OREANDA-NEWS. Fitch Ratings has affirmed Far East Hospitality Trust's (FEHT) 'BBB-' Long-Term Foreign - and Local-Currency Issuer Default Ratings (IDRs). The Outlook is Stable.

KEY RATING DRIVERS

Healthy Financial Profile: The affirmation of FEHT's IDRs is supported by the company's healthy financial profile, despite net property income contracting by 6% in 2015. FFO fixed-charge cover also declined to 5.9x in 2015, from 6.6x in 2014, but remains above the 4x threshold below which we may consider negative rating action. FEHT's net debt/investment property value remained low at 32% and its assets remain unencumbered, providing strong access to domestic credit markets. This is reflected in the company's favourable borrowing cost of 2.6% at end-1Q16.

Singapore Market Pressure Moderating: RevPAR of Singapore hotels fell by 1% in May 2016, compared with the 5% fall seen in 2015, as visitor arrivals have increased by 13% in the year to date (2015: 1%). Industry data estimates 2,800 new hotel rooms will open in 2016. This is about 30% lower than previous estimates and follows construction delays that have pushed more supply into 2017. Furthermore, the Singapore government has not released any new land sites for hotel development since mid-2014, supporting a more balanced market. Subsequently, we expect the squeeze on Singapore hotels to moderate this year.

Fixed-Rents Protect Profile: FEHT's rating is supported by minimum fixed-rental income on its master lease contracts, which accounted for more than half of the REIT's total rental revenues in 2015. This cushions FEHT's credit profile against weakening earnings in its hospitality assets during economic downturns.

Investments Increase FFO-Leverage: FFO-adjusted net leverage increased to 7.8x in 2015 from 7.2x in 2014, mainly due to a loan of SGD21m made out to FEHT's 30%-joint venture with Far East Organisation - Fontaine Investments. The joint venture is developing an 850-room hotel in Singapore's resort island of Sentosa, likely to be completed in 2018. The higher FFO-adjusted net leverage is not a significant risk, as FEHT has healthy access to domestic credit markets.

Large Upcoming Debt-Maturities: FEHT's debt maturities increase in 2017, with SGD250m of its total SGD822m debt at end-March 2016 comping up for repayment. Comparatively, FEHT had just SGD40m of maturities in 2016, supported by a cash balance of SGD18.7m and an uncommitted undrawn revolving facility balance of SGD60m. Fitch expects FEHT to comfortably meet its upcoming maturities in 2016 and 2017, supported by its healthy financial profile. However, the company's FFO fixed-charge coverage ratio may come under moderate pressure as the facilities are refinanced into a rising interest-rate environment. Around 65% of FEHT's interest-rate exposure was hedged in March 2016, up from 59% in 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for issuer include

- revenue declining by around 2% in 2016 due to continued pressure on hotels and serviced residences in Singapore

- EBITDA margin remaining healthy, at between 78%-79%

- capex and dividend pay out remaining in line with 2015.

RATING SENSITIVITIES

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 net debt/investment property value sustained above 40%-45%

- a more prolonged and sharp downturn in key hospitality markets than Fitch expects, resulting in a prolonged weakening in RevPAR combined with EBITDA margins falling below 70%.

Positive: Positive rating action is not probable in the medium-term, owing to potential operating weaknesses in Singapore's hospitality market.