Eagle Hospitality Trust (EHT) is a US hospitality reit listed on the SGX earlier this year (May 2019). EHT had a whooping 15.5% drop in share price yesterday (25 Oct 2019), from 63.5 US cents to a low of 54.0 US cents around midday. The share price did recover slightly to 56 cents before retreating back to close at 54.5 cents for the day.
Disclaimer: I am merely a amateur small time retail investor with no formal training or background in finance or stock analytics. If you stumbled upon my humble blog, please read this post with a large pinch of salt as I am unable to guarantee the accuracy and reliability of my thought process from a fundamental standpoint. Finally, the purpose of this post is not to recommend this stock but to document the chain of events which prompted me to take a small position in this reit.
Eagle Hospitality Trust IPO
The figures quoted for the IPO was rather attractive at 8.2% for 2020 projected yield.
Offer Price: 78 cents/share
Projected Yield: 8.2%
EHT has 18 hotel properties with a few concentrated in the California region. Although the projected yield was high compared to other reits at that time, I wasn’t interested in hospitality reits due to their unstable revenue stream with little visible dpu growth.
Wary of hospitality REITS
Looking into the past performance of similar Singapore listed hospitality reits such as CDL Hospitality Trust (J85) or Frasers Hospitality Trust (ACV), we can see the share price and distribution isn’t stellar compared to other sectors such as logistics or retail. My preference remains tilted towards quality reits with strong sponsors like Mapletree Commercial Trust (N2IU) which is able to consistently deliver higher nav and dpu over the years, rewarding shareholders with spectacular returns over time.
Granted, CHT and FHT are local hospitality properties and the hospitality sector was in a downturn last couple of years. Things are expected to improve this year with higher revpar recovering and also with the F1 race taking place this year. The opening of Changi Jewel should also contribute alightly to the tourist influx. EHT also offers about 2% higher dpu compared to CHT and FHT, which is fair for a new player with no proen track record and some concerns over one of their properties.
The Queen Mary
The Queen Mary is a hotel converted from a decommissioned ship (RMS Queen Mary) and permanently moored in Long Beach Harbor, California. Interestingly, the ship is rumored to be haunted and has the nickname of the “Grey Ghost”. The Queen Mary made a final voyage on 9 December 1967 and was subsequently converted into a museum and hotel.
News broke out about the Queen Mary being in a troubled state with significant repairs required to keep the ship operational. There were some concerns that this property is a ticking time bomb since the cost of repair of US$298m would far exceed the current valuation of US$160m. The Queen Mary was also the only property that is not freehold. With the above considerations, it was clear that I would not be considering applying for the IPO.
IPO Day
EHT had a poor IPO with the share price tanking 6.4% to a low of 73.5 US cents on day one. Definitely not a good sign of confidence. The recent IPO of Lendlease Commercial REIT saw the share price jump from 88 cents to a high of 94.5 cents.
The share price continued to stay on a downwards trajectory (see chart above), well below IPO price to close at 63.5 cents about a week ago, which means the projected yield was now 10.1% based on the IPO prospectus. Rarely has any reit offered such high yields besides Keppel KBS which was depressed when they did a large rights issue at a significant 30% discount to the share price. LMIRT would count too, but the quality of assets are not in the same ballpark and they face a whole other set of issues so it would not make for a fair comparison.
Q2 Results
EHT announced their Q2 results in August with figures largely in line with their IPO projections. However, the NPI is lower than expected due to construction delays and renovation works at certain properties. The report also notes that the higher DPU is attributed to lower finance expenses and administrative cost savings at the trust level. Despite the acceptable results, EHT share price failed to recover and instead continued to fall.
Trading Halt
Following an article published on the Edge Singapore claiming that the sponsor (Urban Commons) may be in default if they failed to respond to the city’s query on the planned fixes for the Queen Mary issues, EHT called for a trading halt and issued a statement to clarify that the Queen Mary has been deemed structurally safe and the sponsor is not in default of the lease.
Despite the statement, EHT share price proceeded to freefall on 25 Oct after the trading halt was lifted.
Scooping Discounts
Given the deeply discounted share price, I felt that the issue was overblown. Even before the trading halt at the trading yield of above 10%, EHT was oversold.
Assuming that the Queen Mary is in default and the asset is removed from the balance sheet, the NAV still comes up to 69 cents. Based on the statement issued by EHT, the Queen Mary issue is not a major concern and therefore the chances of a full writedown is highly improbable and therefore at the share price of 55 cents, there was a reasonable margin of safety established. Assuming that the asset stays intact, the current NAV is valued at 89 cents. The current price of 55 cents represents a 38% discount.
Based on the above information, I decided to purchase a small position of EHT, partially out of curiosity whether my reasoning was sound. That and the fact that 11% yield was too rare an opportunity to pass by.
Be fearful when others are greedy and greedy when others are fearful
Warren Buffett
The oracle of omaha advises that investors be greedy when others are fearful. Many investors(institutional?) are fearful right now and are selling heavily. We shall see if the issue really is overblown and whether the share price recovers after the dust settles or whether it will continue to slide downwards.
Edit: Update (29 October) has been posted!