The FINANCIAL -- Hong
Kong-10 October 2011: Fitch ratings has revised Cathay No.2 Real Estate
Investment Trust Fund's Outlook to Stable from Negative.
The ratings have been affirmed at National Long-Term 'A(twn)' and Short-Term 'F1(twn)'.
The change in Outlook follows evidence that the majority of the leases in Cathay No.2's commercial property portfolio due in 2011 were renewed at current or higher rental levels.
"This, together with Fitch's stable outlook of the Taipei office property market and steady occupancy history of the major tenants, has mitigated risks stemming both from the lease expiry concentration in 2012 and the sustainability of the rental cash flow for 2012," says April Chen, Associate Director in Fitch's Structured Finance team.
Renewals of major leases in the portfolio's three Grade B office buildings, namely MinSheng Building (MinSheng), World Building (World) and AnHo Building (AnHo) in Taipei have resulted in higher average rental per ping (one ping =35.6 sq ft) per month, excluding the first floor, for each building, compared with Fitch's expectation at the time of the previous rating action in October 2010, and Fitch's stabilised rental rates assumed at closing in 2006.
The ratings also reflect the capabilities of the REIT's management team and the adequate net operating cashflow generated by the three buildings. As of end-August 2011 revenue contributions from MinSheng, World and AnHo were 52%, 28% and 20%, respectively. The portfolio's occupancy rate was 95.3% at end-June 2011, a slight decrease from 96.1% at end-December 2010. Few leases in the World building were renewed at a discounted rental rate. Nevertheless, the REIT's projected office rental revenue for 2011, based on the H111 financial report, are 4.3% and 9.0%, respectively higher than the actual rental revenue for 2010 and Fitch's stabilised assumptions at closing.
The top 10 tenants of the three buildings contribute more than 55% of the total portfolio rental revenue. Nine of these have been tenants in the buildings for more than eight years, and six of them for more than 15 years. Fitch notes that 40% of the leases in terms of rental revenue will expire in 2012, with half of these from tenants with a history of long occupancy in the existing buildings. In view of this, along with Fitch's expectation of moderate economic growth rate in Taiwan in 2012, it is expected that a significant portion of tenants will renew their leases in 2012.
Cathay No.2 was established under the Taiwan Real Estate Securitisation Law in October 2006 with Mega International Commercial Bank ('AA(twn)'/Stable/'F1+(twn)') acting as trustee, and Cathay Real Estate Management as property manager. The REIT has TWD7.2bn face value outstanding equity issued and is listed on the Taiwan Stock Exchange.
The ratings do not address the REIT's equity return but its capacity for timely payment of its financial commitments, assuming that it has reached its ultimate borrowing limit of 35% of total fund's assets according to the REIT documents. However, the REIT has not incurred borrowing to date, and there is presently no proposal that would lead to additional debt being incurred.
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