Heartland Boy

Seriously Singaporean Financial Literacy

MENUMENU
  • About
  • Investment
    • Investment
      • REITS
      • Singapore Stocks
      • Singapore Property
      • Cryptocurrency
    • review-of-dividend-machines-by-the-fifth-person

      Review of Dividend Machines By The Fifth Person

      February 22, 2021 By Alison_Liew 7 Comments

    • performance-review-2022

      Heartland Boy 2022 Investment Performance Review

      posted in Investment, Singapore Stocks

    • hdb-bto-and-hdb-resale-prices-have-increased-are-they-still-affordable

      HDB BTO and HDB resale prices have increased, are they still affordable?

      posted in Investment, Singapore Property

  • Banking & Insurance
    • Banking & Insurance
      • Bank Deposits
      • Bank Loans
      • Credit Card
      • Insurance
    • review-gxs-bank-trust-bank

      Review of GXS bank and Trust bank Savings Accounts

      posted in Bank Deposits, Banking & Insurance

    • review-instarem-amaze-card-foreign-currency-fee-cashback

      Review of Instarem amaze Card: Avoid foreign currency fees, receive additional cashback

      posted in Banking & Insurance, Credit Card

    • Great-SP-10

      Review of Great Eastern’s GREAT SP Series 10 – Guaranteed 4% Return!

      posted in Banking & Insurance, Insurance

  • Retirement
    • Retirement
      • Singapore CPF
      • Singapore SRS
      • Taxes
    • Why I invested my CPF OA funds in OCBC fixed deposit at 3.55%

      posted in Retirement, Singapore CPF

    • invest srs

      Why Invest Your SRS Funds In ETF

      posted in Retirement, Singapore SRS

    • gst-increase

      Beat The GST Sales Campaigns Brought Out Some Irrational Financial Decisions

      January 29, 2023 By Alison_Liew Leave a Comment

  • Lifestyle
    • Lifestyle
      • Dining
      • Travel
      • Parenthood
      • Wedding
      • Others
    • review-of-mealpal-singapore-that-now-serves-hawker-food

      Review of MealPal Singapore That Now Serves Hawker Food

      posted in Dining, Lifestyle

    • My family holiday to Australia’s Brisbane, Gold Coast and Sunshine Coast

      posted in Lifestyle, Travel

    • how-much-my-family-saves-in-transport-costs-from-cycling

      How Much My Family Saves In Transport Costs From Cycling

      posted in Lifestyle, Parenthood

  • Resources
  • Contact

Investment REITS

Why I Embarked On Eagle Hospitality Trust’s The Queen Mary

why-i-embarked-on-eagle-hospitality-trust-the-queen-mary

REITs and Business Trusts are supposed to be relatively stable assets that are not subject to significant volatility. However, just before the Deepavali long weekend in Singapore, Mr Market presented a unique opportunity in Eagle Hospitality Trust (ticker code SGX: LIW). Eagle Hospitality Trust (‘EHT’) capitulated a total of 15.5% to close at US$0.545 in a single trading session, definitely a far cry from its IPO price of US$0.78 This was a swift reaction to the damning allegations that ran on The Edge with regards to one of the biggest and most controversial assets in its portfolio, The Queen Mary. Eagle Hospitality Trust certainly did not meet most of the investment criteria in Heartland Boy’s checklist for REITs and Business Trust. Nonetheless, he took a leap of faith that day as he felt that the sell-off was more knee-jerk than rational. Here is his review of Eagle Hospitality Trust and why he decided to embark on Eagle Hospitality Trust’s Queen Mary (pun intended).

The Relationship Between The Stakeholders

The Queen Mary is a decommissioned British ocean liner that has been converted into a 347-room upscale hotel. It is therefore no longer required to sail and is instead permanently moored at Long Beach, becoming an iconic tourist destination in itself. (Closer to home, think of St James Power Station- an iconic entertainment hub operating in a decommissioned power plant)

In April 2016, the sponsor of Eagle Hospitality Trust, Urban Commons, took a 66-year ground lease on The Queen Mary from the City of Long Beach for an assumed consideration of US$140 million. This ground lease governs the use of the land, the submerged water area, and improvements made to The Queen Mary. Specifically, Urban Commons is obligated to cover part of the costs to repair The Queen Mary, with the City of Long Beach bearing the rest. As at end 2018, Urban Commons spent a total of US$23.5 million to renovate the meeting spaces, restaurants, attraction venues etc.

