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Yuexiu Real Estate Investment Trust #BBB-# Rating Affirmed On Deleveraging Outlook Stable

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HONG KONG--6 Dec--S&P Global Ratings

HONG KONG (S&P Global Ratings) Dec. 6, 2017-- S&P Global Ratings today affirmed its 'BBB-' corporate credit rating on Yuexiu Real Estate Investment Trust. The outlook is stable. At the same time, we affirmed our 'BBB-' long-term issue ratings on the company's guaranteed medium-term notes (MTN) program and outstanding senior unsecured notes.

We affirmed the rating on Yeuxiu REIT because we believe the impact on leverage from a planned acquisition will be temporary. We expect Yuexiu REIT to deleverage over the next six months, due to organic growth and in line with a corporate asset disposal plan. In the meantime, leverage will remain weak for the current rating due to the REIT's plans to acquire a majority stake in a commercial property complex comprising an office building, a shopping arcade, and a car-parking lot in Wuhan. The project is an asset injection from the REIT's sponsor, Yuexiu Property Co. Ltd. (BB+/Stable/--). On Dec. 4, 2017, independent shareholders approved the Hong Kong-listed REIT's acquisition plan.

We anticipate the REIT's ratio of funds from operations (FFO) to debt will deteriorate to about 6.1% in 2017 because of a point-in-time effect from the acquisition. This compares with 7.4% in 2016. We expect the company to gradually deleverage to about 7% in 2018, mainly supported by its organic growth from existing projects, as well as rental support provided by Yuexiu Property Co. Ltd for the Wuhan project as it ramps up. In our base-case assumption, we have not factored in asset disposals because none are committed at this point.

Our expectation is that the weaker credit metrics can be tolerated because we believe the REIT will dispose of assets and provide a greater financial buffers and credit metrics that are consistent with the current rating. Management's progress on deleveraging over the next six months will be a key rating consideration. Rating pressure would arise and could lead to a downward action if we believe that the potential asset sales are not sufficient to restore its financial position.

Yuexiu will mainly fund the Chinese renminbi (RMB) 1.9 acquisition costs with overseas bank loans of RMB1.22 billion. The remaining 40% will be funded through an interest-bearing deferred payment to the sponsor of no more than RMB820 million. The deferred payment will be rolled over as a short-term shareholder loan after one year if it is not settled by asset sales or internal funding.

In our view, the proposed acquisition of a 67% stake in the Wuhan complex is aligned with Yuexiu's strategic focus on high-quality investment properties. The project was completed in 2016 and it could contribute over RMB160 million in rental income per year once fully running. The acquisition would also reduce the trust's concentration in Guangzhou after its purchase of a Shanghai office tower last year.

The stable outlook reflects our expectation that Yuexiu REIT will demonstrate financial discipline in deleveraging through asset disposals, and that it can maintain high occupancy rates and stable rental growth, and its good positions across its major assets over the next two years. We expect the REIT to have lower flexibility to take on additional leverage as bounded by restrictions in the REIT code. We also believe that company will benefit from an income support arrangement provided by sponsor Yuexiu Property. The arrangement will last for three years, and is meant to give the REIT more time to ramp up the occupancy and rents for the Wuhan complex.

We could lower our rating on Yuexiu REIT if (1) the REIT's asset disposal plans do not materialize, such that FFO-to-debt ratio stays below 7% on a sustained basis; (2) it enters into other major debt-funded transactions causing a delay to its deleveraging; or (3) the occupancy and rental growth, especially for Guangzhou IFC and its properties in Wuhan, are materially weaker than our expectations.

We believe the rating upside is remote at this point. However, an upward rating transition could emerge if Yuexiu REIT substantially deleverages and commits to a stronger financial discipline, such that its FFO-to-debt ratio will be maintained at above 9% on a sustained basis. We may also raise the rating if Yuexiu REIT significantly expands its property portfolio with geographically diversified, well tenanted, and high quality assets, while maintain the leverage levels.


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