1. Rating Methodology for Real Estate Investment Trusts (REITs)
Daniel Hsiao
Associate Director
Corporate Ratings, Taiwan Ratings
July 7, 2004

2. What is a REIT?
 A REIT pools investors’ capital for investing in various forms of real estate.
 REITs seek out investment opportunities and actively manage real estate assets.
 REIT investors are not directly investing in real estate property, but instead own REIT units that are publicly traded.

3. REIT Structure Trustee REIT Unit Holders Trust Manager Properties
Distributions
Investment
REIT
Trust Manager
Ownership
Distributions
Properties

4. Rating Criteria
Industry risk
Business risk
Financial risk

5. Property Industry Characteristics
 Cyclical trends
 Competition
 Economic outlook

6. Business Risk Considerations
 Asset quality
 Diversification
 Operating stability
 Operating strategy & management experience

7. Asset Quality  Location quality (primary versus secondary)
 Property age and extent to which the portfolio has been renovated
 Seasoning of asset and length of time under ownership

8. Diversification & Operating Stability
 Asset-type concentration
 Geographic concentration
 Tenant concentration & credit quality
 Lease maturity profile
 Portfolio rents vs. prevailing market rents
 Portfolio vacancy rates vs. market rates
 Insurance requirements & quality of coverage

9. Operating Strategy & Management Experience
 Investment strategy
 Appetite for portfolio growth
 Asset selection process
 Administrative framework
 Organizational structure

10. Financial Profile  Financial policy  Profitability
 Cash flow protection
 Capital structure
 Financial flexibility

11. Financial Policy  Plans to acquire and sell properties
 Funding strategy
 Dividend policy

12. Profitability & Cash Flow Protection
 Operating margin
 Breakdown of costs
 Interest coverage ratios
 Funds from operations to debt
 Capital spending plans

13. Capital Structure & Financial Flexibility
 Leverage
 Terms and conditions of borrowings
 Unencumbered collateral
 Liquidity
 Bank lines
 Number and diversity of shareholders

14. Case Study: Fubon No.1 REIT
 Fubon No.1 REIT to be the first to list in Taiwan
 NT$5.8 billion property portfolio
 Two office buildings & one service apartment
 Fubon Real Estate Management is the manager
 Fubon Group will hold 20% of the trust units

15. Strengths of Fubon No.1 REIT
 Good quality property portfolio
 Above-average quality tenant mix
 Moderate gearing policy
 Strong links with the Fubon Group

16. Weaknesses of Fubon No.1 REIT
 Exposed to cyclical fluctuations in Taipei City's office market
 Geographic, asset, and tenant concentration
 Lack of track record on operating REITs

17. Preliminary Rating Results
 Taiwan Ratings assigned Fubon No.1 REIT its long-term credit rating of ‘twA-’
 Short-term rating: ‘twA-2’
 Outlook: Stable