What Investors Should Know About Eagle Hospitality Trust's 2019 Earnings

Eagle Hospitality Trust (SGX: LIW) was probably the most-talked-about REIT of 2019 due to its free-falling unit price.

The trust went public on 24 May 2019 at a price of US$0.78.

But right now, it’s trading at US$0.385.

That translates to a plunge of around 51% within nine months.

Much of the fall could be attributed to pains surrounding Eagle Hospitality Trust’s The Queen Mary, a luxury cruise ship that has been converted into a hotel.

The Fifth Person’s article touches briefly on what had happened:

“The Edge Singapore pointed out that the retired cruise ship might sink into disrepair due to poor maintenance.

 

Even if the repairs are carried out, it would cost a bomb and the amount would balloon to as high as twice the amount of its asset value.”

Shortly after The Edge Singapore report was released on 23 October 2019, Urban Commons (Eagle Hospitality Trust’s sponsor) confirmed to the REIT manager that it is not in default on The Queen Mary ground lease and that The Queen Mary continues to be safe and structurally sound.

But that does not seem to have calmed the market as Eagle Hospitality Trust’s unit price has not recovered.

For potential investors who are looking to be contrarian and buy units in Eagle Hospitality Trust, they should be aware of how it has performed for the latest financial year.

Therefore, let’s find out about Eagle Hospitality Trust’s 2019 financial report card.

Distribution Not Up to the Mark

Eagle Hospitality Trust’s year ends on 31 December each year. However, since the trust was only listed in May 2019, its 2019 financial performance consists of the period from listing date to 31 December 2019.

For 2019, Eagle Hospitality Trust’s revenue came in at US$51.6 million, 10.1% below its IPO forecast.

The trust said that the difference was largely due to “less favourable US lodging market fundamentals, roof repairs at its largest asset, Holiday Inn Resort Orlando Suites coupled with the impact by the ramp from the construction delays”.

With property expenses coming in lower than forecast, net property income stood at US$42.9 million, 7% below the estimates in its IPO prospectus.

Consequently, distribution per stapled security (DPS) was 10.2% lower than forecast at 3.872 US cents.

Not a great beginning for Eagle Hospitality Trust at all.

Balance Sheet Could Be Stronger

As of 31 December 2019, Eagle Hospitality Trust’s gearing ratio stood at 37.2%, below the regulatory limit of 45% for Singapore REITs.

The gearing ratio is also below the threshold I’m looking at when investing in REITs.

However, its interest coverage ratio is only at 3.8x, which is too low in my opinion. I prefer REITs with an interest cover of above 5 times.

The interest cover ratio shows how well a REIT can pay interest on its outstanding loans. Generally, the higher the ratio, the better it is.

We can also compare a REIT’s balance sheet strength with its peers to see where it stands.

On that front, ARA US Hospitality Trust (SGX: XZL), another REIT with hotel properties in the US, ended 2019 with a slightly stronger balance sheet than Eagle Hospitality Trust.

ARA US Hospitality Trust had a gearing ratio of 32.1% and an interest cover of 4.5 times at the end of last year.

Clearly, Eagle Hospitality Trust’s balance sheet is not as strong compared to its peer.

Covid-19 Update

Something that would be on investors’ minds right now is how the Covid-19 disease will affect Eagle Hospitality Trust.

On that note, the trust said the following in its 2019 earnings update (released on 17 February 2020):

“Industry experts maintain that it is still too early to predict the impact that the COVID-19 virus may have on the US hospitality industry, as compared to certain parts of Asia that have since registered a significant adverse impact.”

Eagle Hospitality Trust’s sponsor also said that “[o]ur portfolio currently remains relatively insulated given the de minimis proportion of international guests originating from the more affected regions in Asia.”

For 2019, only 11% of revenue from properties owned by Eagle Hospitality Trust came from overseas while the remaining 89% was from domestic visitors.

However, Eagle Hospitality Trust’s outlook could change, given how the virus has evolved since then.

Covid-19 used to be more of an Asia-centric disease, but it has now spread to Europe and the US. America has already reported deaths from the novel coronavirus.

Last week, fears surrounding the virus caused the S&P 500 index to fall to its worst weekly performance since October 2008.

If the Covid-19 cases increase in the US, more domestic travellers could curtail their local travel plans, and that might affect Eagle Hospitality Trust’s variable rent, which is estimated to represent 34% of its total rent for 2020.