Negative rating outlook for Far East Hospitality Trust

Oasia Hotel in Novena is one of the hotels in Far East Hospitality Trust's portfolio. The trust has focused on maintaining and improving occupancy rates at its hotels and serviced residences at the expense of room rates, says Moody's.
Oasia Hotel in Novena is one of the hotels in Far East Hospitality Trust's portfolio. The trust has focused on maintaining and improving occupancy rates at its hotels and serviced residences at the expense of room rates, says Moody's.ST FILE PHOTO

Moody's issues downgrade, saying earnings have fallen while the trust continues to incur debt

Rating agency Moody's Investors Service has changed Far East Hospitality Trust's rating outlook to negative from stable.

Ms Jacintha Poh, a Moody's vice- president and senior analyst, said in a report on Monday: "The negative rating outlook reflects the weakening of the trust's financial profile.

"The company's earnings have fallen, on the back of a competitive operating environment, and, in particular, the supply of hotel rooms has continued to grow, while demand has stayed muted."

Moody's also affirmed the Singapore-listed hotel real estate investment trust's Baa2 issuer rating, which means it has "average creditworthiness relative to other domestic issuers".

The report said the trust has focused on maintaining and improving occupancy rates at its hotels and serviced residences at the expense of average daily room rates.

Unless the operating environment recovers substantially - which Moody's does not expect to happen over the next 12 to 18 months - a recovery in rates would be unlikely, it added.

Hotels under the trust include Oasia Hotel in Novena and Orchard Parade Hotel, which completed renovations in July.

Ms Poh noted: "In the absence of a debt reduction exercise or equity- funded acquisition, we expect the trust's leverage to remain elevated at above nine times over the next 12 to 18 months, especially as the trust continues to incur debt to fund its 30 per cent stake in a hotel development joint venture with Far East Organization Centre." She added that if this continues over a long period, it will result in a rating downgrade.

Moody's noted that revenue and earnings before interest, taxes, debt and amortisation (Ebitda) have been declining since 2014.

It added that for the 12 months to Sept 30, the trust's reported revenue was $110 million, 10 per cent down from the year ended Dec 31, 2014. Ebitda had also fallen by about 10 per cent to $87 million over the same period.

Moody's said the weakness in the trust's operating performance led to its financial profile worsening, and its rating is unlikely to be upgraded. However, the agency did note that the rating outlook could return to stable "if the trust reverses the negative trend in its earnings over the next six months".

It must also show it can maintain a stable financial profile and have a "well-balanced debt maturity profile and address near-term debt maturities in a timely manner".

But Moody's said it could run into issues if the operating environment worsens, leading to a continued drop in operating cash flows.

Another blow would be if Far East Organization's ownership in the trust falls below 50 per cent - "signifying a decrease in linkage with and access to the parent company".

OCBC Investment Research said late last month that hospitality stocks will end the year on a downbeat note in the wake of a drop in business travel.

A version of this article appeared in the print edition of The Straits Times on December 14, 2016, with the headline 'Negative rating outlook for Far East Hospitality Trust'. Print Edition | Subscribe