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Rating Action:

Moody's affirms Suntec REIT's Baa2 ratings; changes outlook to negative

08 Aug 2016

Singapore, August 08, 2016 -- Moody's Investors Service has affirmed Suntec Real Estate Investment Trust's (Suntec REIT) Baa2 issuer rating

Moody's has also affirmed the provisional (P)Baa2 senior unsecured rating on the euro medium term note (EMTN) program established by Suntec REIT MTN Pte Ltd, a wholly-owned subsidiary of Suntec REIT, and the Baa2 ratings on the senior unsecured notes issued under the program.

At the same time, Moody's has changed the outlook on all ratings to negative from stable.

The change in outlook follows Suntec REIT's announcement on 5 August 2016 that Southgate Trust (unrated), in which it holds a 50% indirect interest, will acquire a 50% interest in Southgate Complex -- a Melbourne property comprising office and retail -- from a sub-trust of Dexus Property Group (A3, stable).

RATINGS RATIONALE

"The change in outlook to negative reflects our expectations that Suntec REIT's credit metrics will weaken following the proposed debt-funded acquisition of Southgate Complex, which will in turn reduce headroom at its Baa2 ratings," says Rachel Chua, a Moody's Analyst.

Under the transaction, Suntec REIT will acquire an effective 25% stake in Southgate Complex for a total acquisition cost of AUD154.9 million (approximately SGD159.5 million). The acquisition will be fully funded with debt.

Southgate Complex is a freehold, landmark waterfront integrated development in Melbourne comprising two A-Grade office towers, a 3-storey retail podium and a car park with 1,026 lots.

"We expect Suntec REIT's leverage -- as measured by net debt/EBITDA -- will remain elevated at 11x-12x over the next three years which is high relative to its global Baa-rated peers. Our projections assume the trust will acquire an additional 50% stake of Southgate Complex in 2017 which will also be fully funded with debt," adds Chua, who is also Moody's lead analyst for Suntec REIT.

Moody's also expects the trust's adjusted debt/deposited assets ratio will weaken to 38%-40% in 2016-18 from 36.3% in 2015, while EBITDA/interest coverage will decline to around 3.6x over the same period from 4x in 2015.

Southgate Trust is jointly owned by Suntec REIT (through wholly-owned subsidiaries) and PIP Southgate Sub-Trust (unrated) in an equal 50:50 proportion.

Southgate Trust has the option to purchase the remaining 50% of the property from Dexus. If Southgate Trust does not exercise that option, Suntec Southgate Trust (which is indirectly wholly-owned by Suntec REIT) will have the right to purchase the full 50% remaining interest in Southgate Complex.

Against the backdrop of slowing economic growth in Singapore, Moody's believes the negative outlook also reflects Suntec REIT's exposure to weakening leasing space demand and the potential for lower property valuations, which could further increase its debt leverage.

Suntec REIT's Baa2 ratings continue to underpin the trust's stable and recurring income from its portfolio of high-quality and centrally-located assets in Singapore and Australia. Although the trust derives the bulk of its income from its largest asset -- Suntec City, concentration risk is mitigated by the diversified asset types (retail, office and convention centre) and a good quality tenant base.

The ratings also reflect Suntec REIT's strong track record of access to funding via both the debt and equity markets.

At the same time, Suntec REIT's ratings are constrained by its partial ownership in its assets which limits operational control over the properties. The ratings are also constrained by the inherent liquidity risks associated with S-REITs, as a result of their high dividend payout ratios and minimum cash balances.

As of 30 June 2016, Suntec REIT had cash and cash equivalents of SGD130.1 million and total debt of SGD3.0 billion. As of 8 August 2016, Suntec REIT had no debt maturing within the next 12 months.

Given the negative outlook, upgrade pressure is unlikely.

However, the outlook could return to stable if Suntec REIT successfully improves its credit profile such that its net debt/deposited assets recovers to below 10x while maintaining adjusted debt/deposited assets below 40%.

Suntec 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, with adjusted debt/deposited assets exceeding 40%, net debt/EBITDA staying above 10x, EBITDA interest coverage falling below 3x or secured debt/total deposited assets exceeding 15%-20% on a sustained basis.

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

Suntec Real Estate Investment Trust (Suntec REIT) is a Singapore-focused Real Estate Investment Trust (REIT), listed on the Singapore Exchange Securities Trading Limited in December 2004. It has a portfolio of five commercial properties -- four assets in Singapore including the joint venture for redevelopment of Park Mall and one asset in North Sydney. The total appraised value of its assets was approximately SGD8.8 billion as of 31 December 2015. Suntec REIT is managed by an external manager, ARA Trust Management (Suntec) Limited (unrated).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rachel Chua
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

Laura Acres
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

No Related Data.
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