Duration Financial News, on December 7, Moody's will Champion Real Estate Investment Trust (hereinafter referred to as "Champion Real Estate Investment Trust"), 02778HK) and Champion MTN Limited's rating outlook was downgraded to negative from stable.
At the same time, Moody's also affirmed the "BAA1" issuer rating of Champion Real Estate Investment Trust, as well as the provisional "(P)BAA1" senior unsecured rating of the Champion MTN Limited Medium Term Note (MTN) Program, and the "BAA1" rating of the senior unsecured notes issued under the MTN Program, which are unconditionally and irrevocably guaranteed by Champion Real Estate Investment Trust.
Stephanie Lau, Vice President and Senior Credit Officer at Moody's, said: "The downward revision to negative outlook mainly reflects the likelihood that Champion REIT's key credit metrics are likely to deteriorate and remain weak over the next 12-18 months amid rising interest rates and a prolonged downturn in the office leasing market. ”
Rating justification. Champion REIT's earnings fell sharply in 2022 due to lower rental income and rising operating expenses, and will face further pressure in 2024-2025 as the decline in office rental income outweighs the recovery in retail rental income. The continued downturn in the office leasing market could result in negative rental returns and lower occupancy rates for two of its office assets, which account for approximately 75% of the trust's total net property income. The concentration of tenants exacerbates the risk of declining occupancy rates.
As a result, Moody's**, Champion REIT's adjusted net debt EBITDA ratio will increase from 8.20223 times worse to 8 in 2024-20255 times to 87 times. Weaker yields and higher interest rates will also result in its adjusted EBITDA interest expense ratio from 38 times to about 30x to 32 times. For the "BAA1" rating category, these ** ratios are weaker.
Champion REIT's "BAA1" issuer rating continues to reflect its high-quality assets and sound access to financing in its Hong Kong SAR** location. The rating also reflects the complementarity of the trust's three assets, which have a diversified and high-quality tenant portfolio. In addition, the rating factor is reflected in the conservative management of the trust company, which is reflected in its lack of aggressive expansion and redevelopment activities.
The rating also takes into account Champion REIT's asset and tenant concentration, as well as its high financial leverage.
Champion REIT is illiquid. As at the end of June 2023, the projected liquidity** (i.e. its cash balance), together with its operating cash flow, liquid investments and committed undrawn credit facility of HK$2.9 billion, will not be sufficient to cover its short-term debt, dividend payments and committed capital expenditures of approximately HK$5.4 billion over the next 12 months. Nonetheless, the trust's track record of good access to finance and its established banking relationships may mitigate this refinancing risk.
Environmental, social and governance (ESG) factors have a non-material impact on credit ratings. The trust is exposed to physical climate and carbon transition risks. On the social front, the company faces demographic risks and changing social trends. However, its good governance offsets the impact of these risks on credit ratings.
Factors that may lead to an upgrade or downgrade of a rating.
If Champion REIT's earnings improve and deleverage, its adjusted net debt EBITDA ratio will fall below 85 times;The ratio of its EBITDA interest expense tends to be 35 times, Moody's may adjust its outlook to stable.
Moody's may downgrade the trust's rating if the trust's operating performance deteriorates due to a decline in asset quality, occupancy or earnings. Weakening of its financial metrics may also lead to a downgrade, including (1) a sustained increase in the adjusted net debt EBITDA ratio above 85 times;and (2) the ratio of EBITDA interest expense is consistently below 35 times;If the trust's liquidity is lower than Moody's currently expects, the rating could also be downgraded.
Any material change in the business position of Champion REIT may also affect the rating due to the accelerated expansion drive.
Champion Real Estate Investment Trust is headquartered in the Hong Kong SAR. The company was listed on the Hong Kong Stock Exchange in May 2006 and has a market capitalization of approximately HK$16 billion (US$2 billion) as of December 6, 2023. The Company focuses on retail and office property investment businesses in the Hong Kong Special Administrative Region. Its revenue in 2022 was HK$2.6 billion (3.).$3.7 billion).