(The following statement was released by the rating agency)
Nov 09 -
— We expect Keppel REIT’s acquisitions of two Australian properties will increase its leverage to the ceiling for the current rating, assuming they are fully funded by debt.
— We are affirming our ‘BBB’ long-term corporate credit rating and our ‘axA’ long-term ASEAN regional scale rating on the Singapore-based REIT, reflecting its stable cash flow generation on its high-quality leasing portfolio.
— The stable outlook reflects our expectation that the trust will manage its leverage below 45%, which is appropriate for our assessment of an “intermediate” financial risk profile.
On Nov. 9, 2012, Standard & Poor’s Ratings Services affirmed its ‘BBB’ long-term corporate credit rating on Singapore-based REIT, Keppel REIT Management Ltd. The outlook is stable. At the same time, we affirmed our ‘axA’ long-term ASEAN regional scale rating on the company.
We affirmed the rating because we expect Keppel REIT to maintain its stable cash flow, based on high occupancies in all its properties, despite the weaker leasing outlook for the office sector in Singapore. As of Sept. 30, 2012, the REIT’s office properties in Singapore’s central business district have 98% occupancy despite significant new supply in 2012. This reflects Keppel REIT’s properties of above-average quality, good locations, and long weighted-average lease expiry profile of 7.2 years, compared with the industry average of three to four years. We expect Keppel REIT to be resilient even though leasing rates may come under pressure in the next six to 12 months.
We also affirmed the ratings as Keppel REIT will likely maintain its leverage below 45%, despite increasing its borrowing more than we expected. We assumed that the REIT will take on additional borrowing of Singapore dollar (S$) 280 million to S$300 million in the next 12 to 18 months, to complete the acquisitions of Chifley Square in Sydney and Old Treasury Building in Perth. The debt increase will weaken the leverage and cash flow coverage, pushing the credit ratios closer to the threshold for an “intermediate” financial risk profile. We also expect the trust will have adequate facilities and a refinancing plan in place to meet its large maturities coming due in 2014.
In our base-case scenario, we assume the acquisitions will be fully debt-funded. Hence, leverage could range from 42% to 45% by the end of 2014. We have defined leverage as the ratio of adjusted debt to total assets. The debt and total assets include Keppel REIT’s proportionate share of debt and assets in its associate, One Raffles Quay Pte. Ltd. (unrated). Despite our estimation that debt could rise to S$3.1 billion by the end of 2014, projected leverage still remains within the range for an intermediate financial risk profile because we have assumed a slight upward revaluation of Keppel REIT’s property portfolio in the next six months.
Our assumption is anchored on Keppel REIT’s stable cash flow generation, backed by good-quality tenants with long-term leases. In our projections, we have not factored in fresh equity injections or sale of older assets by Keppel REIT to reduce debt. However, the company has a record of raising equity in 2011 and 2010 for asset acquisitions, such as Ocean Financial Centre. At the end of September 2012, Keppel REIT’s leverage was 44.1% and ratio of funds from operations (FFO) to interest was 5.2x.
In our view, Keppel REIT’s business risk profile remains “satisfactory,” but will not be significantly enhanced with the completion of redevelopment of Chifley Square and Old Treasury Building in the third quarters of 2013 and 2015, respectively. We expect both assets to form about 6% of Keppel REIT’s enlarged asset portfolio and about 8% of net property income by the end of 2014. Nevertheless, with the completion of Old Treasury Building, which has been leased for 25 years to the government of Western Australia, we expect Keppel REIT’s top 10 tenants’ weighted-average lease expiry to extend to 9.7 years from 7.5 years as of Sept. 30, 2012, further supporting our view of Keppel REIT’s stable cash flow generation.
Keppel REIT’s liquidity is “adequate,” as defined under our criteria. We expect the REIT to refinance S$598 million in debt ahead of its maturity in December 2012 and this could extend its average debt maturity profile to 3.4 years, compared with 3.1 years as of Dec. 31, 2011.
We estimate Keppel REIT’s liquidity sources will exceed uses by about 1.2x in the next 12 months, based on the following major assumptions:
— We expect the REIT to generate FFO of S$200 million-S$210 million.
— The REIT had unrestricted cash balance of S$104.6 million as of Sept. 30, 2012.
— We expect the REIT’s cash uses in the next 12 months to include distributions of S$190 million-S$200 million and interest expenses of S$52 million.
— Debt of S$155 million due in 2013 will be successfully refinanced in a timely manner.
— Keppel REIT has committed undrawn facilities of S$360 million as of Sept. 30, 2012.
We also expect Keppel REIT to commence refinancing plans for the S$775 million debt falling due in 2014, about six months ahead of maturity. We have assumed successful refinancing of this significant maturity (about 28% of total debt as of Sept. 30, 2012), based on Keppel REIT’s satisfactory relationships with its 12 lenders and its strong financial flexibility, backed by unencumbered assets of S$4.7 billion. Based on these expectations, we believe Keppel REIT will continue to benefit from the low borrowing cost of 2% in the next 12-18 months at least.
The stable outlook reflects our expectation that Keppel REIT’s leverage will remain below 45% for the next two years and that the REIT will maintain:
— its property portfolio with an emphasis on the ‘A’ to prime-grade office assets;
— its intermediate financial risk profile; and
— its adequate liquidity.
We may lower the rating if the value of Keppel REIT’s property portfolio substantially declines, interest rates rise, or rental income falls. A combination of these factors could cause the FFO-to-interest coverage ratio to weaken to 3x or the leverage to exceed 45% for a prolonged period. Our downgrade trigger is an FFO-to-interest coverage ratio of 4x. We may lower the rating if Keppel REIT’s acquisition appetite is more aggressive than we expected.
Upward rating potential is limited in the next 12 months as the trust’s leverage will be near to the ceiling of our downgrade triggers. We could review the rating if Keppel REIT meaningfully expands its portfolio of high-quality office properties, backed by equity issuances, or if the company adopts a more conservative financial policy.
Related Criteria And Research
— Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
— Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21 2011
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Keppel REIT Management Ltd.
Corporate Credit Rating BBB/Stable/—
ASEAN Rating Scale axA/—/—