Fitch Ratings has revised
The agency has also affirmed the REIT's 'BBB' senior unsecured debt rating, as well as the 'BBB' long-term ratings on the REIT's
The Negative Outlook reflects the 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 leverage elevated.
Ascott REIT was reconstituted as a stapled group -
KEY RATING DRIVERS
Uncertain Recovery: The unprecedented severity of the downturn is creating uncertainty in terms of the timing and trajectory of recovery in lodging fundamentals, especially amid the possibility of a second wave of infections and the risk of a return to lockdown measures, which add risks to our estimates. International air travel volume - a key driver of lodging-sector earnings - is not expected to recover completely until 2024, according to the
Strong Liquidity Supports Affirmation: Ascott REIT has sufficient revolving credit lines and cash available to cover debt maturing in 2020 and 2021. 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.
Temporary Leverage Increase: We expect Ascott REIT's FFO net leverage to rise to around 11x by end-2020 (end-2019: 9.2x), before recovering to around 8.5x in 2021, the appropriate level for its 'BBB' rating. We believe the deleveraging pace would pick up if the trust completes the sale of two of its properties in
We have not incorporated a market value decline in its property portfolio, but we estimate Ascott REIT's assets will have to decline by about 30% in market value before it breaches the regulatory gearing threshold of 50% (
Master-Lease, Long-Stay Challenges: We expect master-lease contracts expiring in the next 12-18 months to be renewed on variable-rent terms given the current environment. We also believe Ascott REIT's long-stay tenant mix will drop on weak business travel. Around 18% and 9% of master-leased income expire in 2020 and 2021, respectively, which is a manageable exposure. However, we do not rule out master lessees renegotiating contracts prior to expiry if the downturn is prolonged.
Nevertheless, existing master-lease contracts, which accounted for 59% of the trust's gross profit in 1H20, should continue to provide a significant buffer to the REIT's 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.
Ascendas Merger Strengthens Profile: The trust's merger with AH-Trust on
Hybrids Treated as Equity: Fitch has assigned 100% equity credit to the trust's
DERIVATION SUMMARY
Ascott REIT's rating can be compared with that of
Ascott REIT has a stronger business risk profile than CDLREIT, characterised by a substantially larger and more geographically diversified portfolio of properties than CDLREIT. This, together with Ascott REIT's larger share of gross profit than CDLREIT stemming from master-leased properties, properties with minimum guaranteed rents, and longer-stay clientele, provides Ascott REIT with substantially more cash flow stability during economic downturns. These factors, and stronger capital and credit market access than CDLREIT, support Ascott REIT's higher rating.
Ascott REIT is rated one-notch higher than Host to reflect its substantially greater cash flow stability through economic downturns due to Ascott REIT's master-lease income and tenants' longer length of stay. Host is subject to a greater degree of near-term repricing of its room rates, exposed to a greater degree of fixed costs, which is driving a sharper decline in its EBITDA margins in the current environment than Ascott REIT, and is geographically concentrated to the US. Both trusts maintain large pools of unencumbered assets that serve as contingent liquidity sources and have demonstrated strong access to credit markets during all points in the cycle.
Whitbread is rated the same as Ascott REIT to reflect Fitch's view that the current downturn will only have a limited and temporary impact on the
KEY ASSUMPTIONS
Key assumptions in our rating case include:
Like-for-like revenue drop of around 40% in 2020, followed by a 30% and 35% increase in 2021 and 2022, respectively, translating to 2020 revenue that will be around 60% of 2019's level, 2021 revenue at 75%, and 2022 at 100%
EBITDA falling to around
Extended working-capital cycle as operators re-negotiate leases and delay payments
Capex of around
Dividend payout to remain in line with historical trends
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO net leverage remaining above 8.5x beyond 2021, or loan-to-value ratio sustained above 40%
FFO interest coverage sustained below 3.0x
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook may be revised to Stable if Ascott REIT does not trigger the negative sensitivities
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Ascott REIT had aggregate liquidity in terms of cash, and undrawn committed and uncommitted revolving facilities with banks of
The trust also completed the divestment of Somerset Liang Court on
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Ascott Real Estate Investment Trust LT IDR BBB Affirmed BBB
senior unsecured
LT BBB Affirmed BBB
senior unsecured
LT BBB Affirmed BBB
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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