Partenón, 12-16, one of Merlin Properties' office assets in Madrid | Photo Collected From Merlin Properties' Website
And there are several reasons to support this decision. Moody’s stated this Thursday that «we have changed the company's outlook to negative following the expected sharper negative impact on the Spanish economy relative to other European countries such as Germany or Sweden and the more challenging operating environment for Merlin's commercial real estate operations amid the coronavirus outbreak».
The challenges the REIT will need to face in the future are related to weaker rental growth prospects and pressure on properties valuation, notably at its shopping centres (22% of rental income) and hotel operations (3% of rental income). Not only were these the most affected real estate segments, but it is also expected a «slow recovery of footfall and sales at its retail properties (helped by the presence of food and essential good retailers) as well as a dampened visitor demand at its hotels, most likely not reaching the levels seen in 2019, before 2022», it can be read in the note.
And these will not be the only segments to suffer from lack of demand. Offices should also suffer a negative evolution, mainly due to the upcoming unemployment, which will have a direct impact on rent growth. But, on the other hand, « a high tenant retention ratio across its portfolio and the fact that Merlin's office properties are to some extent still rented at price levels below current market levels are expected to act as a buffer to the expected weaker occupier markets».
The logistic segment – which represents 11% of rental income – should remain resilient. «The company's triple net leases with Banco Bilbao Vizcaya Argentaria, S.A. (A3 senior unsecured rating, stable) representing 17% of rental income provide for a visible income stream over a WALT that exceeds 18 years», explained the agency.
Although the predictions are based on the uncertainty and the rents’ negative evolution, REIT Merlin Properties faces the crisis with sustained liquidity of around 357 million euro cash on hand and 700 million euro drawn under its RCF, a large unencumbered assets ratio exceeding 80% and no meaningful debt maturities until 2022.
«Furthermore, the company has taken additional measures to preserve cash flows such as the reduction of all non-pre-let capital projects as well as dividend reduction as permitted by the Spanish REIT tax regime. MERLIN's substantial amount of unencumbered assets could give them some additional financial flexibility if needed», concluded Moody’s.