Moody's changes ESR-Reit's outlook to negative, affirms Baa3 rating

RATING agency Moody's has affirmed ESR-Reit's investment grade Baa3 rating, but changed its outlook to negative from stable.

The change comes after the real estate investment trust's (Reit) debt-funded acquisition of 8 Tuas South Lane amid continued pressures on occupancy and rental rates, said Moody's analyst, Rachel Chua.

"Assuming the acquisition goes ahead as planned, we expect ESR-Reit's leverage, as measured by adjusted net debt to Ebitda, to weaken materially to around eight times in 2018 compared to 7.2 times at September 30, 2017, which exceeds our downgrade trigger of 7.5 times," she said.

Ebitda refers to earnings before interest, taxes, depreciation and amortisation. The net debt to Ebitda ratio can be thought of as the number of years it will take for a firm's cashflows to pay off its debt, all things equal.

But Moody's said the Reit's existing Baa3 rating is "underpinned by its portfolio of well-located industrial assets in Singapore, supported by a diversified tenant base, demonstrated track record in managing its assets, and high degree of financial flexibility, given its fully unencumbered asset portfolio. Moreover, it has no material near-term maturity until November 2018."

ESR-Reit was formerly known as Cambridge Industrial Trust. It last traded unchanged at S$0.57.