Eagle Hospitality Trust Q3 FY2019 Performance- Is Hurricane Dorian the only main reason for the underperformance against IPO forecast?

The release of the Q3 FY2019 financial results for Eagle Hospitality Trust (“EHT”) turns out to be neither reassuring nor promising. EHT missed forecast by <10.6%> and <2.7%> for revenue and net property income respectively. Since EHT did not display a convincing set of superb performance, it will lead to persistent lingering doubts over the quality as well as fair valuation of the hotel assets being injected into the Trust. Without a strong performance to quell the rumors, the share price will probably languish on for the next 3-6 months albeit some short term upside.

Q3 FY2019 financial performance- Is Hurricane the main reason for poor performance relative to IPO forecast?

During the previous Q2 FY2019 results announcement, the performance had already missed forecast and the reason given were that some of the hotels are just coming off the asset enhancement completion and thus will take time now to ramp up bookings.

For Q3 FY2019, the press release seems to give more emphasize with regard to disruption of demand at one of its main asset, that is, EHT suffered “unforeseen demand dislocation” at its largest asset, the Holiday Inn Resort Orlando Suites (“OHIR”)- Waterpark driven by a category 5 Hurricane Dorian which threatened the South Atlantic. As a result, Q3 rental from OHIR was down approximately US$0.6Mil from forecast. It is interesting to note that Mr Howard Wu, Founder of Urban Commons commented that “Eagle soared through the storm and delivered DPU amidst a Category 5 hurricane impacting its largest asset”.

However, a closer look at the released financial analysis revealed that “macroeconomic headwind” is the main cause of the under performance. From the total drop of <US$2.5Mil> in Q3 revenue against forecast whereby US$0.6Mil as aforesaid mentioned was attributed to Hurricane Dorian, it seems to suggest that the larger remaining US$1.9Mil decline was due to worsening macroeconomic factor. Hence the entire hotel industry may be headed into a downward economic cycle with weakening demand and overcapacity. That maybe why some substantial shareholders of EHT who are themselves specialist in the US hotel business have been busy unloading millions and millions of their units into the open market.

Other highlights for Q3 FY2019 results and silver lining

Overall, EHT benefitted from a less than proportionate decline of <2.7%> in net property income against the <10.6%> drop in revenue mainly due to savings from property tax and lower professional fees than forecasted.

As of July 2019, interest rate swap was concluded and effected thus locking in US$1.36 Million of savings per annum (this seems already built into the IPO forecast hence no material upsides from financing costs). The swap also means that 93% of borrowings of EHT are now fixed interest and with a 3.9 years average debt to maturity.

In addition, potential upsides from 5 hotel assets that just completed asset enhancements are expected to drive up future operating results in Q4 FY2019. Please see attached main Operational Performance KPIs of W-I-P assets vs Upgraded assets.

I am wary of the assertion by the management of EHT of “upsides from ramping up of the hotel assets that have just been renovated” being used so many times to give hope to investors. If the Q4 FY2019 result announcement is again an under performance with this being recycled as a future beacon of hope, then most likely, it means that there are truly some grave fundamental issues. This is similar to Asian Pay TV Trust which keep repeating stabilization in its average revenue per user (ARPU) key metric but then we know what happened after that fateful day where its unit price melted down to the abysmal level of S$0.127 per unit.

Lack of market confidence in Sponsor, Urban Commons, is a major crisis for EHT

The main challenge faced by EHT is the lack of confidence in its sponsor, Urban Commons, with regard to the injection of assets during IPO process and also the financial strength of Urban Commons to weather any major economic downturn. In other words, many investors are viewing EHT as mere financial engineering tool by Urban Commons to make it look good for IPO only and are pricing in a probability that it will meta-morph into a going concern disaster with either sub-par revenue generating performances or in a worst case scenario, breakout of further bad news which will confirm that the assets valuation and projection are grossly inflated.

The good news here is that Urban Commons has undertaken not to sell off their shares in EHT even after the expiry of their lock in period from IPO. This should provide much needed support on the unit price which has been heavily sold off by the other substantial shareholders in particularly, the Yuan Family members, which own ASAP Holdings that was involved in the enigmatic sales of hotels assets to Urban Commons and subsequently marked up in price and sold to EHT eventually, just 2 mths to 3mths before the IPO in May 2019.

Parting Thoughts

The trending of missed forecast for 2 consecutive quarters is worrying and may point to an incoming downturn in the US hospitality industry. But then, the unit price has slumped by 40% from IPO. Notwithstanding the Queen Mary issue, the significant decline in unit price relative to the slight decrease in financial performance seems overdone. However, it would be best to further observe the 4^th quarter performance and of course, most importantly, whether there are actual physical cash on hand from the said net property income earned by EHT for paying out the 2^nd half final dividends to investors by March 2020.