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Rating Action:

Moody's affirms Ascott REIT's Baa3 rating; outlook stable

24 Oct 2019

Singapore, October 24, 2019 -- Moody's Investors Service ("Moody's") has affirmed Ascott Residence Trust's (Ascott REIT) Baa3 issuer rating.

At the same time, Moody's has affirmed the provisional (P)Baa3 backed senior unsecured rating on the SGD1.0 billion multicurrency medium-term securities program issued by Ascott REIT MTN Pte. Ltd. — a wholly owned subsidiary of Ascott REIT — and the Baa3 ratings on the backed senior unsecured notes issued under the program.

The outlook on all the ratings above is maintained at stable.

RATINGS RATIONALE

The affirmation follows Ascott REIT's announcement on 21 October 2019 that the shareholder resolutions for its combination with Ascendas Hospitality Trust (AHT) have been duly passed.

AHT is a hospitality REIT with a portfolio of 14 assets spread across Australia (Aaa stable), Japan (A1 stable), Korea (Aa2 stable) and Singapore (Aaa stable). At 31 March 2019, AHT's portfolio was valued at SGD1.8 billion.

"The ratings affirmation reflects our expectation that Ascott REIT's credit metrics will continue to remain well positioned for its current Baa3 issuer rating, following its combination with AHT", says Sweta Patodia, a Moody's Analyst.

Proforma for the combination, Ascott REIT's leverage — as measured by net debt/EBITDA — was at 7.8x for the 12 months ended 30 June 2019. Moody's expects Ascott REIT's net debt/EBITDA to remain around 8.4x-8.5x over the next 12-18 months compared to its downgrade trigger of 9.0x.

"The combination with AHT is credit positive for Ascott REIT, because it will strengthen the trust's business profile and improve its financial flexibility," adds Patodia, who is also Moody's Lead Analyst for Ascott REIT.

Completion of the combination will consolidate Ascott REIT's position as the largest hospitality REIT in Asia Pacific, with an enlarged asset portfolio of SGD7.6 billion compared with its current asset size of SGD5.5 billion.

At the same time, the transaction will also improve the trust's income resilience, with an estimated 45% of gross profits attributable to properties under contracts with either fixed or minimum guaranteed rental income compared to around 40% currently.

Moody's also expects that Ascott REIT's financial flexibility will improve, following the combination, with a decline in the proportion of secured debt in the combined capital structure. Proforma for the combination, the ratio of secured debt over total reported debt would be about 33% compared to 46% without the merger, based on data as of 30 June 2019.

However, the transaction remains subject to legal approvals, which the trust expects will be received by November 2019. Even under an assumption that the proposed combination does not go through, Moody's believes that Ascott REIT's credit metrics will remain supportive of its current Baa3 rating.

Ascott REIT's liquidity is excellent. At 30 June 2019, the trust had cash balances of SGD251 million compared to total reported debt of SGD1.7 billion and SGD81 million of debt maturing over the next 12 months.

However, following the merger, the trust's liquidity profile will weaken because of the cash consideration to be paid to AHT unitholders and SGD 75 million of debt maturities in April 2020 at AHT. Nonetheless, given Ascott REIT's strong access to the debt and capital markets, and its long-standing banking relationships, it should be able to arrange for external funding for any cashflow shortfalls.

Ascott REIT's Baa3 rating reflects its established market position, reinforced by an enlarged portfolio of assets that is diversified across Asia Pacific, Europe and the US. The rating also takes into account the support of the trust's strong sponsor, The Ascott Limited, and the trust's ability to leverage its sponsor's expertise, track record, and strong network of relationship banks.

Nonetheless, the trust's rating remains constrained by its exposure to the volatile hospitality segment and a high level of secured debt. Although the proportion of secured debt has been reducing over the years, this level remains high for an investment-grade rated Singapore-REIT.

However, given the trust's high proportion of unencumbered assets, Moody's does not notch for legal subordination. As of 30 June 2019, approximately 68% of trust's gross assets were unencumbered and provided a cover of 4.2x for the unsecured lenders.

In terms of environmental, social and governance risks, Ascott REIT's rating also takes into consideration the significant related-party transactions between the trust and its sponsor, The Ascott Limited. Nevertheless, Moody's is assured by the regulatory oversight provided by the Monetary Authority of Singapore and the trust's Board of Directors, majority of which are independent.

The stable ratings outlook reflects Moody's expectation that Ascott REIT will continue to generate stable cash flow from its portfolio and maintain financial discipline in its pursuit of growth, while keeping its credit profile within targeted parameters.

An upgrade of Ascott REIT will require that it (1) derives a significantly higher proportion of income from master leases and stable income contracts from high quality counterparties; (2) maintains a well-managed debt maturity profile; and (3) improves its financial flexibility by reducing its reliance on secured borrowings.

Credit metrics supportive of higher rating includes adjusted debt/total deposited assets below 40%, adjusted net debt/EBITDA below 8.0x and EBITDA interest coverage exceeds 3.0x on a sustained basis.

On the other hand, Moody's could downgrade the ratings if: (1) the operating environment deteriorates, leading to a decline in operating cash flow; and (2) the trust's financial metrics weaken, with adjusted debt/total deposited assets exceeding 45%, adjusted net debt/EBITDA exceeding 9.0x, and EBITDA interest coverage falling below 3.0x.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ascott Residence Trust (Ascott REIT) is a hospitality real estate investment trust focusing on serviced residences. At 30 June 2019, it had an asset portfolio of 74 hospitality properties across 38 cities in 14 countries, with an appraised value of SGD5.5 billion. The trust is sponsored by The Ascott Limited, an indirectly wholly owned subsidiary of CapitaLand Limited, which owns in turn 45% of Ascott REIT.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sweta Patodia
Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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