Fitch Affirms Far East Hospitality Trust at 'BBB-'; Stable
KEY RATING DRIVERS
Financing Flexibility, Limited Headroom: The affirmation reflects FEHT's financing flexibility in spite of its rising FFO net leverage, which has been battered by weakening earnings from Singapore's hospitality sector. FEHT's net debt/investment property ratio (LTV), FFO fixed-charge coverage and unencumbered assets/unsecured debt stood at 31%, 6.6x, and 3.1x, respectively, at end-2014. This provides some rating headroom even if market dynamics remain turbulent over the next 12-18 months. We estimate that FEHT's financial profile is able to absorb up to a 75bp increase in market interest and cap rates, all else remaining equal.
Challenging Operating Environment: The Singapore hospitality sector has remained under pressure since 2013 on account of rising hotel room supply. The sector weakened further in 2014 because of falling tourist arrivals from its key inbound markets of Indonesia and China - due to slowing economic growth. Fitch expects the demand/supply imbalance to persist through 2017, as hotel room supply is likely to rise by a compound annual growth rate of 4.9%, while the growth in annual tourist arrivals should be lower (2014: -3%; YTD April 2015: -5%, on a seasonally adjusted basis).
Commercial, Fixed Rent, Cushions Earnings: Approximately 19% of FEHT's 2014 revenue stemmed from leasing out commercial space, located within its hospitality assets. Revenue from commercial properties grew 2.5% year-on-year in 1Q15 (4Q14: 5.9%), driven by better occupancy as well as higher rental rates, providing some diversification to FEHT's earnings. Fitch expects earnings from commercial rentals to decline in 2015 due to slower economic activity in Singapore, thereby providing a lower marginal benefit. Furthermore, around 50% of FEHT's 2014 hospitality sector income was in the form of fixed rent, which also reduces earnings volatility. FEHT's fixed rent covered its interest costs by 3.8x.
Weakening Fixed-Charge Cover: FFO fixed-charge coverage came down in 2014, largely on account of softer earnings as well as higher borrowing costs. Fitch expects fixed-charge cover to ease further in the next 12-24 months, driven by continued earnings pressure as well as the higher costs incurred on the refinancing of SGD200m of debt in December 2014. Interest-rate risk is mitigated by more than 60% of debt being at fixed interest rates, with the earliest re-pricing/refinancing due in 2017. The weighted-average debt maturity had come down to 3.2 years by end-March 2015 from four years in 2012, exposing debt to shorter re-pricing and re-financing cycles.
Adequate Liquidity: FEHT had SGD21m in available cash reserves at end-2014, and SGD84m in unutilised revolving facilities, against near-term maturities of SGD116m. FEHT's near-term liquidity profile has improved significantly because of the early refinancing in December 2014, where it was able to lengthen its debt maturity profile by obtaining two lines of SGD100m each at tenors of seven and four years, respectively. Fitch expects FEHT to be able to comfortably roll over maturing debt so long as its FFO fixed-charge cover (2015 projection: 5.7x) and LTV remain healthy, and its investment properties remain unencumbered.
RATING SENSITIVITIES
Positive: No positive rating action is likely in the medium term, owing to the potential for operating weakness across most of its operating markets - which we expect will persist through 2017.
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- Heightened interest-rate risk, as evident from FFO fixed-charge cover sustained below 4x
- FFO-adjusted net leverage sustained above 6.5x, and LTV sustained above 40%-45%
- Unencumbered assets/unsecured debt sustained below 2x
- A sustained weakening in FEHT's competitive position, as evident from sustained and substantially weaker revenue per available room (RevPAR) across its properties.
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