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Eagle Hospitality Trust: Financial engineering and selling at 44.5 cents a unit.

Monday, November 11, 2019

When I analyse stocks, I am aware that I do not have the resources to do complete analyses.

Most if not all of my analyses are incomplete and I make decisions based on such incomplete analyses.



Yes, really.

An example:
ComfortDelgro: An incomplete analysis.

I just have to decide on which bits of information are more crucial to my decision making process.

If I have access to those bits of more crucial information, I will be able to make a decision.

If I don't have access to what I think are more crucial, I should stay away until a time when things have changed.

Those few times that I ignored this advice to myself, I mostly regretted my decisions.

It is almost like a jigsaw puzzle.

We don't usually need to put every piece of the puzzle in its place to see the picture.

As retail investors, if we can be approximately right most of the time, we will probably do well enough in the long run.

When I blogged about Eagle Hospitality Trust recently, it was the same.

In the blog, I said "it is enough to stop me from investing in Eagle Hospitality Trust even now."

Of course, if you have read my last blog on Eagle Hospitality Trust, you know what I am talking about.

Yes, in the case of Eagle Hospitality Trust, what really struck me hard was the substantial shareholders selling at what seemed like ridiculously low prices.

Not just selling their investments at ridiculously low prices but also selling them in large chunks.

Guess what?

It has happened again.

Today, it was announced by Eagle Hospitality Trust that Compass Cove Assets Limited which is wholly-owned by Mr. Norbert Shih Hau Yuan sold 5 million units at 44.5 cents per unit on 7 November 2019.

SGX: Eagle Hospitality Trust corporate announcement.

So, we see that even a selling price as low as 44.5 cents a unit is acceptable to this substantial shareholder.

I believe they are the people who sold 6 hotels to Eagle Hospitality Trust's sponsor who in turn injected the hotels into the Trust.

"Asset management firm ASAP sold six hotels to EHT's sponsor..."

We should ask how realistic are the valuations of these hotels?

Making an investment decision based on published NAV could be a bad idea as the valuation could be inflated.

Older readers of my blog would remember that I said the NAV of Saizen REIT was too low because they were able to sell their properties at a premium to valuation in the open market.

Newer readers might want to read this blog in which I talked to myself about Saizen REIT and Sabana REIT.

Saizen REIT: Right price and luck.

If you would like to read more about Sabana REIT,

Sabana REIT: History and current thoughts.

Anyway, we should ask if Eagle Hospitality Trust tried to sell these six hotels in the USA, could they get buyers to pay prices equal to the valuations by the "two reputable independent valuers" the manager of the Trust keeps referring to?

Good question, don't you think?

Closer look at EHT's portfolio. 

(You can also go to the comments section at the end of this blog for a brief account.)

So, looking at the cash flow is probably a better way.


As more than 60% of EHT's cash flow is secured with master leases, there is some comfort there for investors.

However, as seasoned REIT investors know, master leases usually hide the real (usually lower) cash flow generated by the properties.

It was also probably the master leases that led to higher valuations for the properties.

Financial engineering.

Always amazing.

When Ascendas Hospitality Trust had its IPO so many years ago, I wasn't interested in it partly because of some financial engineering involved to make it more attractive.

Of course, older readers of my blog know that I usually avoid IPOs anyway.

So, how did Ascendas Hospitality Trust become one of my largest investments?

It was only after some time when the effects of financial engineering lapsed and when the unit price declined to a level that became more compelling that I nibbled.

When unit price plunged even lower, I gobbled as I had clarity.

As an investor, I need clarity.

Without clarity, I cannot be sure if something is clearly undervalued or not.

Of course, if we cannot trust, we cannot invest.

Ascendas Hospitality Trust: More income.

Of course, Ascendas Hospitality Trust will have a new name soon.

Ascendas Hospitality Trust: Bad deal?

Anyway, back to Eagle Hospitality Trust.

At this point, it is almost impossible to believe that everything is fine and nothing is wrong.

Of course, it is only my belief since it could also very much be that I am growing old and cynical.

We should ask why are substantial shareholders selling at such low prices?

Unless they issue a statement on why they are doing this, we can only guess.

Will they do this?

EHT is due to announce results two days from now on 13 November 2019 but it should not distract investors from important questions that need answering.

Related post:
Is Eagle Hospitality Trust worth it?


AK71 said...

Since August, Claydon Hill Investments and Compass Cove Assets have been selling their stakes in Eagle Hospitality Trust.

Based on reports in the US press, Claydon Hill and Compass Cove invested in hotels on behalf of Chinese clients. They are also the managers/part owners of ASAP International Holdings whose unit Third Party ASAP6 Portfolio Vendors divested six hotels into EHT for the IPO process.

These hotels are: Sheraton Denver Tech Center, Crowne Plaza Dallas Near Galleria-Addison, Hilton Houston Galleria Area, Hilton Atlanta Northeast, Renaissance Woodbridge and Doubletree by Hilton Salt Lake City.

Crowne Plaza Dallas was purchased by ASAP for US$27.6 million ($37.4 million) and sold the hotel into EHT for US$50.7 million. Its adopted valuation in the REIT is US$57.8 million.

