The Eagle Hospitality Trust Saga

Author: | Date:

Eagle Hospitality Trust (EHT) went for IPO on 25 May 2019 at an Offer price of US$0.78. In less than a year, EHT was suspended from trading as of 24 Mar 2020. The last traded price before it was suspended was US$0.137. That was a 82% loss from the IPO price, excluding dividends.

What led to this disastrous performance in such a short time?

Issue #1: The Queen Mary

The Queen Mary is a retired ocean-liner that has been converted to a hotel and is one of the 18 properties held by EHT.

The ship received bad press in October 2019 – The Edge Singapore reported that the condition of the ship was bad based on inspection reports:

…several years of abandonment evident in issues such as broken or missing handrails and splitting carpets patched with duct-tape.

The article added that Urban Commons (UC) (also the sponsor of EHT), who is responsible for the repair, has been given a warning by the City of Long Beach that UC may risk losing the lease because of failed obligations. If this issue gets out of control, the Queen Mary might not be able to operate and EHT would lose all the revenue on this property.

EHT subsequently clarified that UC is not defaulting on the lease and has been carrying out her obligations. And that The Queen Mary is structurally safe.

Inspection reports say one thing. EHT says another. Who do you trust?

I believe that the truth is somewhere in between. It opens up more questions when I read this in the same The Edge Singapore’s article:

Three years ago, Urban Commons is reported to have taken on the lease despite a marine survey that unveiled that the ship’s deteriorating condition was “approaching the point of no return”. According to that report, the total cost of ship repairs could range from US$235 million ($320 million) to US$289 million. In addition, it estimated that the work would take approximately five years to complete, with some 75% of repairs deemed “urgent”.

The ship seems like it needs a lot of money and a long time to be fixed and I wondered what made UC so confident to take this up. Granted, it is a prized asset that is unique to other hotels. But it will also pose unfamiliar challenges and little transferrable competency to enhance The Queen Mary. Fixing a building is very different from fixing a ship.

Our Early Retirement Masterclass (ERM) trainer, Chris, invested in EHT and added positions after this incident. He reasoned that the selldown was overdone as UOB Kay Hian’s analyst have projected EHT’s NAV to be $0.69 even without The Queen Mary. A share price of $0.58 looks like a good reasonable bet with a margin of safety.

I agree with that line of thinking and it wasn’t wrong to make that decision given the information at that point in time. Only in hindsight we knew about more issues were going to surface.

What would really happen to The Queen Mary? Only time will tell.

Issue #2: Substantial Unitholders Paring Down Stakes

It doesn’t help when your major unitholders start to lose faith and sell their units.

Temasek was the first to bail. On 23 Jun 2019, Temasek sold down from 10.02% to 7.25%. By 27 Jun 2019, the stake was down to just 2.93%. This was before The Queen Mary issue went to press. What has made Temasek changed their mind so quickly, a month after the IPO? [Update: Goh KK said it was DBS who bought the shares as an underwriter as part of the stabilisation program. Temasek has stakes in DBS and that was how both names were reflected in the substantial unitholders’ transactions.]

Other substantial unitholders have also pared stakes over time.

  • Compass Cove Assets Limited (Norbert Shih Hau Yuan), from 13.83% to 4.96% (the current stake might be lower because they no longer need to report after ceasing to be substantial unitholder)
  • Claydon Hill Investments Ltd (Frank Shih Chi Yuan), from 16.3% to 2.12% (the current stake might be lower because they no longer need to report after ceasing to be substantial unitholder)
  • Qian Jianrong, from 8.86% to 5.99%

Even the co-founder of UC, Howard Wu, reduced his stake from 7.62% to 6.1%. The other co-founder, Taylor Woods, reduced slightly from 7.62% to 7.59%. Regardless the reason for selling, it isn’t optically reassuring to unitholders, at all.

However, that’s one person accumulating the units – Gordon Tang, the CEO of SingHaiYi, has increased his stake to 13.8% as of 11 Mar 2020.

Issue #3: Covid-19 and REITs Selldown

Covid-19 was destructive to our global economy. With borders closed and travels banned, the hospitality sector was the first to take the blow. Even Singapore which enjoys high hotel occupancy rate of over 80% have seen it dived below 30%.

Hospitality REITs took a heavy beating and EHT was the worst performer, losing 77% within 7 trading days.

Why did it become the worst-hit Hospitality Trust?

I speculate that it could be due to the association with cruise ships. There was record rates of Coronavirus infection among the passengers onboard Diamond Princess and Grand Princess. Unfortunately investors remember EHT has The Queen Mary, even though there were other 17 hotels which are buildings and not ships. So there could be some quick association without any logic. Customers and investors would think that congregating in confined spaces onboard a ship is akin to courting death. Demand for The Queen Mary is expected to be extremely poor.

EHT took a double hit because of the ship.

Issue #4: Loan Default, Delayed Dividends and Suspension

The worst has happened. EHT has voluntarily suspended its trading of units as of 24 Mar 2020. They ran into more issues as the Master Lessees couldn’t fulfil rent obligations and EHT has received a notice of default from the bank. A loan amount of US$341 million is now due to be repaid immediately.

EHT is barred from distributing dividends because of the default.

Unitholders are now left in a bind. They can neither sell the stock nor they are going to receive any dividends. It is unclear when the trading suspension will be lifted, if ever. Looking at the Covid-19 situation worsening in the U.S., it is hard to imagine a quick recovery is possible.

The financial results were discouraging too. The actual dividends were 10% lower than what they have projected during IPO, even before Covid-19.

Conclusion

After poring through information about EHT, I can only come out of it with more questions than answers.

Why did The Queen Mary got acquired in the first place despite the management know how much it takes to keep it running?

Why did most of the substantial unitholders pare down their stakes to almost insignificant levels?

Why did the management decide to sell part of their stake when shoring up investors’ confidence was more important?

What is the next step? How are they going to resolve the debt call and not run into cash flow problems?

Disclaimer: I have no stake in EHT and has no intention to enter a position in the foreseeable future.

7 thoughts on “The Eagle Hospitality Trust Saga”

  1. Hi Alvin,

    Just providing some colour to readers on some of the questions you raise.

    1) Why did Temasek sell EHT units just one month after IPO?

    If you study regulatory filings more closely, Temasek technically did not own EHT as is common perception. Deal runner DBS, which is majority owned by Temasek, has a unit price stabilisation deal with EHT such that DBS buys / sells units to stabilise prices. As part of the deal, the Sponsor loans DBS units to provide liquidity and price stabilisation for a short period post IPO.

    During the price stabilisation period, Temasek, by virtue of their ownership of DBS, is deemed interested in those units. Once the stabilisation period is over, the units are returned to the Sponsor, thus Temasek is no longer deemed interested in those units.

    2) Why did the management decide to sell part of their stake when shoring up investors’ confidence was more important?

    If you study the regulatory filings, the reduction in units by the REIT manager is usually to satisfy debt obligations (ie repayment of debt using units). Something that I’ve never seen before in other REITs.

    Hope this helps.

    Reply
  2. Spot on Sir. This piece of crap should never have been listed in Singapore. The assets can’t sell in US and they brought the junk to Singapore. With or without covid, this trust would have sunk long ago.

    Signing off
    Aaron

    Reply

Leave a Comment