Fitch Ratings lowers Ascott Reit's outlook to negative

FITCH Ratings on Tuesday revised its outlook to negative from stable for Ascott Real Estate Investment Trust (Ascott Reit), one part of mainboard-listed stapled group Ascott Residence Trust (ART).

The credit ratings agency also affirmed the real estate investment trust's (Reit) long-term issuer default rating at BBB, its BBB senior unsecured debt rating, as well as the BBB long-term ratings on its S$2 billion multicurrency medium-term note programme and the outstanding senior unsecured notes under the programme.

The negative outlook reflects the Covid-19 pandemic-related challenges facing the global travel, hospitality and lodging industry over the next 12-24 months, which are likely to constrain Ascott Reit's operating cash flows and keep its leverage elevated, Fitch said.

The agency expects master-lease contracts expiring in the next 12-18 months to be renewed on variable-rent terms, given the current environment. 

It also believes Ascott Reit's long-stay tenant mix will drop due to weak business travel.

About 18-19 per cent of the Reit's master-leased income expires in 2020 and 2021, which is a "manageable" exposure, Fitch said. "However, we do not rule out master lessees renegotiating contracts prior to expiry if the downturn is prolonged."

As for the affirmed ratings, Fitch said the Reit has sufficient revolving credit lines and cash available to cover debt maturing this year and next year. 

"We expect the trust to be able to maintain a robust liquidity buffer of cash and undrawn revolving credit facilities to refinance its upcoming maturities, underpinned by its strong access to domestic credit and capital markets," it wrote.

Nevertheless, the existing master-lease contracts, which made up 59 per cent of the Reit's gross profit in the first half of this year, should continue to provide a "significant" buffer to the operating cash flows. 

"The trust's cash flows are also buttressed by its geographical diversification because different markets are affected by the pandemic to varying degrees and at different points in time," the agency added.

Fitch expects Ascott Reit's funds-from-operations net leverage to rise to about 11 times by the end of this year, from 9.2 times as at end-2019, before recovering to around 8.5 times in 2021, which is the appropriate level for its BBB rating.

Its deleveraging pace will likely pick up if it completes the sale of one of its properties in France in Q4 2020 and another property in China in Q1 2021 for a total of S$191 million as announced last month, Fitch noted.

That being said, a deeper or more prolonged decline in trading conditions for the Reit's properties poses a "meaningful" risk to Fitch's forecasts and could lead to leverage remaining higher than 8.5 times beyond 2021, which could result in a downgrade.

Stapled securities of ART, which also includes Ascott Business Trust, were trading flat at S$0.89 as at 3.17pm on Tuesday.