Upon the successful IPO of Eagle Hospitality Trust, Urban Commons transferred the lease to EHT for a total of US$139.7 million (discount of 12% from Collier’s valuation). EHT in turn entered into a sub-lease master agreement of 20 years (with option to extend for another 14 years) with Urban Commons on a triple nett basis. To break down all these real estate jargon, EHT now becomes a passive landlord who simply collects rent from Urban Commons consisting of:

  • Fixed Rent of US$10.4 million, with a 2% annual escalation rate
  • Variable Rent consisting of 8% of the Gross Operating Profit

Urban Commons is also responsible for maintenance capex, property taxes and property insurance on top of the usual fees such as operating expenses of The Queen Mary.

eagle-hospitality-trust-heartland-boy-embark

Diagram 1: Various stakeholders: City of Long Beach, Urban Commons and Eagle Hospitality Trust

EHT’s business risk comes from the credit worthiness of the lessee of The Queen Mary- i.e. whether Urban Commons can pay the rent (both fixed and variable components) when they come due. If Urban Commons defaults, EHT would have no income distribution to pay to its security holders.

Urban Commons’ business risk lies in whether it can yield The Queen Mary higher than all the expenses (including its rental obligations) that it costs to operate it. If it is unable to do so, it will have to look for cash elsewhere to subsidise the costs of leasing The Queen Mary.

It is essential to understand the role of each stakeholder in this business model so that we can evaluate the risk-reward profile of this investment.

The Edge’s Report on The Queen Mary

Here is a summary of the viral article (Business Times and Straits Times each ran an extract of it) that was published on The Edge that triggered EHT’s massive sell-down.

  • In their most recent inspection, City of Long Beach claimed that the ship has never been in a worse condition, and that its structural integrity is at risk
  • It has requested financial paperwork (repair costs ranging from US$235 million – US$289 million) and a plan for making urgent fixes from Urban Commons
  • If Urban Commons fails to respond by 31 Oct 2019, it may be found in default of the ground lease

Response From Eagle Hospitality Trust’s Manager

  • Neither Urban Commons nor EHT is in default on The Queen Mary ground lease, as confirmed by the City of Long Beach subsequently
  • Urban Commons responded and estimates that the repair work required to be done within the next 2 years will cost approx. US$7 million
  • EHT has contractual right to perform these obligations if Urban Commons defaults, but there are reserve mechanisms in the leases to fund such expense. If required, EHT can obtain external financing to carry out these repair works and subsequently try to seek reimbursement from Urban Commons as they ultimately remain liable for such expenses
  • The Marine Survey cited in the letter from City of Long Beach was conducted in Jan 2017, and did not form the basis for the agreement between the City and Urban Commons regarding the cost of expected repairs
  • The Queen Mary remains safe and structurally sound

Heartland Boy’s Analysis Of EHT

1) Cost of Expected Repairs More Likely To Be US$7mil

This seems to be a case of whose professional consultant/engineer to trust and Heartland Boy finds more reason to believe Urban Common’s assessment than the City of Long Beach’s.

Assuming that the findings of the Marine Survey is true, Urban Commons would have forked out a total of US$429 million (purchase price + repairs) for a 66-year lease on a decommissioned ocean liner. According to Eagle Hospitality Trust’s prospectus, it was revealed that The Queen Mary generated Gross Operating Profits of US$7.1 mil, US$6.5 mil, and US$11.2 mil in Years 2016, 2017 and 2018 respectively. It would take many years (almost 2/3 into the leasehold tenure) to even reach payback. The IRR for such a project would be so poor that it is hard to fathom the Board/Investment Committee ever approving such an investment. Moreover, Heartland Boy found it odd/not very plausible that a survey conducted in Jan 2017 could retrospectively form the basis of a sale of lease agreement executed in Apr 2016. This goes back to the point that any competent management would not have recommended/signed off on an investment when the cost of repairs, which the purchaser is obligated to co-pay, remains an unknown entity.

