS due in May 2011. As such,
the debt repayment and the new acquisition debt will extend its debt maturity
profile and increase the level of unencumbered assets, which improves
its financial flexibility. The new borrowings will also be secured
at a lower borrowing cost. However, a significant proportion
of its portfolio is under joint venture (or assets without majority control).
The stable outlook reflects Moody's expectation of continued stable
cash flow generation from its portfolio, supported by high occupancy
and rental revenues and ongoing financial discipline in the pursuit of
growth strategy. K-REIT is currently well positioned within
its Baa3 rating.
The rating could be upgraded if K-REIT (1) demonstrates further
successful execution of a disciplined acquisitive growth strategy through
a proven record of yield-accretive asset growth in a prudent financial
manner; (2) establishes an operating track record in managing its
properties outside Singapore; and (3) maintains Debt/EBITDA at around
7x, Debt/Total Assets below 35% and EBITDA/Interest coverage
above 3x, on a consistent basis.
On the other hand, downward pressure could emerge if (1) the operating
environment deteriorates, such that it suffers high vacancy rates
and a decline in rentals operating cash flows, and/or financial
metrics with Debt/EBITDA exceeding 9-11x, Debt/Total Assets
rises above 40% - 45%, and EBITDA/Interest
coverage drops below 2x on a consistent basis, (2) further acquisitions
are made without long-term committed funding in place; and
(3) a more aggressive growth policy is undertaken to fund new investments.
Moody's last rating action with regard to K-REIT was taken on 5
October 2009 when its corporate family rating was affirmed at Baa3 with
a stable outlook, following its announcement of the fully-underwritten
rights offering to raise approximately SGD620 million.
The principal methodology used in rating K-REIT is Rating Methodology
for REITs and Other Commercial Property Firms published in July 2010.
Other methodologies and factors that may have been considered in the process
of rating K-REIT can also be found on Moody's website.
K-REIT is sponsored by Keppel Land Limited, and was listed
on the Singapore Exchange in on 28 April 2006. It has six assets
located in Singapore and Brisbane with a total portfolio size of $2.3
billion as of 30 September 2010.
Philipp L. Lotter
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
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Moody's affirms K-REIT's Baa3 rating; outlook stable
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