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Link Real Estate Investment Trust ‘A’ Rating Affirmed With Stable Outlook

          HONG KONG (S&P Global Ratings) July 20, 2018--S&P Global Ratings today affirmed its 'A' long-term issuer credit rating on Link Real Estate Investment Trust (Link REIT). The outlook is stable. At the same time, we also affirmed our 'A' long-term issue rating on the REIT's guaranteed senior unsecured notes.
          We affirmed the ratings to reflect our view that Link REIT will maintain its strong position in the non-discretionary retail market, which is likely to remain resilient to economic downturns. 
          The REIT will also continue to benefit from strengthened asset quality supported by its high-quality asset acquisitions, asset enhancement, and divestment of non-core assets. We expect Link REIT to retain its operating strategy of maintaining satisfactory growth in rental rates and improving geographic and product diversity. 
          Link REIT's stable and robust rental income support its operating stability. The trust's properties have high occupancy rates and satisfactory rental reversions (in terms of rental amounts following lease expiry). A diverse tenant mix with various lease maturities also supports income stability. Food and beverage and supermarkets--relatively stable businesses--account for about 50% of the portfolio. 
          We expect Link REIT's operating performance to improve following the completion of two new projects. A new commercial project in Mongkok will start to contribute earnings in fiscal 2019 (ending March 31, 2019) and is likely to partially offset the loss in rental income from divestments. We anticipate that the trust's Kowloon East office project will be completed in the first half of 2019. About 32% of the project is secured for long–term lease contracts.
          Link REIT faces some execution risk in these development projects. Nonetheless, we believe this is mitigated by the REIT's track record of successful construction and leasing progress. 
          Link REIT's acquisition appetite is likely to be focused on high-quality assets over the next 12 months, compared with a recent focus on asset recycling. This strategy may likely reduce the financial buffer and result in lower credit metrics than our base-case expectation. The trust's increased cash balance from divestments could temper the risk.
          We expect Link REIT's ratio of funds from operations (FFO) to debt to be more than 20% over the next two years. The ratio was 21% in fiscal 2018. We forecast capital expenditure (excluding potential acquisitions) to be Hong Kong dollar (HK$) 2.0 billion-HK$2.5 billion per year for the next two years. This is mainly for construction of the Kowloon East project and for asset-enhancement projects. We expect Link REIT's debt to remain consistent with its financial policies and operating strategy. 
          We have revised our assessment of Link REIT's liquidity to strong from adequate. This reflects the REIT's high cash balance from divestments and satisfactory committed credit lines relative to its maturing debt and capital expenditure requirements over the next 12-24 months.
          We expect Link REIT's liquidity sources to be more than 1.5x its liquidity needs over the next 12 months, and more than 1x in the next 24 months. The assessment also reflects the Trust's high standing in capital markets and sound banking relationships. We also believe that Link REIT has the flexibility to lower capital spending or sell assets to preserve liquidity if needed. 

          Principal liquidity sources include: 
          - Unrestricted cash balance of HK$11.7 billion as of March 31, 2018.
          - Available committed undrawn bank lines of about HK$11 billion as at March 31 2018.
          - FFO and working capital inflow that we project at about HK$5 billion-HK$6 billion over the year ending March 2019.

          Principal liquidity uses include: 
          - Short-term debt maturities of HK$2,589 million as of March 31, 2018.
          - Capital expenditure that we project at HK$2 billion-HK$2.5 billion in fiscal 2019.
          - Dividends and share repurchases that we estimate at HK$10 billion-HK$11 billion.
          The stable outlook reflects our expectation that Link REIT will moderately grow its stable recurring rental income over the next 24 months. It also reflects our view that, in executing its operating strategy the REIT would utilize debt of up to 25% of its assets. At this peak gearing level, we expect the REIT's FFO-to-debt ratio to be greater than 12%. 
          We could lower the rating if: (1) Link REIT's risk appetite for debt-funded acquisitions and share buyback increases substantially beyond our expectations; (2) the REIT's rental income from new acquisitions are of weaker asset quality ; or (3) Link REIT substantially increases its development exposure, such that its strong competitive position weakens.
          In a less-likely scenario, we could lower the rating if Hong Kong's mass-market retail sector significantly deteriorates and weakens the growth of Link REIT's rental income. Downward pressure on the rating would be seen if the REIT's FFO-to-debt ratio remains below 12% for a sustained period with no signs of short-term recovery. 
          The rating upside is limited over the next 12-24 months. We could raise the rating if Link REIT adopts a more conservative acquisition strategy and financial policies that result in consistently stronger financial metrics.