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Smart money exiting US hospitality sector?

Wednesday, December 11, 2019

This is a blog to share some food for thought regarding the US hospitality sector.

It is going to be partly about what I picked up from someone who seems to be in the know.

It might or might not explain in part why there were two IPOs of US hospitality assets in Singapore earlier this year.

As usual, remember that it is just me talking to myself here in ASSI.

Of course, don't take everything in ASSI as the Gospel truth.

It is just my perspective most of the time.

The US hospitality sector has grown robustly for a decade but incumbents are facing increasing number of challenges and stronger ones too.

So, it is not surprising that some incumbents are letting go of their assets to lock in capital gains.

It could be that rather than deal with the challenges themselves, they are passing the risks to other investors when showing off a past robust growth trajectory is still enough to attract buyers.

It could also be the case that some of the challenges are insurmountable such as the possible ending of the hospitality expansion cycle.

Some pertinent points which I picked up:

1. Very real rising operating costs and, increasingly, operators are under a lot of pressure to keep a lid on expenses.

2. The expansion cycle in the US hospitality sector could very well be coming to an end after 10 years of consecutive growth.

3. Since the Global Financial Crisis, there is a strong sense of financial insecurity and US consumers are given to eliminating vacations altogether in a recession as was seen in the last recession as half of US households spent nothing on vacations then.

Any entity holding US hospitality assets who is thinking of going asset light would be very happy to have a REIT as a captive buyer at this point when discretion could be the better part of valor.

On hindsight, the lukewarm response to Eagle Hospitality Trust's IPO might have been a sign of things to come.

Especially so when the IPO launched with a lowered offer price of 78 cents a unit probably after a less encouraging book building exercise.

A lowered offer price was necessary to give a higher projected distribution yield to make the IPO more attractive to investors.

"In EHT's IPO, no applications were received for about 60 per cent or 26.6 million stapled securities out of the 44.9 million available to the Singapore public for subscription, at the close of the public offer on May 22. 

"The subscription rate for the public offer is therefore 0.4 times."

The Straits Times.

An IPO in which the public offer was only 0.4x subscribed?

Eagle Hospitality Trust probably made IPO history in Singapore.

Memorable but not in a good way.

Eagle Hospitality Trust's DPU is partially shielded by Master Leases where fixed rents make up 66% of the Trust's total rent.

Of course, we have to remember that Master Leases are only as strong as the lessee.

Questioning the financial strength of the lessee is probably a prudent thing to do.

Master Leases also have the possible effects of inflating asset valuations and masking the real ability of an asset to generate income.

Without the fixed rents provided by Master Leases, ARA Hospitality Trust's DPU performance could possibly be a clearer indication of what things are probably like on the ground.

ARA Hospitality Trust's DPU missed forecast by a wide margin in the face of challenging conditions in the US hospitality sector and not due to any major internal issues.

"ARA H-Trust On Wednesday separately reported DPS of 1.77 US cents for its third quarter, 11.5 per cent lower than the 2.01 US cents figure forecasted in its IPO (initial public offering) prospectus.

"This comes after overall supply growth outpaced demand growth in the upscale select-service segment for the first three quarters of fiscal 2019, it said."

The Business Times.

Are these reasons enough to explain the seemingly irrational and repeated insider selling even at a huge discount of more than 40% from the IPO price and in large chunks?

Maybe but probably not.

Of course, we are referring to insiders of Eagle Hospitality Trust, specifically those who sold some hotel assets to be injected into the Trust.

Money should go to where it is treated best and smart money probably know where to go.

Eagle Hospitality Trust could be a good investment for income but just not good enough for the insiders who reduced their stakes aggressively.

Is this an optimistic statement about what has happened at this point in time?

Probably but maybe not.

I am ending the blog with a couple of video clips.

The first one is about hotels in the USA.

Titled "Selling Hotels 2020", the video clip has some interesting insights.

"The buyer pool for value add properties is a lot deeper than the buyers that are looking for stabilized income properties." 

The second video clip is just for fun and laughter.

Ho ho ho!

Alamak, how come like that?

Support SPH a bit lah. ;p

Related post:
His plight and my philosophy.

