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

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.

What?

Really?

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.

See:
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.

See: 
"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.

See:
Saizen REIT: Right price and luck.

If you would like to read more about Sabana REIT,

See:
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?

See:
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.

Really?

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.

See:
Ascendas Hospitality Trust: More income.

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

See:
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?

Is Eagle Hospitality Trust worth it?

On 24 October, a reader left a comment here in my blog:

"https://www.businesstimes.com.sg/companies-markets/eagle-hospitality-trust-calls-for-trading-halt-after-reports-on-possible-lease

"The yield is almost 10% now.

"When trading halt is lifted, price is likely to crash and yield will shoot up above 10%.

"Do you think the risk is worth taking ? Thanks."






In reply, I said that the risk looked pretty significant.

I felt that I shouldn't take on too much risk in my retirement.

Basically, that meant I wasn't going to invest in Eagle Hospitality Trust.

The following day, on 25 October, Eagle Hospitality Trust's unit price crashed from 64.5 cents to 54.5 cents.

Of course, it did not stop there as it further plunged spectacularly to 44 cents on 5 November.






People say that IPO stands for "it's probably overpriced".

Well, it seems to be the case here.

Eagle Hospitality Trust's IPO earlier this year was priced at 78 cents per unit.

It is certainly not an exaggeration to say that investors who got in during IPO have suffered massive wealth destruction.

What to do?

For those already vested, should they cut loss or buy more?






Well, when even substantial shareholders cut their losses, it is rather ominous.

In fact, it is because of substantial shareholders selling a substantial portion of their stakes that created massive selling pressure leading to the catastrophic crash in Eagle Hospitality Trust's unit price.

When elephants stampede, it is the grass that suffers.

As retail investors, keeping an eye on what insiders do is usually a very good idea.






When insiders buy, it is usually because they think they are getting a good deal.

When insiders sell, it might not be because they think they got a bad deal.

To be fair, there could be many rather innocent reasons why they sell.

However, I would say that this is probably true when the stock is doing relatively well.

Insiders might want to take some profit off the table.

After all, it is never wrong to take profit, as the saying goes.






When insiders sell a significant percentage of their investments and take big losses in the process, however, the reason for selling could be less benign.

Alarm bells should go off when more than one insider take big losses selling down their investments.

This is the case with Eagle Hospitality Trust.

Insiders probably know something retail investors or outsiders don't.

If Eagle Hospitality Trust is a good investment for income, after a huge decline in unit price, insiders should be buying more.

Even if they don't buy more, they should be holding on to their investments.

They should not be selling.

This kind of selling by insiders is ominous and it is enough to stop me from investing in Eagle Hospitality Trust even now.






Not investing?

What about doing a bit of speculating instead?

This is when we buy and hope that the unit price will go up in the (not too distant) future.

Well, the selling pressure has weakened but it has not disappeared.

The slight recovery in Eagle Hospitality Trust's unit price now is due to reduced selling pressure and not due to strong buying pressure.

This is quite obvious when we look at the trade summary.

There is much more selling down going on than there is buying up of units.






After so much damage, unless there is very strong and sustained buying pressure, it is likely that Eagle Hospitality Trust's unit price will stay depressed for some time to come.

If there is strong and sustained buying pressure, we could see a rebound that moves the unit price to test resistance provided by the declining 20 days moving average.

Lacking this, the unit price could move sideways and the declining 20 days moving average will catch up in time which could create more downward pressure then.

The RSI, a momentum oscillator, says Eagle Hospitality Trust is oversold but there is nothing to say that it won't stay oversold for an extended period of time.

The MACD, another momentum oscillator, is still declining in negative territory and from the looks of it, it will take a rather long time before this is repaired.

A trade is usually safer when we see a positive divergence and I do not see one now.






Remember,

"Never risk what we have and need for what we don't have and don't need." - Warren Buffett

Unless we have deep pockets like the substantial shareholders, whether we are investors or speculators, it might better to stay away from Eagle Hospitality Trust even now.

It could be that I am missing out on a fantastic deal but when in doubt, I should stay out.

I might be tempted but I don't need this.

Peace of mind is priceless.






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