Having established that US$7 million is more plausible as the cost of repairs required for The Queen Mary in the next 2 years, it is unlikely that Urban Commons would default on this financial commitment.

2) Sufficient Cash To Finance Cost Of Repairs

According to the its IPO prospectus, Urban Commons as the master (sub)lessee is required to set aside cash to fund the Capital Improvement Fund (‘CIF’) Reserve. Failure for Urban Commons to make the required CIF contribution would be an event of default. For The Queen Mary, CIF contribution is mandated at 2% of Total Revenue in 2019 and 3% of Total Revenue in 2020 and onwards. Based on its forecast and Heartland Boy’s internal estimates, this works out to US$4.7 million in CIF reserves that can help to part-fund the expected cost of repairs for The Queen Mary in the next 2 years as shown in Diagram 2.

capital-improvement-fund-eagle-hospitality-trust

Diagram 2: The Queen Mary’s contribution to EHT’s Capital Improvement Fund Reserve

Additionally, Urban Commons have established the Historical Preservation Capital Improvement Plan (HPCIP) fund with the City of Long Beach that can help to fund the repairs to ensure The Queen Mary’s viability. According to UOB KayHian research report, its interaction with EHT’s Manager indicated that these twin sources of funds can help fund capex of up to US$4.5mil p.a. for The Queen Mary.

3) Share Price Capitulation Provides Sufficient Margin of Safety

Assuming a worst-case scenario that The Queen Mary is completely written off, it will be interesting to analyse the financial metrics. After studying its prospectus and the latest results announcement, Heartland Boy did a comparison of a business-as-usual scenario vs worst-case scenario of EHT as show in Diagram 3.

queen-mary-eagle-hospitality-trust-analysis

Diagram 3: Business-as-usual and worst-case scenarios of The Queen Mary on EHT’s financials

Under the worst-case scenario, a 9% dividend yield seems about fair in current environment given that (i) it is a hospitality reit, (ii) an overseas REIT with exchange rate risks and (iii) relatively high gearing. This seems to suggest that the likelihood of upside is higher than the downside and the margin of safety (from its NAV) seems adequate. In addition, its portfolio is managed by established hospitality operators such as Marriott.

On the basis of the 3 reasons outlined above, Heartland Boy took a small position on Eagle Hospitality Trust at a share price of US$0.555. Of course, since this is an extremely volatile stapled trust, Heartland Boy will implement a 15-20% stop-loss if it turns out that he is sipping from a poisoned chalice.

This article was published on 3 Nov 2019.

Update: Heartland Boy cut loss at $0.475 on 4 Nov 2019.

Disclaimer: The information contained herein is the writer’s personal opinion on his blog and do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein.


20 Comments

« First Year Confessions From a Father
Citi MaxiGain Savings Account Has Lowered Its Interest Rate Again »

Comments

  1. Christopher says

    November 4, 2019 at 8:32 am

    Hello heartland boy,

    I am a new investor in this realm.

    1) The small position you took is how many percentage of your portfolio?

    2) Assuming QM is not contributing at all, and at the price you purchased, what is the dividend yield?

    3) Which platform are you using to do shorting?

    Reply
    • Alison_Liew says

      November 4, 2019 at 12:42 pm

      Hi Christopher,

      1) <10% of my proftolio
      2) Pls look at Diagram 3. Refer to Worst case scenario
      3) i do not short. thanks.

      Reply
  2. sgdividends says

    November 4, 2019 at 10:43 am

    Between a business and a government entity, i would give the government entity more benefit of a doubt because there is less reason or conflict of interests.

    Reply
  3. Christopher says

    November 4, 2019 at 1:02 pm

    Thank you for getting back to me. How do you put stop loss?

    Reply
  4. Rick says

    November 4, 2019 at 3:45 pm

    See the profit margin of ASAP :-

    ” 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.”