Recently published:
IREIT Global is going to Spain!


ed said...

in this age of disruption, i think another example of smart money exiting is the aramco ipo. while oil can still demonstrate profitability in this cycle, it may well cede significant ground to renewable energy in 2030, and certainly by 2050, and beyond. saudi smart money locking in the gains...

AK71 said...

Hi ed,

Disruption is happening everywhere.

It is happening especially rapidly in an era of easy money and low interest rates.

Hard to tell which ones will prevail especially when those using other people's money act in an irrational manner.

APTT, Softbank, ECB, UBER, GRAB, WeWork and irrational competition.

We have to be extra vigilant as no one cares more about our money than we do.

Most certainly, we don't want to ask barbers if we need a haircut. ;p

AK71 said...

"Questioning the financial strength of the lessee is probably a prudent thing to do." AK

Queen Mary operator Urban Commons found itself in a sea of red ink last year, despite generating income of nearly $60 million on the historic ship’s attractions, events, rooms and other revenue, according to a newly obtained independent audit.

The audit by the accounting firm of Grant Thornton LLP for 2018 showed that Urban Commons Queensway, which operates the Queen Mary under a lease agreement with the city of Long Beach, suffered net losses of more than $6 million on operating costs and interest payments.

The Chicago-based auditor warned that those losses, along with other shortcomings, raised “substantial doubts about the Company’s ability to continue as a going concern.”

Urban Commons, a Los Angeles-based real estate investment and development firm, only recently provided the audit to the city as part of its lease agreement to operate the ship. In October, Long Beach officials had warned Urban Commons that it could be in danger of defaulting on its lease if it failed to divulge its finances and make critical repairs to the ship.

The Post this week obtained the audit, dated Nov. 12, through a public records request with the city.

The financial standing of Urban Commons has come under increasing scrutiny in recent months.

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

Investing Wise said...

Hi AK,

You should see the response from EHT management on the Long Beach Post New article. In any case, I think the selling from SSH has not gone below 0.40 USD. My suspicion is this is where the value from EHT is beginning to emerge. Correct me if I am wrong.

AK71 said...

Hi Investing Wise,

All investments are good at the right price.

If there is no shenanigan, then, I believe that at under 40 cents a unit, EHT is probably something even the Yuans should be buying into.

Would probably be a case of too cheap to ignore then. :)

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.

sginvestor said...

from my perspective, the risk increases if the master leases are with related parties.
are the master leases transacted at arm's length rate?

From Eagle Hospitality Trust prospectus:

On the Listing Date, each Property will be leased to a Master Lessee. EH-REIT is dependent upon rental payments from the Master Lessees, which are wholly-owned by the Sponsor.

AK71 said...

Hi sginvestor,

The financial strength of the sponsor is a pertinent consideration.

The fact that the sponsor needed the funds from EHT's IPO to save itself doesn't inspire confidence.

Well, a rising tide will lift all boats and, for the sake of all invested, I hope the tide rises for EHT.

konmmo said...

Thanks for sharing your thoughts on the US hospitality sector AK. While EHT took the headlines, I think the key takeaway is that valuations are rich across the board, and not just in the hospitality sector.

AK71 said...

Hi konmmo,

Like what Warren Buffett said, interest rates act like gravity.

If interest rates stay low, things will stay frothy.

Having said that, some things are probably frothier than others. ;p

Sillyinvestor said...

Hi AK,

Long time no comment. It worried me when I take position opposite on yours LOL.

I did take a speculative position on EHT, after doing some research on EHT. I think Queen Mary will continue to be milked for the time.being. hope I am right, looking at the reviews about the ghosts and legends carnival done but UC being popular, and linking the dots with what city says, I think this thing won't blow anytime soon.

AK71 said...

Hi Mike,

Good to hear from you. :D

I just don't know if there is a skeleton in the closet and I am not referring to a closet on the haunted ship here. ;p

It is not just the crazy insider selling that makes me uncomfortable but also the way the sponsor seems to be less than upfront with certain details.

If not for the media and the subsequent queries by SGX, we would have been kept in the dark.

If I were to plonk down some money in EHT now, it would be more a speculative position than an investment per se.

The fact that you said yours is a speculative position shows that we are on the same side and not on opposite sides. ;)

I am just less willing to take speculative positions these days but if the unit price should go much lower, then, I might be sorely tempted.

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