Eagle Hospitality Trust (SGX: LIW) was the talk of the town last year before its IPO due to its attractive valuation. It got worse when Urban Commons, its sponsor, failed their lease obligations to make repairs to the old Queen Mary, the REIT’s main asset.

There were also questionable related party transactions between the Eagle Hospitality Trust (EHT), its sponsor Urban Commons and an asset management firm, ASAP.

The last 2 nails to the coffin to all the EHT saga is when they reported a Q4 DPS 24.4% below IPO forecast and receiving a notice on default

Looking back to the previous article on EHT, the Trust itself has garnered more negatives than its prospects. 

Of course, no one would foresee this happening. But plenty of red flags back then would have served as warnings for potential bigger hiccups.

So what could we learn from the EHT fiasco?

1. Quality Is More Important Than Valuation

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. The oracle of Omaha sums it up perfectly. EHT is still one of the cheapest valued REITs / Investment Trusts listed in the Singapore Stock Exchange. Ever since its a lower DPS vs forecast and the notice on default, share price has nosedived more than 70%.

Even before the sharp selldown, optimistic investors were justifying the opportunities and claiming the stock has good margin of safety. But for a stock that has been in the news countless times for negative reasons, I was sceptical.

Great and sound companies rarely appear in the news often with negative limelight. When the shady related party transaction news broke out, it has raised too many bells.

2. Avoid Investing in IPO Companies 

There is a common misconception that the cheapest price to buy a company is during an IPO. This is a dangerous assumption as IPOs do not guarantee investment returns for subscribers. 

An IPO prospectus offers company insights and past performances. But things can change. As retail investors, we need to always step back and think. A company goes for IPO to raise funds from the public, to either pare down their leverage or to grow and expand. IPO is when the management gets a huge chunk of money from the public to further grow the company. Only if the money raised is well allocated, then the company can continue growing. 

Barely one year into their IPO, EHT’s note of default is shocking. A syndicated loan has been accelerated, triggered by an event of default. Under the master lease agreements (MLAs) Master lessees, there were missed rental payment to EHT for certain properties in EHT’s portfolio.

3. Forecasts and Promises mean nothing in the face of the actual results. 

EHT’s missed results were before COVID-19 became a pandemic in the US. But it still caused a massive panic selling. Some substantial shareholders sold off big chunks, ceasing their status as substantial shareholders. Many retail investors are the ultimate victims. Distributions are halted due to the notice of default, coupled with the huge capital losses 

The valuation and indicative yield of EHT mentioned in their IPO prospectus were truly attractive. A forecast annualised distribution yield of 8.2% was attractive for an IPO REIT. But at the end of the day, it is the actual performance that counts. 

An IPO prospectus serves not only as a source of information but also as a pitch to the investors. There will be rosy elements as the company is convincing for public funds. So always take the forecasts with a pinch of salt!

4.  Misfortunes do not come alone (祸不单行)

A leaf was taken out from an ancient Chinese proverb. Small negatives tend to lead to bigger problems. 

No one would have foreseen a default of a newly IPO REIT. But once we discover bad news about the REIT, it would have disrupted any investor’s sleep. Perhaps the right thing to do then was to cut the losses.

Usually, a company would not implode in short notice. There usually are small hints until the timer runs out. 

EHT has yet again reminded us if small multiple red flags appear, it means something is not right. And that should be the best time for investors to minimize their losses. 

Verdict

I am fortunate to be very sceptical of EHT ever since it’s IPO by following the negative news surrounding it. An investor needs to spot great opportunities but also be wary of handling potential value traps. 

Let the EHT incident serves as a reminder to all of us, and make us better investors for trickier situations that we will face in the future!

2 COMMENTS

  1. Good analysis.
    We happened to review this potential account from a secondary offer of its syndication loan last year
    Fortunately, we decided to skip it after some discussion. Some parameters in our evaluation process did include your advice of avoiding investing in IPO companies. Thanks for your information sharing.

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