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It’s no surprise that Eagle Hospitality Trust is all the talk of the town these days. This REIT has fallen from its IPO price of 78 cents to a latest closing price of 44 cents (5 Nov 2019). In other words, if you had bought into this REIT at IPO, you’re sitting in excess of a 40% loss, which is almost as bad as HPH Trust (no offence intended).
Based on UOB Kay Hian’s estimates, at its current price (assuming 44 cents), Eagle Hospitality Trust is effectively trading at a 15% forward yield, and a 50% discount to book. And even if Queen Mary is completely wiped out (assuming the value is written down to zero and it contributes nothing to income), Eagle Hospitality Trust is trading at a 11.6% yield and 37% discount to book.
Or in plain English, this REIT is undervalued as hell, at least when evaluated on traditional metrics.
When the market undervalues a stock to this extent, there are only 2 possibilities: (1) the market is completely wrong and Eagle Hospitality Trust is the best buy since DBS in 2008, or (2) the market is absolutely right and there is something seriously wrong with Eagle Hospitality Trust.
Basics: What Happened to Eagle Hospitality Trust
We’ve spilt quite a bit of digital ink on Eagle Hospitality Trust here at Financial Horse, so I won’t cover it in too much detail (you can check out some previous article here or here or on Patron for some background). For a fuller picture, you should also take a look at the company announcements on SGX.
But for the benefit of newer readers, here’s a quick summary of what’s happened thus far:
- Eagle Hospitality Trust IPO-ed in May 2019 at 78 US cents. It had a poor IPO performance and dropped to low 70s on first day trading.
- After release of quarterly results that missed the top line but beat on bottom line, the share price continued to slide to the mid 60s.
- The Edge released an article saying that the Sponsor had received a letter from the state alleging breach of obligations under the head lease for Queen Mary.
- Eagle Hospitality Trust responded to the allegations to refute claims that it was in danger of losing Queen Mary. It also clarified that the Sponsor was responsible for any repairs to Queen Mary. In fact in the prospectus of Eagle Hospitality Trust it’s also disclosed that if the head lease is terminated due to actions from the Sponsor, Eagle Hospitality Trust is entitled to a termination fee from the Sponsor equivalent to the “fair market value” of the Queen Mary lease. If accepted at face value, these would prima facie greatly alleviate the impact of the Queen Mary allegations.
- BT published an article stating that the vendor who sold assets to the Sponsor that were injected into the IPO also took up a big stake in the IPO placement.
- Eagle Hospitality Trust issues a response to clarify the nature of the relationship with the vendor.
- Pursuant to SGX queries, Eagle Hospitality Trust releases further information on the relationship with the vendor.
- The media reports that insiders and substantial shareholders have been divesting positions in Eagle Hospitality Trust (this is also reported under the required SFA disclosures on SGX).
And for the record, here is the share price chart. So yeah.. this has been one eventful REIT.
Heartland Boy has an interesting writeup on Queen Mary where he basically argues that the Queen Mary saga is overblown and that the impact to Eagle Hospitality Trust is not likely to be significant.
Based on the announcements from Eagle Hospitality Trust on SGX so far, I’m actually inclined to agree with him on this.
I think the risk of Queen Mary being completely written off is low, but of course non-zero. But when the market is pricing Eagle Hospitality Trust at a 11.6% yield and 37% discount to book assuming Queen Mary is written down to zero, there clearly is something deeper going on here.
Related Party Transactions
The related party transactions that are being talked about, are equally interesting.
Personally for me, I don’t think any of the disclosures on related party transactions to date are so fatal that would warrant Eagle Hospitality Trust trading at its current price.
But the problem with this kind of issues, is that we don’t know what we don’t know.
Warren Buffet summarises it much better than me when he says “first you see a cockroach in the kitchen, in the weeks that go by, you start to see its cousins”.
