Moody's Investors Service has upgraded the issuer rating of Keppel REIT to Baa2 from Baa3.
The outlook on the rating is stable.
Moody's upgrade of Keppel REIT's rating comes after it placed the Baa3 rating on review for upgrade on 2 July.
The upgrade reflects Keppel REIT's: (1) enlarged and high-quality asset portfolio in Singapore and Australia; (2) strong operating performance; and (3) proactive capital management, which minimises refinancing risk for the next 12 to 18 months.
The review for upgrade focused on the trust's ability to continue pursuing its long-term growth plan, while maintaining leverage (debt/total deposited assets) of between 40 per cent and 45 per cent.
In light of the trust's announcement on 26 June of the acquisition of a commercial property – 8 Exhibition Street in Melbourne – Moody’s reviewed Keppel REIT's funding choices for the transaction. In addition, Moody's reviewed the trust's ongoing early refinancing efforts.
The upgrade follows the acquisition of a 50 per cent interest in the property. Keppel REIT had funded 63 per cent of the total purchase consideration of SGD192.4m with equity – through a successful share placement of 95 million new units, raising SGD119.7m – and 37 per cent with debt. The trust's efforts to refinance 60 per cent of its borrowings due in 2014 also support the upgrade.
"Keppel REIT's successful equity issuance to fund its acquisition demonstrates the trust's commitment and ability to maintain its leverage within 40 per cent to 45 per cent – a level which supports its Baa2 rating – while pursuing its long-term growth plans. The company's pro-forma leverage, after the acquisition, is approximately 41.2 per cent and, going forward, we expect it to be closer to 40 per cent rather than 45 per cent," says Jacintha Poh, a Moody's analyst.
"The trust's proactive capital management, as evidenced by its early refinancing of all of debt maturing in 2013 and 60 per cent of borrowings due in 2014 also support the upgrade. In addition, Keppel REIT has proven its ability to obtain funds at low interest rates, allowing the trust to maintain a high interest coverage ratio of approximately 6.2x as at end-June 2013," adds Poh.
Going forward, Moody’s remains cautious on Keppel REIT's continued expansion into the Australian office market due to growing headwinds from negative pressure on white-collar employment in Australia which has resulted in rising vacancy rates. Nonetheless, the trust's exposure to Australia post acquisition of 8 Exhibition Street is less than 15 per cent of its total investment property value, and provides diversification to its portfolio. The Australian properties also have high occupancy rates of over 95 per cent and long weighted lease expiries of approximately 12 years.
The rating outlook is stable, reflecting Moody's expectation that Keppel REIT will continue to generate stable cash flows from its portfolio, driven by steady occupancy levels and positive rental reversions.
Moody's also expects Keppel REIT to maintain its financial discipline when pursuing growth and to keep its credit profile within targeted parameters.
Keppel REIT is a commercial real estate investment trust which listed on the Singapore Exchange on 28 April 2006. It has a portfolio of nine properties located in Singapore and Australia, with a total appraised value of approximately SGD6.8bn as at end-June 2013. It is sponsored by Keppel Land Limited (unrated), one of the largest property developers in Asia.