Taiwan Ratings Corp. Assigns Millerful Number One Real Estate Investment Trust 'twA+/twA-1' Preliminary Ratings; Outlook Stable

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Taiwan Ratings Corp. Assigns Millerful Number
One Real Estate Investment Trust 'twA+/twA-1'
Preliminary Ratings; Outlook Stable
July 4, 2018

Overview
−   Taiwan-based Millerful No.1 REIT's satisfactory asset quality and diversified property type and
    tenant mix support the trust's competitive position. These strengths are mitigated by likely
    higher rental volatility associated with Taimall that contributes a significant portion of the REIT's
    rental income.
−   We believe Millerful No.1 REIT will acquire Songlin building and selected floors of the NASA office
    building through borrowing as proposed, which will increase its ratio of debt to EBITDA to around
    9.3x in 2018. There is a chance the trust may further increase leverage to enlarge its asset
    portfolio and enhance returns, but we expect total debt to remain less than 35% of total assets.
−   We are assigning our 'twA+' long-term and 'twA-1' short-term preliminary issuer credit ratings
    on Millerful No.1 REIT.
−   The rating outlook is stable, reflecting our expectation that the trust can generate relatively
    stable operating cash flow through its satisfactory asset quality and diversification, to maintain
    ratio of debt to EBITDA below 11x over the next two years. That's despite potential weakening of
    its cash flow coverage ratios as a result of debt-funded portfolio property acquisitions.

Rating Action
Taiwan Ratings Corp. today assigned its 'twA+' long-term and 'twA-1' short-term preliminary issuer
credit ratings to Taiwan-based Millerful Number One Real Estate Investment Trust (Millerful No.1
REIT). The outlook on the long-term preliminary rating is stable. The final ratings on Millerful No.1
REIT will be subject to the successful listing of the REIT and our review on the final documents after
the trust's establishment.

Rationale
The ratings reflect Millerful No.1 REIT's satisfactory asset quality and diversification, which underpin
our expectation that the trust will generate relatively stable operating cash flow and keep its ratio of
debt to EBITDA below 11x over the next two years. The ratings also reflect our view that Millerful No.1
REIT will maintain a prudent financial policy and keep its ratio of debt to asset comfortably below
35% over the same period despite the possibility of debt-funded acquisitions to its asset portfolio.

rrs.taiwanratings.com.tw

The portfolio's satisfactory asset quality underpins Millerful No.1 REIT's competitive position and its
ability to attract creditworthy tenants, in our view. However, we expect the trust's operating cash flow
to be more volatile than its domestic office-rental-based peers', due to the trust's mall-based
operation. In our base case, we assume Millerful No.1 REIT's asset portfolio is composed of Taimall
(floors one to four), a family oriented shopping mall in Taoyuan City in northern Taiwan, Songlin
building (mostly occupied by Green World Hotel in Taipei City), part of the Metropolitan International
Center and NASA office buildings, both in Taipei City, and shares in overseas and domestic REITs.

We assess Taimall has a well-established market position and customer base in Taoyuan's Nankan
area, supported by a good selection of popular brands and diverse range of services. We expect
Taoyuan's above-average population growth and Taimall's ongoing effort to upgrade services and
optimize the brand composition to support moderate revenue growth over the next two years. That's
despite increasing competition from newer malls opening in the area. We anticipate the REIT's office
buildings will maintain full occupancy and slightly higher rental levels than nearby competitors,
supported by their good location and property condition. NASA and Metropolitan office buildings are
located close to subway stations in Taipei City, which provide convenient transportation links to
office tenants. We expect the trust's investment in overseas and domestic REITs will generate stable
dividend income, underpinned by the REITs' portfolio diversity.

However, a substantially lower number of Chinese tourists arriving in Taiwan is likely to add
operating pressure on Green World Hotel, due to its location in a major gathering place for tourists.
Growth from Northeast and Southeast Asia tourists may help to offset some of this impact, but
cannot fully make up for the shortfall in Chinese tourists, in our view.

We believe Millerful No.1 REIT's rental income is subject to higher volatility than local office peers, as
a result of Taimall's need for periodic renovations and the fact the majority of the mall's rental
income fluctuates with store sales. The trust's satisfactory asset and tenant diversification partly
offset this weakness, in our opinion. We expect the REIT's mall, office, hotel business, and dividend
income to contribute 53%, 13%, 12% and 22%, respectively, of EBITDA in 2018.

