SINGAPORE (Feb 20): KGI Securities has downgraded its recommendation on Eagle Hospitality Trust (EHT) to a “neutral” from the previous “outperform”, and slashed its target price by 16.4% to 51 US cents.
In an interview with The Edge Singapore on Thursday, analyst Amirah Yusoff stresses that the brokerage’s biggest concern for the REIT is its lack of clarity, which results in unwarranted risks for investors.
EHT had hit the headlines several times last year amid concerns about its second largest asset, The Queen Mary, which is currently docked in Long Beach, California.
See: Eagle Hospitality Trust could get wings clipped as key asset The Queen Mary sinks into disrepair
See: Eagle Hospitality Trust says Urban Commons 'not in default' of lease; The Queen Mary 'safe and structurally sound'
In comparison to ARA Hospitality Trust, which is similar to EHT in terms of asset demographics and locations, Amirah says that there are stark contrasts between the REITs’ management and communication styles.
“The outlook for the US Hospitality REITs doesn’t look that good. But that story changes with ARA H-Trust because I see them actually doing something about it,” says Amirah.
“They know and understand that FY2020 is going to be a soft year, so they’re putting in all the initiatives and changing up management and get their hotels up to par, acquiring those with higher margins to boost DPU. But I don’t see that same story with EHT. That’s why my reaction is pretty different to EHT,” she adds.
While EHT’s management might well be making efforts to mitigate the impacts of a slow market, Amirah attests that the REIT’s management has yet to inform investors about it.
“The lack of clarity and information is the main problem for investors. You don’t really know what’s happening,” Amirah quips.
Weighed down by trade tensions, elections
While the REIT is not directly affected by the Covid-19 virus outbreak, Amirah notes an overall softening of demand remains on the back of trade tensions and the upcoming US elections.
“While EHT hotels are 90% backed by domestic demand and are not affected by the seeming halt of international and Chinese travellers, we expect the ongoing US-China trade tensions in addition to impending year-end elections to weigh on consumer and business sentiments in the coming year,” says Amirah.
On Feb 18, the manager of EHT has reported a distribution per stapled security (DPS) of 1.179 US cents for 4QFY2019 ended December, some 24.4% shy of its initial public offering (IPO) forecast of 1.56 US cents. This also missed KGI’s estimates by 18%.
See: Eagle Hospitality Trust misses IPO forecast by 24.4% with 4Q DPS of 1.179 US cents
Amirah notes that REIT’s full US$174 million in capital expenditure works have been completed as of 2019, with a remaining five Work-In-Progress (WIP) assets still in stabilization.
“Yet, we see a marginal downward revaluation of 0.6% in the portfolio, potentially providing for the usual softening in demand during election years and in line with the macro outlook,” she says.
In addition, the dip in property valuations comes despite substantial capital expenditures, revenue management and profit initiatives, says Amirah.
Although the Queen Mary’s valuations had booked a y-o-y increase of 5.6%, Amirah hones in both Crowne Plaza Danbury and The Westin Sacramento, which saw their valuations plummet 23.3% and 16.1% respectively.
“The fact that something can fall 23% is of concern, and having such a big decline is scary,” says Amirah. “Even though the valuation of the Queen Mary went up, there’s a bit of ambiguity in how the valuations were derived in the first place.”
Lack of near-term catalysts
Amirah notes that EHT has reported improvements to its existing operations. These include a new parking management company that will begin operations and cost management at 12 of its 18 hotels, as well as new contracts secured with for events at the Queen Mary.
“On a positive note, EHT’s RevPAR index outperformed peers by 3.7% on a full 12-month basis,” Amirah says.
In addition, EHT’s sponsor, Urban Commons, had also agreed to amend the master lease agreements to allow the REIT to receive more variable rents from any outperforming properties that generate excess cash flow in relief of any underperforming properties.
“However, we still remain doubtful that these could adequately lift revenues from a dismal 2019,” says Amirah. “I think at best, the revenues will remain status-quo, I don’t think it’s enough necessarily to bring [revenue] figures up to our previously forecasted numbers,” she adds.
The way Amirah sees it, the adjustment of the master lease serves more as a form of reassurance for worried investors, as opposed to an attempt by EHT to bulk up its revenue.
“The factor that would have the greatest impact [on revenue] for EHT would be the clearing up of uncertainty,” says Amirah. “There are still a number of questions.”