Is OUE Hospitality Trust Managing Its Debt Well?
The debt profile of a real estate investment trust can determine its long-term growth prospects. A well-managed balance sheet, with little debt, affords a REIT the leeway to grow through debt-funded acquisitions. Therefore, the debt profile is one of the first things I look at before investing in any REIT. In this article, I will use three common metrics to analyse OUE Hospitality Trust’s (SGX:SK7) debt profile.
As a quick introduction, OUE hospitality Trust is a stapled trust – consisting of a real estate investment trust and a business trust – that owns three properties in Singapore. They are Crowne Plaza Changi Airport hotel, and the connected Mandarin Orchard Singapore hotel and Mandarin Gallery retail mall.
The gearing ratio
The gearing ratio is the ratio of the trust’s debt to its assets. As of 31 December 2017, OUE Hospitality Trust had total assets of S$2.26 billion, while its borrowings totalled S$875 million. This equates to a gearing ratio of 38.8%, which is below the regulatory gearing limit of 45%. That said, the trust’s current gearing ratio is still relatively high compared to its peers.
For perspective, OUE Hospitality Trust currently has the seventh highest gearing ratio among the 40-odd property trusts and REITs in Singapore. It is also higher than the gearing ratios of other hospitality trusts such as Frasers Hospitality Trust (SGX:ACV) and Ascendas Hospitality Trust (SGX:Q1P), which have gearing ratios of 32.1% and 32% respectively.
Debt maturity profile
The length of time until a REIT’s debt matures is also an important consideration. In general, the longer the debt maturity profile, the less a REIT has to worry about refinancing its loans. Amidst the rising interest rate environment, a long debt maturity profile is especially important to reduce the risk of refinancing at a higher average borrowing cost.
OUE Hospitality Trust provided the graph below in its latest earnings presentation:
Source: OUE Hospitality Trust 2017 earnings presentation
As you can see, all of OUE Hospitality Trust’s loans are due on either 2020 or 2021. Although the loans are due some years into the future, the fact that all of OUE Hospitality Trust’s debt comes due in a two-year timeframe exposes it to concentration risk. If interest rates are high at the time of refinancing, the REIT may have no choice but to refinance most of its loans at higher borrowing costs.
Average cost of debt and interest coverage ratio
According to its latest results, OUE Hospitality Trust has an average cost of debt (essentially interest) of 2.5% per year. This is a reasonably low rate when compared to other similar trusts such as Frasers Hospitality Trust (2.8%) and Ascendas Hospitality Trust (2.9%).
The interest coverage ratio compares a REIT’s interest cost with its net property income. The higher the interest coverage ratio, the more buffer a REIT has in being able to service its borrowings and to manage any increase in interest rates. OUE Hospitality Trust currently has an interest coverage ratio of 4.5, which is fairly safe.
The Foolish Takeaway
In all, OUE Hospitality Trust has both good and bad aspects in its debt management. The trust has a comparatively low financing cost and reasonable interest cover. It also has a fairly long maturity for its loans. But, on the flip side, the trust has a high gearing ratio and its loans are also due in a concentrated period of time, exposing it to concentration risk.