Meanwhile, we expect the REIT's office and hotel tenants to generate stable rental income for the
trust through their long-tenor fixed-rate contracts. This can partly reduce the degree of impact from
Taimall's operating swing on the overall portfolio. In addition, Millerful No.1 REIT's tenant mix is well
diversified, with the largest tenant accounted for less than 10% of total rental income. A diversified
tenant mix can lower the likelihood of significant performance fluctuation caused by a single tenant.

We expect Millerful No.1 REIT to use debt leverage to enhance its return, but sustain its total debt to
asset ratio below 35%, as per local regulations. In our base case, we assume the REIT will acquire a
portion of the planned asset portfolio through borrowing, which leads to a ratio of debt to EBITDA
around 9.3x by the end of 2018. Meanwhile, we believe the REIT will adopt a more active strategy in
portfolio management and is likely to further increase leverage beyond our base case scenario to
support new asset acquisitions. To reflect the negative deviation risk in Millerful No.1 REIT's credit
metrics, we assess the trust's financial policy as negative and arrive at its stand-alone credit profile
which is one-notch below its anchor.

Our base case assumes:
       Millerful No.1 REIT will acquire the lower four floors of Taimall, Songlin building, selected
        units in Metropolitan building, and selected floors of the NASA office building, and New
        Taiwan dollar (NT$) 2.5 billion worth of shares in overseas and domestic REITs. All the
        acquisitions will be completed before the end of 2018.
       Taiwan's real GDP to grow 2.4% in 2018 and 2.6% in 2019, based on S&P Global's estimates.
       The recent slight pickup of economic growth underpins our view of moderate growth in retail
        spending and steady occupancy in offices. The hotel sector is likely to underperform GDP
        growth, due to shrinkage of Chinese tourists.
       All of the trust's buildings will remain fully occupied over the next two years.

rrs.taiwanratings.com.tw                                                                                     July 4, 2018   2

    Taimall's rental income to increase by 1%-3% in 2018, driven by some space renovation on
         the first floor and the introduction of new popular restaurants. We expect rental levels at
         Songlin, NASA, and Metropolitan buildings to remain stable over the next two years.
        Blended dividend yield on overseas and domestic REITs of 3.5%-4.5% over the next two
         years.
        The REIT's operating expense ratio will remain 13%-15% of revenue over the next two years.
        Non-operating expense in 2018 reflects the REIT's setup costs.
        The trust will incur very limited maintenance expenses because of its properties' good
         condition and the agreement that the tenants will be responsible for the major maintenance
         of the Songlin, NASA, and Metropolitan buildings.
        Interest rate of 1.7%-1.8%.
        100% dividend payout as stipulated in the REIT's trust deed.
        10% haircut on cash and short-term investments for surplus cash adjustment on debt.

Based on these assumptions, we arrive at the following credit measures:

        EBITDA margin of 84%-86% in 2018 and 2019.
        Ratio of adjusted debt to EBITDA of 8.7x-9.7x in 2018 and 2019.
        Ratio of debt to capital of 25%-26% in 2018 and 2019.

Liquidity: Strong
The short-term preliminary credit rating on Millerful No.1 REIT is 'twA-1'. We believe the trust has
strong liquidity to meet its needs up to the end of 2019, based on our view that the ratio of liquidity
sources to liquidity uses will be around 2x in 2019. We also believe the trust has the ability to cope
with high-impact low-probability events without refinancing. In addition, we consider Millerful No.1
REIT has generally prudent risk management, a solid relationship with Taiwan banks, and a generally
high standing in Taiwan's credit market, backed by its properties of satisfactory quality. The trust
had zero debt upon its establishment.

Principal Liquidity Sources

 − Cash and short-term investments: Zero at the end of 2017 and NT$250 million-NT$270 million
   at the end of 2018.
 − Cash flow from operations: NT$250 million-NT$270 million in 2018 and NT$330 million-
   NT$370 million in 2019.

