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Moody's: OUE C-Reit's acquisition of One Raffles Place will add diversification
[SINGAPORE] Moody's Investors Service says that OUE Commercial Real Estate Investment Trust's (OUE C-Reit, Ba1 stable) proposed acquisition of an effective interest in One Raffles Place will increase its asset base significantly and add diversification to its portfolio.
However, the trust will need to fund the acquisition with an equal proportion of debt and equity to keep its financial metrics within the parameters of its Ba1 rating.
"Upon completion of the acquisition, OUE C-Reit's asset portfolio will more than double in value and its total net lettable area will increase significantly," says Jacintha Poh, a Moody's Assistant Vice President and Analyst. "The trust's asset and income diversification will also improve."
OUE C-Reit's reliance on its largest asset, OUE Bayfront - which accounted for 69 per cent of its total asset value at 31 March 2015 - will fall to around 33 per cent, once the acquisition completes.
Moody's expects that if the acquisition is successful, the gross rental income contribution from OUE Bayfront will fall to approximately 40 per cent from the 68 per cent maintained during the period starting from the trust's listing date of 27 January 2014 until 31 December 2014.
While the acquisition will increase OUE C-Reit's asset concentration in Singapore to 85 per cent from 69 per cent at 31 March 2015, One Raffles Place is a good quality and strategically located asset that will strengthen the trust's competitive position as a landlord in the Singapore office market.
In addition, the increase in gross revenue contribution denominated in Singapore dollars will reduce the impact of foreign exchange fluctuations from its ownership of Lippo Plaza in Shanghai.
While OUE C-Reit's plans to fund the proposed acquisition through a combination of debt, equity and convertible perpetual preferred units (CPPUs), it is unclear as to what proportion will comprise debt. In addition, because the terms and conditions of the CPPUs have not been finalised, it is unclear as to whether or not the CPPUs will receive equity treatment under Moody's methodology for hybrid instruments issued by speculative grade non-financial entities.
"Based on OUE C-Reit's total deposited assets as of 31 March 2015, we expect that the trust can raise its debt levels by around SGD890 million before reaching 45 per cent leverage; which is our maximum tolerance level for its Ba1 rating category," says Ms Poh, who is also the Lead Analyst for OUE C-Reit and other Singapore real estate investment trusts.
Ms Poh explains that leverage is measured by adjusted debt/total deposited assets.