Investing 2019 November (Part 1) ... Eagle HTrust
[Disclaimer: I am an amateur investor and not a financial advisor. I blog here to chronicle my investment journey. My stock purchases and sales are unique to my temperament, life situation, risk appetite and investment goals. All information that you find on my blog such as ideas, commentaries, predictions, or stock picks, whether expressed or implied, are not to be construed as personal investment advice. I repeat, I am only an amateur investor. I cannot and will not be held liable for any action that you take as a result of what you read here. Do your own due diligence and/or seek the help of a qualified financial advisor.]
This month is yet another busy month with some time spent working overseas, and I've not been very diligent monitoring the market. Nevertheless, I was able to invest in 2 counters, namely, Eagles HTrust and HongKong Land.
I. Eagles HTrust
There is no stock more unfortunate this year than Eagle Hospitality Trust, methinks. The public offer was under-subscripted and right out of the gate on the day of debut on May 24th, the stock price dropped by 6.4%. Thereafter, the share price never really took off ... it was the eagle that never flew. The share price dropped gradually to the 60 cents range over a few months, and then over 2 weeks (end Oct and early November), the share price dropped to its lowest of 42 cents on November 5th.
This came about after the publication The Edge came out with an alarming account concerning the Queen Mary Long Beach, one key asset of Eagle HTrust on October 23rd (https://www.theedgesingapore.com/news/reits/eagle-hospitality-trust-could-get-wings-clipped-key-asset-queen-mary-sinks-disrepair). From pre-IPO days, the Queen Mary, "the sinking albatross", has drawn much controversy and discussion. And in The Edge's article, it has been said that "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." The last phrase "the ship's deteriorating condition was approaching the point of no return" struck fear in the hearts of most investors. And it didn't help that of late, insiders were aggressively disposing their Eagle HTrust stocks.
So is Eagle HTrust a cheap buy or a value trap? Many prominent financial gurus and bloggers have given their take on this (https://www.drwealth.com/a-margin-of-safety-eagle-hospitality-trust/; https://financialhorse.com/eagle-hospitality-trust-what-is-going-on/; https://valueinvestasia.com/what-should-you-do-about-eagle-hospitality-trust/; https://www.probutterfly.com/blog/eagle-hospitality-trust-time-to-nibble; https://investmentmoats.com/money-management/reit/eagle-hospitality-trust-queen-mary/; http://singaporeanstocksinvestor.blogspot.com/2019/11/is-eagle-hospitality-trust-worth-it.html).
In response to SGX's queries, Eagle HTrust gave a robust defence of its Queen Mary asset thus (https://links.sgx.com/FileOpen/EHT-Responses%20to%20SGX%20Queries.ashx?App=Announcement&FileID=583246):
1A. The timeline to complete improvement and repair works that was stipulated in the QM ground lease agreement: Currently, the Queen Mary is structurally sound and in good operating condition. There is no default under the ground lease and the Queen Mary is in compliance with the requirements of the City of Long Beach. The City only requires five items of work to be addressed. UC estimates that the work required will be done within the next two years at an estimated cost of up to US$7 million.
1B. Implications to Eagle Hospitality Trust in the event that the Urban Commons, LLC (“UC”) the sponsor of Eagle Hospitality Trust fails to meet its obligations under the Queen Mary ground lease: UC is not in default in performing its repair and maintenance obligations under the ground lease. If UC defaults, EH-REIT has a contractual right to perform these obligations. Even if a default should occur, EH-REIT’s estimated liability is approximately US$7 million and there are reserve mechanisms in the leases established to fund that expense
1C. Quantify the financial impact to Eagle Hospitality Trust in the event that UC fails to meet its obligations under the Queen Mary ground lease: The REIT Manager does not expect there to be any material financial impact to EH-REIT. EH-REIT’s exposure is estimated to be up to US$7 million with respect to the repair items noted by the City.
2. Please quantify the total cost of ship repairs, provide further details on how this will affect the operations of the Trust, the implication on the impact of the valuation of The Queen Mary and how the Trust intends to finance such costs of repairs: The REIT Manager believes that the Marine Survey’s estimate of scope of work and costs was grossly inaccurate and does not reflect UC’s actual obligations at the property. UC has been working with the City since 2016 to address any needed repairs. Presently, the City only requires repairs with respect to the noted items, which have a total estimated cost of up to US$7 million, such items will be paid for by UC utilizing the multiple capital reserve mechanisms built into the leases. UC is working together with the City to address the noted items of work that the City expects to be done. UC expects these noted repair items to be completed within the next two years.
Since this announcement was made in response to SGX's queries, I was confident that Eagle HTrust was truthful in its response (lest Eagle HTrust be caught with the attempt to beguile investors).
The thing with being a Singaporean is there is a tendency to think of the worst case scenario ... that of the Queen Mary being totally unsalvageable and eventually written-off from the books. What then should that happen? A UOB analyst has this to say (https://research.sginvestors.io/2019/10/eagle-hospitality-trust-uob-kay-hian-research-2019-10-29.html):
Assuming the valuation of Queen Mary is written down to zero and it no longer contributes to rental income, Eagle HTrust's 2020F DPU would drop by 22% from 6.60 US cents to 5.12 US cents, while its NAV/share would drop 21% from US$0.87 to US$0.69. Our target price for Eagle HTrust will also correspondingly drop from US$1.02 to US$0.80.
I don't believe the Queen Mary will be written off. It is indeed an old ship, and believe me, people will actually pay money to look at old things and experience life back in the "good ol days". Hence museums exist! And American people are more into history than we city folks in Singapore are (yeah, we are that shallow ... lol). Read this beautiful review of the Queen Mary (https://blog.cooladventures.com/tag/queen-mary-hotel-review/). And the Queen Mary's Dark Harbor, a Halloween haunt at the Queen Mary, is a yearly hit with locals and visitors alike.
So, I'm satisfied that the Queen Mary remains a viable asset of Eagle HTrust. I cannot ascertain the reason(s) behind the recent sell-down by insiders ... can anyone other than Mr Shih and Mr Tong, two substantial shareholders who had sold millions of their shares? Obviously something was going on. Well, did the two gentlemen know that Eagle HTrust was going to underperform the market, and hence the heavy selling? Or did they sell simply because they had financial reasons of their own and their selling had nothing to do with Eagle HTrust's prospects?
Hence when buying Eagle HTrust, I was cautious but not overly paranoid. I nibbled some at $0.57, at 44% discount to NAV. I intend to go long on Eagle HTrust, so I'm not too perturbed with the price fluctuations in the short term. Anyway, it's a small amount so I just sit tight and enjoy the dividend ride.