Principal Liquidity Uses

 − Distribution to unit holders: Zero in 2018 and NT$250 million-NT$270 million in 2019.

rrs.taiwanratings.com.tw                                                                                  July 4, 2018   3

Outlook
The stable outlook reflects our expectation that Millerful No.1 REIT can maintain satisfactory asset
quality and diversified asset and tenant mix, which will support its credit quality and relatively stable
operating cash flow generation over the next 24 months. The stable outlook also reflects our
expectation that the trust's ratio of debt/EBITDA will remain under 11x even if the REIT acquires new
properties and increases its ratio of debt to assets to close to 35%.

Downward scenario
We may lower the long-term rating on Millerful No.1 REIT if the trust's ratio of debt to EBITDA
increases to above 11x for an extended period. Such deterioration could result from aggressive debt
funded property acquisitions accompanied by high tenant turnover or unexpected sluggishness in
the general economy that substantially weakens the asset portfolio's performance.

We may also lower the rating by one notch if Millerful No.1 REIT's portfolio diversification weakens,
so that the trust's operating cash flow relies heavily on the performance of a single asset. A single
asset EBITDA contribution of materially above 60% over an extended period would indicate such
deterioration, which can result from strong rental growth in Taimall or different acquisition plan that
the REIT not raises debt to acquire Songlin building and selected floors of the NASA office building as
our assumption. In addition, we may lower the rating if the REIT's competitive position deteriorates or
the volatility of its profitability far exceeds our expectation, possibly due to a higher level of
competition or higher performance volatility associated with Taimall.

Upward scenario
Though the likelihood is relatively low over the next one to two years, we may raise the long-term
rating if Millerful No.1 REIT could reduce the volatility of its profitability and further diversify its cash
flow sources, while keeping the ratio of debt/EBITDA comfortably below 11x even if leverage
increases to 35% of total assets. This could happen if the trust can: 1) materially strengthen EBITDA
diversification through portfolio adjustment, and 2) maintain its current EBITDA margin through
economic downturns and manage cost swings associated with Taimall.

Rating Score Snapshot
Preliminary Issuer Credit Ratings:                    Modifiers:
twA+(prelim)/Stable/twA-1(prelim)
                                                      − Diversification/Portfolio effect: Neutral (no
Note: The descriptors below are on a global             impact)
scale.                                                − Capital structure: Neutral (no impact)
                                                      − Financial policy: Negative (-1 notch)
Business Risk: Satisfactory
                                                      − Liquidity: Neutral (no impact)
 − Country risk: Intermediate                         − Management and governance: Neutral (no
 − Industry risk: Low                                   impact)
 − Competitive position: Satisfactory                 − Comparable rating analysis: Neutral (no impact)

Financial Risk: Intermediate
                                                      Stand-alone credit profile: twa+
 − Cash flow/Leverage: intermediate
                                                      − Group credit profile: twa+
 Anchor: twaa-

rrs.taiwanratings.com.tw                                                                                        July 4, 2018   4

Related Criteria
  −    General Criteria: Methodology For Linking Long-Term And Short-Term Ratings - April 07, 2017
  −    General Criteria: Country Risk Assessment Methodology And Assumptions - November 19, 2013
  −    General Criteria: Group Rating Methodology - November 19, 2013
  −    Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments - November
       19, 2013
  −    Criteria - Corporates - General: Corporate Methodology - November 19, 2013
  −    General Criteria: Methodology: Industry Risk - November 19, 2013
  −    Criteria - Corporates - Industrials: Key Credit Factors For The Real Estate Industry - November
       19, 2013
  −    Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global
       Corporate Issuers - December 16, 2014
  −    Understanding Taiwan Ratings' Rating Definitions, www.taiwanratings.com – June 26, 2018
  −    General Criteria: Methodology: Management And Governance Credit Factors For Corporate
       Entities And Insurers - November 13, 2012
  −    General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
(Unless otherwise stated, these articles are published on www.standardandpoors.com, access to which requires a registered account)

Ratings List
New Rating; Outlook Assigned

Millerful Number One Real Estate Investment Trust

Preliminary Issuer Credit Ratings                                                          twA+(prelim)/Stable/twA-1(prelim)

Copyright © by Taiwan Ratings Corp. All rights reserved.

rrs.taiwanratings.com.tw                                                                                                             July 4, 2018   5

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rrs.taiwanratings.com.tw                                                                                                                               July 4, 2018           6