Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)

Since the resignation of the CFO of Eagle Hospitality Trust ("EHT"), I have mentioned that investors holding on to EHT better be prepared to do a 100% write off of their investments similar to what happened to Hyflux. However, the lightning speed of the collapse did catch me off-guard in March 2020- I was planning to re-evaluate on what to do with my existing holdings of EHT after the payout of dividends (which unfortunately never materialise).

No one can predict with 100% certainty what will happen next. But there are basically 3 scenarios that can happen, and we can then rationalise using probability to figure out it goes which way:

Scenario 1: EHT goes into immediate liquidation and firesales of its hotels to 3^rd parties as bankers refuses to grant any further forbearance of the breach of bank covenant.

I think that the chances of this happening is possible but on the low side. If this happens, then it will be an immediate fire-sales to raise cash to pay off the bankers. If the investment properties is valued at 50% haircut discount to the last valuation done by independent parties as at 31 December 2019, then investors will only get back 18% of their invested sum assuming the average entry price is at USD 0.60 per unit. Any fire sales of discount more than 57.5% to the last valuation will mean investors will not get a single cent back- pls refer to "Financial Projection of Realisable Cash from Sales of Investment Properties" section below.

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Scenario 2: EHT do an equity fund raising exercise and also a partial asset sales to repay bulk of the bank loan as well as restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

This is the scenario that is most unlikely. The reason being that most investors have already lost faith in the sponsor Urban Commons and the senior management team of EHT. Even the last market trading price of USD 0.137 per unit before suspension already represented a substantial discount of close to 50% off the property fair valuation as at 31 December 2019. In addition, taking into account the current high COVID-19 fatality rates in the USA which is still going up, the market sentiment will not be favorable at all. 

Scenario 3: EHT sell off a significant stake to raise cash, restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

I would think that the probability of this scenario seems ostensibly higher given that EHT has already appointed FTI Consulting as their Financial Advisor for the restructuring exercise and to present a sellable storyline to the bankers. Also, the COVID-19 situation to me is not going to last many years as my thoughts are that by end of next year of 2021, more effective treatment drugs and vaccines will end this pandemic. Air travel and tourism will then start picking up again and the hospitality industry will see a gradual recovery from 2022 thereafter. The investment properties thus cannot be worthless and valued at more than 50% hair cut. 

The realizable value from this scenario of a going concern restructured business will be higher than the firesales of all hotels under scenario 1. This will represent a win-win scenario for all stakeholders.

Financial Projection of Realisable Cash from Sales of Investment Properties

Some simple assumptions to the financial model for estimating the realizable fair value:

• Basically, the most significant pieces of asset of value are the hotels (investment properties) worth US$1.27 billion on the statement of financial position last valued by independent assessor as at 31 December 2019. The yellow highlights are the playing around with the haircut/discount upon sales of the hotels of 25%, 33.3%, 50% and 57.5% as depicted above. Any discount at 57.5% haircut or above will mean that shareholders are not getting not a single cent back after the bankers are repaid.

• I have also included operating expenses run rate up till Dec'20 (assume zero rental income and include REIT manager fees, property expenses, financing cost in item L6) for the whole restructuring exercise as mentioned in the above 3 scenarios for conservative estimate of the financial model and business intrinsic valuation at fair value.

Summary and Parting Thoughts

In the event that EHT managed to sell off the assets at one third discount of 33.3%, we can see that the realizable value should still be worth US$0.349 per unit which means that investors can still get back around 52% of their invested amount (assuming entry price average was US$0.60 per unit). However, in the event that the hotel properties can only be sold off if more than 57.5% discount off their last valuation in 31 Dec 2019 is required, then investors will not get a single cent back. However, I am slightly more optimistic that offering a 50% discount should be able to get a rich buyer to takeover some of the hotels to raise cash for repayment to the bankers. In such case, investor will still get back around 18% of their invested amount. So for existing investors that could not exit in time, do keep your fingers crossed.   

Fina

Please also see my previous post on EHT:

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)