Ascott Residence Trust's acquisition-disposal move to raise leverage in long run

Ascott REIT remains exposed to the Euro crisis, with almost 33% of total revenues derived from assets based in Europe.

Moody's Investors Service says that the announcement by Ascott Residence Trust that it will acquire Ascott Raffles Place Singapore and Ascott Guangzhou in China, while entering into an option to sell and subsequently repurchase Somerset Grand Cairnhill Singapore, will be mildly credit positive in the short term, but could raise leverage over the longer term.

Here's more from Moody's:

According to the announcement, the REIT will divest its interest in Somerset Grand Cairnhill Singapore to its sponsor, CapitaLand Limited, for SGD359 million. CapitaLand will then redevelop the property, setting aside 60% for residential use and 40% for hotel use.

Ascott REIT has a put-and-call option on the redeveloped property at a total purchase price of SGD405 million, with 5% of the purchase consideration (approximately SGD20 million) payable immediately, and the remainder upon the achievement of specified milestones.

The proceeds from the divestment will also be used to finance the acquisitions of Ascott Raffles Place Singapore for SGD220 million and Ascott Guangzhou for SGD63.3 million. The remaining balance will be available for debt repayment.

However, the transaction, while leading to a healthier financial profile in the near term with adjusted debt/total asset improving to around 39.9% from 40.7% as at 31 March 2012, will raise leverage upon reaching its milestones.

Assuming the transaction is fully debt funded, Ascott REIT's adjusted debt/total assets could go beyond Moody's downward trigger of 45% upon completion of the development, which is not expected until 2017. By then, Moody's believes that Ascott REIT will consider various funding options to be positioned more firmly within our parameters.

At the same time, Moody's believes that Ascott REIT remains exposed to the weak economic outlook in Europe, with almost 33% of total revenues derived from assets based in Europe as at 31 March 2012. However, income remains supported as the properties are either on master lease or management contracts with minimum guaranteed income.