    Reply
    • Alison_Liew says

      November 4, 2019 at 5:53 pm

      Hi Rick,

      Thanks for these information. On the surface, it looks like EHT “overpaid”. However, I think we need to analyse it a bit further. For instance, did ASAP sink in capex to perform AEI on the properties? Were the properties bought during an environment where cap rates were higher? All these would have added to the valuation of the properties.

      Reply
  5. SgBuffett says

    November 4, 2019 at 9:27 pm

    Hi I am sgbuffett from sgtalk forum.

    I have issued warning to sell and get out.

    This EHT asset valuation is heavily inflated and with. $465M in debt …my assessment is the stock is not a buy at any price level.

    Detail analysis is found in my thread.

    https://sgtalk.org/mybb/Thread-Eagle-REITs-5-months-after-IPO-be-warned-GET-OUT

    Plse be warned. I am a deep value investor and typically do forensic analysis before risking my money my various stock picks and warnings can be found in sgtalk forum.

    Reply
  6. Liong Hai says

    November 5, 2019 at 3:37 pm

    Why did you decide to cut loss?

    Reply
    • Alison_Liew says

      November 5, 2019 at 6:23 pm

      Hi Liong Hai,

      This is part of my investment strategy. You can find more about it here (https://heartlandboy.com/when-to-buy-stocks/)

      Reply
  7. Anarchy99 says

    November 5, 2019 at 7:41 pm

    I bought 1000 at 0.695.. Wanted to sell at 0.655.. But it fell to 0.555.. So I held on..
    Made a snap decision to buy another 1000 at 0.50..
    Am I in deep sheet? Would you hold or sell?

    Reply
    • Alison_Liew says

      November 5, 2019 at 7:52 pm

      Hi Anarchy99,

      I am not a financial advisor and I am not qualified to give financial advice. Thanks.

      Reply
  8. Chris says

    November 5, 2019 at 8:39 pm

    Hi, which TA should i use to analyse this stock?

    Reply
    • Alison_Liew says

      November 6, 2019 at 8:05 am

      Hi Chris,

      I am not familiar with TA unfortunately.

      Reply
  9. anon says

    November 8, 2019 at 11:25 am

    sorry for your monetary loss. thanks for having the courage to share.

    Reply
    • Alison_Liew says

      November 8, 2019 at 2:21 pm

      hey u r welcome! we all learnt from our mistakes

      Reply
  10. Rick says

    November 12, 2019 at 12:58 pm

    Hi HLB, thanks for your honesty and informed us you have cut loss at $0.475…I will support your blog because you are honest and open…Thanks again for you efforts so far

    Reply
    • Alison_Liew says

      November 12, 2019 at 9:30 pm

      Hi Rick,

      Thanks for your kind words and encouragement. Will continue to contribute to the community.

      Reply

Trackbacks

  1. Eagle HTrust: Undervalued Bargain or Value Trap? - SmallCapAsia says:
    November 6, 2019 at 7:46 pm

    […] 3 Nov – https://heartlandboy.com/eagle-hospitality-trust-the-queen-mary/ […]

    Reply
  2. Eagle Hospitality Trust: What is going on and when is a good time to buy? says:
    November 9, 2019 at 8:16 am

    […] Boy has an interesting writeup on Queen Mary where he basically argues that the Queen Mary saga is overblown and that the impact […]

    Reply
  3. The tale of a sinking ship (or not) – sgbudgetbabe.com says:
    March 6, 2020 at 3:00 am

    […] that Urban Commons would have signed up for such a terrible deal given the costs, which Heartland Boy mentioned here (I quote him […]

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Welcome to Heartlandboy.com

Hello there, I am Heartland Boy! I am always thinking about how I can improve my financial literacy in order to achieve financial independence. This is the place to be if you are hungry for financial independence (sometimes good hawker food as well) and foolish enough to believe in the musings of Heartland Boy. Read More…

  • About Heartland Boy
  • Contact
  • Work With Us
  • Privacy Policy
As Seen On

Copyright © 2023 Heartland Boy · All Rights Reserved
All content expressed herein are the personal opinions of Heartland Boy and does not constitute the views of any company nor as professional financial advice.

Copyright © 2023 · Divine Theme on Genesis Framework · WordPress · Log in