So if you told me that everything that has been disclosed about Eagle Hospitality Trust so far is the end of it, and no more funky news is on its way, I would probably say that this is a great investment now.
But the problem is that I don’t know what new allegations may be on its way. Perhaps the next bit of news is going to be even more “interesting”. If so, now’s probably not the right time to buy.
The other bit of the puzzle is the fact that insiders and substantial shareholders have been selling their positions in Eagle Hospitality Trust.
There’s 2 ways of reading this.
The first, is that insiders are just trying to exit their position. Perhaps they have been margin called, or perhaps they need the liquidity urgently for some reason. So they’re liquidating for personal reasons completely unrelated to this REIT.
If this is true, then Eagle Hospitality Trust might be a great buy.
The second interpretation, is that the insiders know something we don’t. This is the scary interpretation. After all, from a public investor’s point of view, it’s been a sequence of new revelations coming one after the other. Who knows what’s coming next?
Under this interpretation, the true value of Eagle Hospitality Trust is unknown, and it’s too risky to buy until more information comes to light.
Without any inside knowledge, it’s hard to know which interpretation is true, and there’s no point guessing.
Don’t forget that in the bigger scheme of things, trading liquidity for the REIT is quite thin. Trading volume today (5 Nov 2019) was 17 million units, which is really only about 7.6 million USD. So the big price swings are made on very thin liquidity, and may not be reflecting underlying value here.
It’s interesting though, just how much Eagle Hospitality Trust has fallen. From its 0.66 price just a week or two ago, it’s fallen a whopping 33%.
And when REITs (or stocks) fall this much in such a short time, they almost never recover immediately.
Or in Technical Analysis speak, there’s been too much technical damage done here.
So if I’m looking to buy in, I think there’s probably some time to think through it and allow more information to surface. Sure, perhaps I miss out on a 10 to 15% rally in the interim, but it’s better than adding now only to find out there’s more undisclosed information to be released.
What is my take on Eagle Hospitality Trust?
There’s a lot of questions in my mind about Eagle Hospitality Trust. And investing is like crime-solving sometimes, where the hardest part is knowing what questions to ask.
And the key question here for me, is where is all this new information on Eagle Hospitality Trust coming from? Let’s think about what information has been disclosed so far? The first bit of information was details of the letter from the City to the Sponsor. The next was the information on the vendor taking up a position in the IPO placement, and the sale being conditional on the IPO. Then it was the related party transactions that took place prior to IPO, including information on the valuations done in the preceding years.
Perhaps the Edge and Business Times have become fantastic investigative journalists and dug up this information through extensive due diligence. Or perhaps someone with inside knowledge has been feeding it to them.
Whatever the case, I don’t know where this information is coming from, and what is the purpose behind this information.
There’s a lot of fear and uncertainty around Eagle Hospitality Trust. I’m seeing most dip buyers buy in at the 50s range, and in the 40s range retail investors are starting to comment this is too risky for them and that they’re staying away. That’s usually a contrarian signal that it’s the time to start buying.
But the flow of information here is concerning. The past few weeks have been a situation where an article appears in the media, and then SGX queries the REIT, and the REIT issues an SGX announcement. And rise and repeat. That’s not fun as an investor.
Investing has made Financial Horse a paranoid horse, and there’s nothing I hate more than not knowing what I don’t know.
I’ll want this process of new disclosures to stop at least for a while, and all immediate unknown information on Eagle Hospitality Trust to get flushed out, before I start averaging in (if at all).
So I’m probably going to be on the sidelines for a week or two, at least until things quiet down. The earnings report could be a nice boost as well, just for everyone to calm down.
Do note however, that I may not be updating the information (or my future decision making) in this article going forward, so please do the necessary due diligence before deciding whether to invest in Eagle Hospitality Trust. New information may come to light in the coming weeks that renders this article wholly inaccurate.
Is Eagle Hospitality Trust a good value investment at it’s current price? Share your comments below!
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