CapitaLand Commercial Trust #A-# Rating Affirmed Despite High Capital Needs For New Development Outlook Stable

Stocks and Financial Services Press Releases Wednesday July 19, 2017 17:11
SINGAPORE--19 Jul--S&P Global Ratings

SINGAPORE (S&P Global Ratings) July 19, 2017--S&P Global Ratings affirmed its 'A-' corporate credit rating on CapitaLand Commercial Trust (CCT), a Singapore-based real estate investment trust (REIT). The outlook is stable. At the same time, we affirmed our 'A-' issue rating on the existing notes and our 'axAA' ASEAN regional scale rating on CCT.

We do not expect CCT's credit profile to be adversely impacted by the recent announcement that the REIT will participate in the construction of a 51-storey integrated development comprising Grade-A offices, 229 serviced apartments, and ancillary retail and food services. The site, in Singapore's central business district, is currently a parking lot; this development is called the Golden Shoe Car Park Redevelopment (GSCP). We anticipate that the project's total development expenditure will be around Singapore dollars (S$) 1.82 billion, with a target completion date in first half of 2021. CCT will participate in the project via a 45% stake in a joint venture (JV) with CapitaLand Ltd. (45%) and Mitsubishi Estate Co. Ltd. (MEC)(10%). CCT has also been granted a call option to acquire the stakes of its JV partners within five years of the development's completion, subject to a base price.

The GSCP redevelopment is the second sizable project that CCT has undertaken and demonstrates management's ability to improve the asset quality of its portfolio and to execute on significant developments. Following the recent completion of the CapitaGreen office building, CCT is the only commercial REIT to undertake major greenfield projects in Singapore to date.

While hefty, the costs and risks of the GSCP's development will be shared among the JV partners. In our view, the development is opportune because it is, at present, the only available new supply of office space due to come on line in 2021. Moreover, in the longer term, CCT will be able to fully own a prime new office asset in Raffles Place, if it purchases its JV partners' stakes.

CCT's management actively recycles its non-core assets and redeploys resources to upgrade the portfolio. In the first six months of 2017, CCT has disposed of two assets: (1) a 50% stake in One George Street, and (2) 100% of Wilkie Edge.

We estimate these disposals will generate net cash proceeds of S$870 million. This is sufficient to cover CCT's 45% portion of GSCP's cost, by our estimates. We project CCT will use the proceeds from the disposals to fund the construction of GSCP, with any excess cash utilized to pay down debt. Based on this, we expect CCT's ratio of funds from operations (FFO) to debt will hover around 9% while gearing (total debt to total assets) will be about 33% to 35%.

CCT's core operations remain stable with occupancies above 90% and lease expiries spread out. Although the commercial office market is currently quite subdued amid business caution, we believe that rental demand may be bottoming and we are projecting fairly flat rental reversions upon renewal of leases in the next 24 months.

However, going forward we believe that CCT has little room to maneuver, as there is no headroom to acquire more assets via debt without placing pressure on its credit metrics and pressuring our downward triggers.

The stable outlook reflects our expectations the CCT will maintain its profitability and solid asset quality amid stable market conditions over the next 24 months. We expect the company's EBITDA interest coverage to remain above 4x, with FFO to debt staying above 9% and total debt to total assets below 35%. We expect the large majority of the proceeds from the recent asset disposals will be applied to debt reduction. Given the GSCP commitments, there is limited buffer in our base case for further increases in debt without placing pressure on our expectation that the CCT maintains its ratio of total debt to total assets below 35%, and ratio of FFO to debt above 9%.

We may downgrade CCT if the REIT embarks on an aggressive debt-funded growth strategy. We may also lower the rating if lower occupancy and declining rentals weaken the company's cash flows, leading the ratio of FFO to debt to decline below 9% and total debt to total assets to rise above 35% on a sustained basis.

We may raise our rating if CCT generates above-average returns from its asset portfolio, expands and diversifies its asset base of properties, or adopts more conservative financial policies. An indication of this improvement will be a ratio of FFO to debt increasing to about 15% on a sustained basis.

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