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

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.

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

Rating Criteria Industry risk Business risk Financial risk

Property Industry Characteristics  Cyclical trends  Competition  Economic outlook

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

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

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

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

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

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

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

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

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

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

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

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