Fitch Ratings cuts CDL H-Reit outlook, expects pandemic to hurt Ebitda

FITCH Ratings has lowered its outlook on CDL Hospitality Real Estate Investment Trust (CDL H-Reit) to negative from stable.

At the same time, the agency affirmed the Singapore-based trust's long-term issuer default rating at BBB-.

CDL H-Reit is one part of mainboard-listed stapled group CDL Hospitality Trusts, which also comprises CDL Hospitality Business Trust.

Fitch revised its outlook to negative because it expects operating Ebitda (earnings before interest, tax, depreciation and amortisation) for the real estate investment trust (Reit) to take a body blow from the economic disruptions related to the Covid-19 outbreak.

The pandemic has severely curtailed travel, hospitality and leisure activities globally. The credit rating agency's forecasts assume a harsh - but temporary - decline in global economic activity as containment measures are implemented to stop the spread of the novel coronavirus, and as governments undertake concerted fiscal and monetary measures.

The Reit's operating Ebitda will likely plunge by almost 75 per cent, dragged down by a dive in revenue from the sharp decline in hotel occupancy this year along with some fixed operating costs, Fitch said.

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It predicts revenue will shrink by almost half and net property income margin will narrow to around 55 per cent, from around 75 per cent historically.

"As a result, CDL H-REit is likely to breach most of its negative rating sensitivities this year," it added in a report on Monday.

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, Fitch said.

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 continued uncertainty about the recovery of the global hospitality industry.

Meanwhile, the BBB- rating was affirmed because the Reit's credit metrics have sufficient headroom for a temporary deterioration.

This rating will be downgraded if there is a "material and persistent worsening" in the credit metrics to levels more in line with a lower issuer default rating.

"The affirmation also captures liquidity that is sufficient for CDL H-Reit to manage through a period of heightened business volatility and the company's prudent financial management, which was evident in its robust financial profile before the Covid-19 outbreak," Fitch said.

As at the midday break on Tuesday, stapled securities of CDL Hospitality Trusts were trading at 92.5 Singapore cents, up 6.5 cents or 7.6 per cent.