Moody's raises ESR-Reit outlook to 'stable', affirms 'Baa3' investment grade rating

CREDIT ratings agency Moody's Investors Services has raised its outlook for ESR-Reit to "stable" from "negative", while affirming the industrial real estate investment trust's (Reit) "Baa3" issuer rating.

The revision came after ESR-Reit raised S$141.9 million of equity capital in March to repay debt.

The revision "reflects the improvement in the trust's credit profile and capital structure, following its reduction in debt levels through the application of equity proceeds," Moody's analyst Rachel Chua said. "This alleviates ratings pressure driven by a series of debt-funded acquisitions over the last 12 months."

Moody's expects ESR-Reit's adjusted net debt to improve to about 7.2 times its earnings before interest, tax, depreciation and amortisation in 2018 to 2019, from more than 10 times as at end-2017. Total debt will also improve to 38 per cent of total deposited assets over the next two years from 46.9 per cent at end-2017.

"While ESR-Reit has an increased appetite for inorganic growth through larger-scale acquisitions, it has demonstrated a willingness to swiftly implement a debt reduction strategy, such that it effectively funds these acquisitions with a good balance of debt and equity," Ms Chua said.

The "Baa3" rating, which is the lowest rung of what is considered investment grade, is underpinned by the Reit's portfolio of industrial assets in Singapore, its diversified client base, its management track record and high degree of financial flexibility, the analyst said.

However, the rating is constrained by oversupply conditions within the industrial property segment, the Reit's small scale and its increased appetite for growing via larger-scale acquisitions.