Moody’s changes outlook on ART, FHT to stable; affirms Baa3 ratings

MOODY'S Investors Service has changed its outlook on Ascott Residence Trust : HMN 0% (ART) and Frasers Hospitality Trust : ACV 0% (FHT) to “stable” from “negative” while affirming its Baa3 rating for both trusts.

The credit rating agency expects both ART and FHT to benefit from the resumption of leisure and business travel, as movement restrictions ease and borders open across most countries.

In a report released on Thursday (May 12), Moody’s analyst Tay Yu Sheng said its change in outlook for FHT to “stable” reflects an improvement in the hospitality trust’s liquidity, Tay also expects FHT’s credit metrics to improve in the next 18 months, supported by a recovery in operating performance and recent asset divestment.

The outlook change for ART meanwhile, incorporates Moody’s expectation that the real estate investment trust (Reit) will remain financially prudent when executing its planned investments in longer-stay accommodation. Doing so will allow it to improve earnings diversification and buffer against the volatile hospitality sector, Tay added.

“Rental housing and student accommodation typically have 1-2 years of average stay compared with much shorter tenures in the hotel and serviced residence portfolios. At the same time, demand for longer-stay accommodation remained resilient during the pandemic, with occupancy rates of more than 90 per cent in 2021,” Moody’s noted.

ART’s Baa3 rating remains supported by its “good scale and portfolio of quality assets”, with 95 properties located mainly in key gateway cities across 15 countries as at Mar 31, 2022.

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The Reit also benefits from revenue visibility under its master leases and management contracts with minimum guaranteed income, Moody’s added. These arrangements contain mechanisms providing fixed income that protects against volatility in the hospitality sector and helped cushion disruptions caused by the Covid-19 pandemic.

As for FHT, Moody’s Baa3 rating is supported by the stapled group’s portfolio of 14 hospitality properties, which are geographically diversified across 6 countries and largely unencumbered. The trust is also “well-positioned” to capture travel recovery as its assets are strategically located in the prime areas of their respective cities.

Furthermore, FHT benefits from partial revenue visibility and downside protection under its long-term master lease agreements – which comprise fixed and variable components. This means the trust is able to receive minimum rental income regardless of the property's performance.

That being said, Moody’s holds the view that FHT’s rating remains constrained by its small asset size and significant tenant concentration risk as 12 of its 14 master lease agreements are with its sponsor Frasers Property.

FHT’s property portfolio was also valued at less than S$2 billion as at Mar 31, small relative to its global peers, Moody’s said.

ART units closed 1.8 per cent or S$0.02 lower at S$1.12 on Thursday, while FHT units dropped 7 per cent or S$0.045 to S$0.595.