ASAP acquired Renaissance Woodbridge for US$30 million and sold the property into EHT for US$67.1 million; the valuation adopted in the REIT is US$76.6 million.

ASAP acquired Doubletree by Hilton Salt Lake City in 2017 for US$31.38 million, the REIT acquired it for US$53.4 million at IPO and its valuation in the REIT is US$60.9 million.


Peach MilkTea said...

I have a question. These deals are made off market. Like today's selling. Does that means there are buyings paying millions to buy? and how can they find such buyers?

AK71 said...

Hi Peach MilkTea,

Your guess is as good as mine. ;)

However, that question doesn't intrigue me as much as why sell at a price that low?

It is mind boggling. O_o

What intrigues me even more is why sell at a price that low and in such a large quantity?

I am flummoxed. O_o

Is there more to come?

For the sake of those who are invested in the Trust, I hope not.

Crossing fingers.

Liu said...

Hi ak,

I clicked the link and it says disposal(Eg married deal) by Compass Cove. Does this mean they must sell immediately no matter the price of that day? Please enlighten me on this. Thank you.

Best regards

AK71 said...

Hi Liu,

It just means that the seller (Compass Cove) found someone to buy 5 million units that day without listing them in the open market.

You can think of it as a transaction behind closed doors instead of one in the public space.

It is fortunate for retail investors of the Trust that this was the case as selling another 5 million units in the open market with a willingness to accept such a low price would have caused the unit price of the Trust to plunge further.

That is my guess.

Henry said...

I think they may be trying to create a smoke screen by selling to 3rd party who will then discharge them into the open market progressively. Example, Mr S sell to Ah Tiong A, Ah Tiong A sell into open market or sell to Ah Tiong B who then sell into open market, many combinations possible. They are very creative you know with so many loopholes to explore. I know buyers don't have to declare unless it cross 5% under existing rule. But SGX should mandate Mr S to disclose who the buyer was, to give more transparency for this unique case.

AK71 said...

Hi Henry,

Yes, I agree that we need more transparency.

I will wait for more clarity.

Given enough time, the fog will disperse.

It could be weeks or months or even years before it happens, of course.

At the moment, the fog is simply too dense.

There are plenty of fairly good options in the Singapore stock market if we want to invest for income.

Don't have to die die get into something like EHT. ;p

Betta man said...

What do you think of EHT latest results?

AK71 said...

Hi Betta man,

I would look at all the numbers and not just the DPU.

It is what it is. ;)

Betta man said...

Does this statement makes you feel better? :)

AK71 said...

Hi Betta man,

Is that the statement from the sponsor that they will not sell their stake?

They cannot speak for the Yuans and Tong.

Still pretty fishy to me.



Like I said, maybe, I am growing old and cynical. ;p

If I don't feel good about something, I should avoid it. :)

AK71 said...

"Wu and the auditors noted that the company’s debt balance was paid in full in May when Urban Commons, under the name Eagle Hospitality Trust, went public on the Singapore Stock Exchange in an effort to generate up to $566 million for its portfolio of 13 hotel properties it owns or manages, including the 1930s-era ship.

"But the financial information Eagle Hospitality provided to investors prior to the offering has raised new questions with city officials, who are concerned about discrepancies with the latest audit.

"In a report to potential investors, the Queen Mary is listed as the most lucrative property in Urban Commons’ hotel portfolio, with a total profit of $11.2 million in 2018, up from $6.5 million in 2017. Key drivers included the reopening of newly-renovated restaurants, increased concert revenue and more visitors. It made no mention of the 2018 operating losses noted by the independent auditors.

"City Auditor Doud in an interview Thursday said there appear to be “inconsistencies” between the information in the 2018 financial audit that was recently provided to the city and information in the financial statements that was provided to potential investors earlier this year."

Read full article at:
Long Beach Post News, 5 December 2019.

If we cannot trust, we cannot invest.

AK71 said...

"EHT clarified that the over US$6 million in net losses on operating costs and interest payments by UCQ refers to a net income statistic which takes into account all expenses of UCQ.

"This includes depreciation and amortisation – a significant non-cash expense, interest expense, and certain operating expenses relevant to UCQ as a property owner, which would not be incurred by the Queen Mary as part of the IPO portfolio, EHT said.

"It added that the interest expense noted in the 2018 audit corresponds to a debt facility that has since been extinguished as part of the IPO.

"EHT further clarified that UCQ's 2018 operating performance was hit by US$23.5 million of renovations and operational disruptions. The disruptions hurt revenue drivers Ghost and Legends tour and the Sir Winston's Restaurant and Lounge, which were out of service for significant parts of 2018, but have since become operational in 2019.

"In addition, EHT flagged a statement in the article on "substantial doubts" about UCQ's ability to continue as a going concern. It added that the "loss" referenced is less applicable to EHT as the 2018 debt held at UCQ had been repaid in full."

Full article in:
The Business Times, 9 December 2019.

Basically, funds from EHT's IPO saved the sponsor, Urban Commons.

Crossing fingers that Urban Commons will do a good job henceforth.

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