The US-based but SGX listed trust, Eagle Hospitality Trust
(EHT) that is currently the most talked-about hot stock in Singapore.
The first round of scare came when The Edge newspaper published an
article from Long
Beach Post (LBP), claiming that Urban Commons, the sponsor of Eagle Hospitality
Trust, has failed their lease obligations to make repairs to the old Queen
And just when you thought the old ship was the only problem, more
news about the related party transactions between the EHT, its sponsor
Urban Commons and asset management firm, ASAP, caused huge concern about the
corporate governance of Eagle Hospitality Trust. This created a sell down in
the units of the trust. (As of today’s writing, the share price of EHT has
tanked close to 40% since IPO.)
Let’s revisit the negativities surrounding this trust and work out
what you should be doing if,
A: You subscribed to the IPO;
B: You entered when prices were around USD0.50+ per unit, and
C: You are waiting for a bigger discount.
Is Queen Mary The Titanic?
Let’s talk about the issue with the ship first, named The Queen
Mary. According to Edward Pribonic, the safety engineer who has inspected the
Queen for the past 25 years (he did all the inspections on a monthly basis!), he
claimed that that the old queen is not in good shape. He commented that it is
close to “unsalvageable” without a significant infusion of manpower and money.
This piece of information itself is a red flag for investor. However,
bullish investors and analysts have since worked out that even with the old
ship eventually written off under a worst-case scenario, their prime land-based
properties (which are great 4-5 stars hotels) could still provide a mouth-watering
7+% distribution yield per annum. It can be done with gearing ratio just well below
the 45% limit set by the Singapore Exchange.
Questionable Related Party Transactions
The second piece of news, which causes more confusion, was the
relationship between property management firm, ASAP, Urban Commons and
EHT. To simplify, SGX found it questionable that ASAP has sold 6 hotels to
Urban Commons in Mar 12th 2019. Urban Commons then reinjected these 6 hotels
into EHT on May 24th, which is the listing date for EHT. And here comes the sucker
punch for investors, the CEO of ASAP is also the single largest shareholder of
EHT, with an initial 16.2% stake which was sold down to 13.7% after a year.
The Bull Case
The current situation has some investors thinking of bottom
fishing for units of Eagle Hospitality Trust. The simply looking at the forward
yield and price to book value valuations, this trust seems like a screaming buy
if you are a deep value and yield hunter. However, that is provided if you
trust the actual valuation of the properties on the books.
The Bear Case
The other side of the coin is, if even if all of the current
issues are finally cleared up, will it be the last piece of negative news, or
there might be still more questionable transactions and news still not brought
out to light? After all, more often than not, when you find a cockroach in the
closet, there is usually a nest nearby.
So what should you do?
If you are an IPO subscriber or has bought some units at USD0.50+
per unit, you knew that
- The listing price was bought under the Price-to-Book value of 1 with the projected yield of around 8% per annum.
- Even if the ship got written off, its gearing ratio and yield might still be manageable.
But you were not aware of:
- The bundle of 6 hotel sales and purchase arrangements between ASAP, Urban Commons and EHT
- Your sponsor Urban Commons is also not doing its best in maintaining the crown jewel (or liability) of your portfolios of US hotels, the Queen Mary.
So you have to ask yourself, are you okay with being on the same boat
with the CEO of ASAP, who has pared down his investments from 16% to 13.2%
barely 1 year of EHT’s IPO?
Moreover, are you also okay with the fact that your sponsor have
not been handling the repair of Queen Mary well, and has not been candid with investors
on the current status. Instead you have to hear it from the media, which raises
a very serious doubt about the integrity of the sponsor and the management.
As for those waiting for a bigger discount, I do not have good
news for you either. If you have followed the news of EHT, you would have known
that things are looking pretty bad for the trust. And if even with such a magnitude
of bad news from the trust, you still waiting for a even wider discount,
chances are you are still very sceptical about this Trust because things have
to get much worse for the discount to widen.
If that is the case, maybe you are only tempted purely by the
valuations itself and have not given much regards to the quality of the REIT. Investors
who are considering this trust should really be comfortable to be on the same
ship with ASAP CEO, Frank Yuan, and having a questionable sponsor.
If I am an investor in Group C, if I am waiting for a bigger
discount, is, I would really try to talk myself out of investing in this trust
and simply walk away. Although the valuation can be very tempting at this
moment, I don’t think I am prepared to invest in EHT and end up worrying about
the management and losing my night-time sleep. To me, time is better spent on
looking at other companies that suit my risk profile and investment grade.
I personally think that this Trust is a bit too exciting and I
would be better off to give this “opportunity” a pass.
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