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Rating Action:

Moody's assigns first-time Baa3 rating to MacarthurCook Industrial REIT

07 Jun 2007
Moody's assigns first-time Baa3 rating to MacarthurCook Industrial REIT

Singapore, June 07, 2007 -- Moody's Investors Service has assigned a Baa3 corporate family rating to MacarthurCook Industrial REIT ("MI-REIT"). The rating reflects Moody's opinion on MI-REIT's ability to honor its financial obligations as if it had a single class of debt and a single consolidated legal entity structure. The rating outlook is stable. This is the first time Moody's has assigned a rating to MI-REIT.

"The rating reflects MI-REIT's steady income stream, supported by its portfolio of good quality industrial properties in Singapore and its relatively long lease maturity profile," says Nancy Koh, a Moody's VP/Senior Analyst.

In terms of quality, the assets are well maintained and close to Changi Airport, port facilities, relevant amenities, public transport and major arterial road networks. They have seasoned operating histories and exhibit stable and high occupancy rates. The portfolio's average lease tenor is 6.7 years and includes built-in fixed rental escalations. Moreover, tenants are generally of good quality and the relatively high level of security deposits committed further supports income stability.

"The rating also reflects the expectation that MI-REIT will prudently execute its acquisitive strategy as it expands its portfolio to achieve economies of scale and enhance its access to the capital markets," says Koh. MI-REIT intends to focus its expansion on Singapore for the next few years, an approach which will help reduce asset concentration and reliance on key tenants. Moody's expects it to keep leverage within 40-45% on a sustained basis, even as it expands its portfolio.

"Nevertheless, these strengths are tempered by MI-REIT's small size, low level of asset diversification and some degree of tenant concentration, though these weaknesses will diminish as its portfolio expands," says Koh. Its top three properties account for almost 60% of rental income while the top 5 tenants contribute to 70% due to a head lease agreement. However, the level of tenant concentration risk is somewhat alleviated after consideration of a multi-tenanted arrangement.

The rating also reflects MI-REIT's short operating history as a REIT and thus its limited record in demonstrating value enhancement. The core members of its management team are from MacarthurCook Limited (MCK), a Melbourne-based specialist real estate investment management group established only in 2003.

Management's approach is to build strategic alliances with local vendors such as United Engineers Ltd (UEL), and engage third-party agents such as Colliers to manage its property portfolio, facilitating the rapid formation of relationships within and knowledge of domestic and regional markets. UEL, from which it has acquired one asset and potentially two more later, has a 7.5% interest in the trust's management company, MacarthurCook Investment Managers (Asia) Limited. UEL has also granted MI-REIT the right of first refusal over potential sales of two assets for 5 years.

As with most Singapore REITs, MI-REIT has limited financial flexibility due to its mandatory high dividend payout policy, lack of committed back-up facilities, and high level of encumbered assets. However, refinancing risk is not expected to be significant in the near term, given that its S$128.8 million bank facility will mature in April 2009. The rating also incorporates Moody's expectation that MI-REIT will have uninterrupted access to the capital markets to unwind any temporary increase in leverage above its 45% target.

If any of MI-REIT's senior unsecured debt obligations were to be rated in future, they would be notched down from the Baa3 corporate family rating to reflect legal subordination risk. Its existing debts are secured, based on the balance forecast for FYE3/2008, wherein secured debt as a percentage of gross assets is expected to measure 41.2%.

By comparison, A-REIT's (A3/Stable) higher rating reflects its substantially larger asset base and diversity, as well as longer operating track record, as demonstrated by higher operating margins and stronger credit metrics. Similarly, MapletreeLog's (Baa1/Stable) rating reflects its larger asset base, longer operating track record, geographically more diversified portfolio and high level of unencumbered assets.

Despite its focus on different asset types, MI-REIT shares similarities with Allco(Baa3/Stable), predominately an office REIT, in terms of management background, size, asset and tenant concentration and the presence of long lease terms supported by master lease agreements. Similarly, both are expected to undertake an acquisitive expansion strategy, the success of which hinges on management's capabilities in managing the associated integration and execution risks with strong financial discipline.

The stable rating outlook for MI-REIT reflects Moody's expectation of continued steady cash flow generation from its portfolio, supported by committed rental revenues, favorable industrial market conditions, low level of development risk exposure, and ongoing financial discipline in the pursuit of its growth strategy.

For upward rating pressure to emerge, MI-REIT will need to demonstrate a track record of sustained and sound operating performances, successful execution of its acquisition strategy and established access to the capital markets. There should also be significant improvements in its liquidity and financial flexibility through reductions in its encumbered assets ratio and reliance on secured borrowings, as well as implementation of a reasonable level of committed back-up facilities. At the same time, it would be expected to maintain EBITDA/Interest above 4x, Total Debt/EBITDA below 8x, and Total Debt/Total Assets below 35% on a sustained basis.

Conversely, the rating may experience downward pressure if EBITDA/Interest coverage falls below 2x, total debt/EBITDA exceeds 12x, and total debt/total tangible assets surpass 45% on a sustained basis. This could be a result of (1) aggressive debt-funded acquisitions; (2) failure to execute its acquisitive growth strategy and achieve expected returns; and/or (3) the occurrence of materially negative events that cause a significant downturn in rentals. In addition, a decrease in the likelihood of it refinancing its major bank loan prior to maturity in April 2009 could also cause negative pressure.

MI-REIT is a Singapore-based real estate unit trust that was formed primarily to own and invest in a diversified portfolio of industrial properties. MacarthurCook Investment Managers (Asia) Ltd is the trust manager and, as such, is responsible for the investment and financing strategies, asset acquisitions, divestment policies, and overall management of real estate assets.

Singapore
Nancy Koh
Vice President - Senior Analyst
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Hong Kong
Clara Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121

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