Fitch cuts CDL H-Reit outlook; sees Ascott Reit as less vulnerable

Singapore

FITCH Ratings has lowered its outlook on CDL Hospitality Real Estate Investment Trust (CDL H-Reit) to negative from stable, even as it affirmed the trust's long-term issuer default rating at BBB-.

The rating agency said the Singapore-based real estate investment trust (Reit) has a weaker business profile than other Singapore Reits, in particular hospitality peer Ascott Reit, which Fitch described as being less vulnerable to disruptions arising from the Covid-19 pandemic.

Fitch said it lowered the outlook on CDL H-Reit, which is part of mainboard-listed stapled group CDL Hospitality Trusts (CDLHT), on expectations that its operating Ebitda (earnings before interest, tax, depreciation and amortisation) will plunge by almost 75 per cent as a result of economic disruptions caused by the coronavirus outbreak.

The forecasts assume a harsh - but temporary - decline in global economic activity as containment measures are implemented to stop the spread of Covid-19, and as governments undertake concerted fiscal and monetary measures.

CDL H-Reit's operating Ebitda will take a hit from an anticipated dive in revenue in the wake of the sharp decline in hotel occupancy this year while grappling with some fixed operating costs, it added. Fitch predicts that revenue will shrink by almost half and net property income margin will be trimmed to around 55 per cent, from about 75 per cent historically.

"As a result, CDL H-Reit is likely to breach most of its negative rating sensitivities this year," it said.

Hotel demand is expected to recover gradually only from the fourth quarter of 2020, before returning to pre-outbreak levels by the second half of 2021, according to Fitch.

There is, however, a risk that CDL H-Reit will not be able to return to within Fitch's rating sensitivities by end-2021, given the uncertainty about the recovery of the global hospitality industry.

Meanwhile, the BBB- rating was affirmed because CDL H-Reit's credit metrics have sufficient headroom for a temporary deterioration. The trust also has sufficient liquidity to manage through a period of heightened business volatility, as well as prudent financial management evident in its robust financial profile before the coronavirus outbreak, Fitch said.

Meanwhile, Ascott Reit is rated one notch higher than CDL H-Reit. This is because Ascott Reit has over 70 properties, versus CDL H-Reit's 19, as well as a larger proportion of master leases in its portfolio. Ascott Reit's assets are also more geographically diversified, with no more than 15 per cent of gross profits stemming from a single market, while CDL H-Reit gets about 60 per cent of its net operating profit from Singapore, Fitch said.

In a separate report, the ratings agency said Ascott Reit's operating cash flows are less vulnerable to stress from the pandemic than its lodging industry peers, thanks to its longer-term revenue visibility and strong sponsor - The Ascott Limited, which is wholly-owned by CapitaLand.

More than half of Ascott Reit's gross profit is from long-term master leases with fixed rents and very limited direct costs, from management contracts with minimum guaranteed income or from tenants staying for 12 months or more. In contrast, most global lodging peers are "almost exclusively" exposed to overnight re-pricing of revenues and discretionary demand, which makes them susceptible to a sharp drop in earnings during an economic downturn, Fitch said.

The majority of Ascott's master leases are also contracted with its sponsor, which is the largest serviced residence operator globally. After the last global downturn, The Ascott Limited continued to pay these fixed-rent contracts in 2010, Fitch pointed out.

Ascott Reit is part of stapled hospitality group Ascott Residence Trust (ART). On Tuesday, stapled securities of ART rose 2.5 Singapore cents or 3 per cent to close at 86.5 cents, while CDLHT stapled securities gained 6.5 Singapore cents or 7.6 per cent to end trading at 92.5 cents.