Singapore, August 21, 2019 -- Moody's Investors Service has affirmed Suntec Real Estate Investment
Trust's (Suntec) Baa3 issuer rating.
Moody's has also affirmed the provisional (P)Baa3 backed senior unsecured
rating on the euro medium term note (EMTN) program established by Suntec
REIT MTN Pte. Ltd., a wholly-owned subsidiary
of Suntec, and the Baa3 ratings on the backed senior unsecured notes
issued under the program.
At the same time, Moody's has changed the outlook to negative from
stable.
RATINGS RATIONALE
"The change in outlook reflects Moody's expectation that Suntec's
credit metrics will remain under pressure at least over the next 12-18
months, as it continues to fund its assets under development,"
says Sweta Patodia, a Moody's Analyst.
In particular, Moody's expects that Suntec's leverage,
as measured by net debt/EBITDA, will remain around 12.5x-13.0x
over the next 12-18 months, compared to Moody's downgrade
trigger of 12.0x. As of 30 June 2019, the company's
net/EBITDA was around 13.4x.
Suntec's credit metrics have weakened following a series of acquisitions
since 2015, amounting to about SGD1.4 billion.
Specifically, Suntec has acquired (1) a 30% stake in the
Park Mall joint venture in Singapore in June 2015 at an estimated valuation
of SGD240 million; (2) a 50% stake in 477 Collins Street in
Melbourne August 2017 at an estimated valuation of SG400 million;
(3) a 50% stake in Southgate Complex in Melbourne in May 2018 for
SGD300 million; and (4) announced acquisitions of two assets in Australia
-- 21 Harris Street and 55 Currie Street -- for a total consideration
of SGD430 million in July 2019.
Suntec's borrowings as of June 2019 do not fully reflect these acquisitions,
as further payments for the 21 Harris Street and 477 Collins Street assets
will need to be made upon their completion in the first and second quarter
of 2020 respectively. As such, Suntec's borrowings
will continue to increase over the next 12 months.
"While the acquisitions, once complete, will strengthen
Suntec's business profile by enhancing its asset base and geographic
diversity, they will also weaken its credit metrics, as about
70% of the SGD1.4 billion acquisition cost will be funded
through debt," adds Patodia, who is also Moody's
Lead Analyst for Suntec.
Three of the five assets acquired since 2015 are currently under development
and hence do not yet contribute to EBITDA, while the acquisition
of the 55 Currie Street will be completed only by August 2019.
As such, the company's credit metrics will only start improving
from 2H 2020 once all the assets are completed and start contributing
to earnings and cash flows.
In addition, Suntec also remains exposed to risks arising from lease
expiries. As of 30 June 2019, about 22% and 34%
of its leases at Suntec City office and Suntec City Mall respectively,
were expiring by 2020. Suntec's Baa3 ratings cannot accommodate
further deterioration in its credit metrics, should there be a rise
in vacancy levels. However, these risks are somewhat mitigated
by Suntec's track record of pro-actively managing its lease
expiries and maintaining healthy occupancy levels.
At the same time, Suntec's ratings also take into consideration
the governance risks associated with the aggressive financial policies
of its manager, ARA Trust Management (Suntec) Ltd (ARA), as
evidenced by the debt-funded acquisitions undertaken since 2015.
However, ARA remains subject to the conditions of the Capital Markets
Services License issued by Monetary Authority of Singapore (MAS) to carry
out REIT management under the Securities and Futures Act. This
ensures that Suntec will adhere to the leverage ceiling, as stipulated
by MAS, of debt/deposited ratio below 45%, while it
pursues growth through acquisitions.
Suntec REIT's Baa3 ratings reflect its 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 center) and its 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 its 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 2019, Suntec had cash and cash equivalents of SGD301.6
million, including SGD195 million of net proceeds raised through
a private placement offering in April 2019. Out of the total proceeds
from the private placement, the company has already repaid SGD35million
of its revolving credit facility. It will utilize another SGD145
million to fund the 55 Currie Street acquisition announced in July 2019.
Suntec has SGD394.3 million of debt maturing over the next 12 months,
namely SGD84.3 million of convertible bonds redeemable in September
2019 and SGD310 million of bonds maturing in February 2020. Moody's
expects that Suntec will be able to refinance its upcoming debt maturities
in a timely manner, supported by its strong access to the capital
markets and long-standing banking relationships.
Given the negative outlook, an upgrade is unlikely. However,
the outlook could return to stable if Suntec refrains from further debt-funded
acquisitions and starts generating the expected EBITDA from its assets
under construction, such that net debt/EBITDA recovers to below
12x, while maintaining sufficient headroom under the 45%
gearing ratio stipulated by MAS.
Suntec REIT's ratings could be downgraded if (1) it undertakes any further
debt-funded acquisitions that weaken its credit metrics; (2)
it fails to meet the 45% gearing ratio stipulated by MAS;
or (3) the operating environment deteriorates, leading to higher
vacancy levels and declining operating cash flow; or (4) the EBITDA
contribution from assets under construction is lower than Moody's
expectation, such that Suntec's leverage -- as measured
by net debt/EBITDA -- remains above 12x beyond 2020.
The principal methodology used in these ratings was REITs and Other Commercial
Real Estate Firms published in September 2018. Please see the Rating
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 seven commercial properties -- four assets in Singapore
including the joint venture for redevelopment of Park Mall, one
in Sydney and two in Melbourne. The total appraised value of its
assets was approximately SGD9.8 billion as of 30 June 2019.
Suntec REIT is managed by an external manager, ARA Trust Management
(Suntec) Limited.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Sweta Patodia
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
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077
