CapitaLand Commercial Trust Downgraded To #BBB+# On Increasing Leverage Following Portfolio E Outlook Stable

Stocks and Financial Services Press Releases Thursday September 21, 2017 18:01
SINGAPORE--21 Sep--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Sept. 21, 2017--S&P Global Ratings lowered its long-term corporate credit rating on CapitaLand Commercial Trust (CCT), a Singapore-based REIT, to 'BBB+' from 'A-'. The outlook is stable. At the same time, we also lowered our long-term issue rating on the REIT's existing guaranteed notes to 'BBB+' from 'A-'.

The downgrade reflects our expectation that CCT's leverage is likely to increase over the next 24 months, primarily due to the REIT's proposed debt-funded acquisition of Asia Square Tower 2 (AST2).

We anticipate that CCT's ratio of funds from operations (FFO) to debt will remain below 9% in 2017-2019 after accounting for the acquisition. We had earlier expected the ratio to exceed 9% during the period. We also estimate that the REIT's ratio of debt to total assets will be about 37% over the next two to three years, compared with our previous expectation of 35%.

We believe the acquisition will improve CCT's portfolio quality over the next three to four years. AST2 is a Grade A office building in the downtown core of Singapore's commercial district. As of June 30, 2017, the property has a committed occupancy of 88.7% and net property income (NPI) yield of 3.6%. Following the acquisition, CCT's asset portfolio valuation will increase to about Singapore dollar (S$) 10.9 billion from S$9.0 billion as of June 30, 2017, making it the largest commercial landlord in Singapore. The REIT has demonstrated a consistent record of high occupancies and stable rentals throughout the property cycle.

We estimate the total acquisition consideration at S$2.1 billion-S$2.2 billion. CCT will fund the acquisition using the proceeds of a proposed S$700 million fully underwritten rights issuance, about S$340 million from the divestment of its One George Street property in June 2017, as well as a S$1.12 billion new bank loan. We expect CCT's funding needs to remain elevated owing to its recent redevelopment proposal of the Golden Shoe Car Park.

We expect CCT's financial strength to weaken considerably in 2017 because AST2 would have minimal income contribution, but the additional debt would be fully consolidated. However, CCT's credit ratios should progressively improve from 2018, when AST2 contributes full year NPI. The REIT's FFO-to-debt ratio will then recover to 7.2%-7.5%, from a low of 6.3% in 2017.

CCT's AST2 acquisition is in line with the company's operating strategy that emphasizes the recycling of its portfolio, replacing non-core assets with higher quality properties. Although the commercial office market is currently quite subdued, we believe the market has bottomed and will progressively improve from 2018 onward, given the absence of new supply until 2020. As such, we believe that AST2 as well as CCT's other high quality and well-located assets are well positioned to benefit from improving market fundamentals. Consequently, we project steady occupancies and modest rental reversions across CCT's portfolio in the next 24 months.

We believe that CCT has limited headroom to acquire more assets or develop other projects using debt without putting further pressure on its financial strength.

The stable outlook reflects our expectation the CCT will maintain its profitability and solid asset quality amid stable market conditions over the next 24 months. We expect the REIT's FFO-to-debt ratio to stay above 7% over the period. We believe CCT has limited buffer for further increases in debt, given the AST2 acquisition and the commitment for the Golden Shoe Car Park.

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 FFO-to-debt ratio declining below 7% on a sustained basis.

We may raise our rating on CCT if the REIT generates above-average returns from its asset portfolio, expands and diversifies its asset base, or adopts a more conservative financial policy. An indication of this improvement will be a ratio of FFO to debt increasing to about 9% on a sustained basis.


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