Review of Eagle Hospitality Trust IPO and The Queen Mary

by: Tam Ging Wien

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The eagle has landed upon the shores of Singapore; Eagle Hospitality Trust (Eagle) lodges its preliminary IPO prospectus with the Monetary Authority of Singapore (MAS) in late-April just last month and has finalised its prospectus this week – after nearly 4 weeks.

Eagle plans to float (pun intended – you see why shortly!) its initial portfolio of 17 hotels (and a ship!) across the US worth US$1.27b.

Based on various reports before the final prospectus, about 559.34 million shares at US$0.80-0.81 will be available in total for the offering. For its initial portfolio, it expects a yield of 8.1%-8.2% in 2020. Now that the final prospectus is released, Eagle is making an offer for 580.558mil shares at US$0.78 – below the original indicated price range which came as quite a surprise to the market.

Most Eagle’s hotels (93.6%) are franchised and/or managed by Hilton Worldwide Holdings Inc., InterContinental Hotels Group, Marriott International, Inc., and Crestline Hotel & Resorts Inc. All 17 of their hotels are freehold assets (the ship however is a leasehold asset).

The sponsor is LA based real estate investment firm Urban Commons LLC (UC) <https://www.urban-commons.com/>. The co-founders of UC are Howard Wu and Taylor Woods – both who indirectly own the REIT manager in 51%-49% proportions. Their combined ownership in Eagle will be approximately 15.2% after listing.

It lodged its preliminary prospectus on the 25-April, ahead of its rival and competitor ARA US Hospitality Trust (ARAHT). The markets expected it to be the first listed pure-play US hospitality trust, but it turned out that John Lim’s ARAHT beat Eagle to the listing on 09-May. ProButterfly had covered the ARA US Hospitality Trust (ARAHT) IPO in detailed in our previous post which we advice readers to review for a comparison.

With a longer than expected gap between lodging its preliminary prospectus and final prospectus could perhaps indicate that it took much longer to finalise its support from institutional or high-net-worth investors. So, what makes this trust tick and why has it taken them so long to finally make the public offering?

Is Eagle a REIT?

Technically, no. Eagle is actually a stapled security consisting of a REIT and a Business Trust (BT) stapled together and traded simultaneously. This means that for every shareholder’s interested in a stapled security, they hold a unit in the REIT and another unit in the BT simultaneously. These units must be traded together and cannot be severed.

But for all practical matters, it can be viewed as a REIT as its Business Trust (BT) component is currently dormant. This is an important point to note as it means that only the REIT component is active, owning the real estate and contributing fully to the revenue, profits and cash flow behaving similar to any other REITs. Therefore, investors owning units in Eagle are sitting on the Landlord side.

This defers from its competitor ARAHT who has both the REIT and BT component simultaneously active and investors holdings on to ARAHT are simultaneously the Landlord and the Tenant!

Source: Eagle Hospitality Trust IPO Prospectus

The Sponsor – Urban Commons LLC

The Sponsor of Eagle is Urban Commons, LLC (UC), a privately-held real estate investment and development firm which managed the 12 of the 18 assets in Eagle’s portfolio and is active across a range of property types with an emphasis on hotels.

UC was Founded in 2008 and headquartered in Los Angeles, US.

Since inception, UC has completed 38 real estate acquisition and divestment transactions. As at 31 December 2018, UC has total assets under management of approximately more than US$1.0 billion, including 14 hospitality assets, of which 12 will be injected into Eagle. The remaining 2 assets are pipeline assets which could be acquired by Eagle in the future.

Source: Eagle Hospitality Trust IPO Prospectus

Lease Structure

Eagle’s lease agreements as structured as master leases with the tenants using a combination of fixed and variable rents:

• Based on the Projection Year 2020, Fixed Rent (FR) accounts for 66.0% of rental income
• The remaining 34.0% of its rental income is pegged to the Gross Operating Revenue (GOR) and Gross Operating Profit (GOP):
  • 71.3% of Variable Rent (VR) based on gross operating revenue

This gives the trust some form of stability, downside protection and is less exposed to fluctuation and seasonal profitability. At the same time, this gives upside to investors during high growth periods. Investors should note that the hospitality industry is inherently cyclic.

This differs from ARA US Hospitality Trust where it was fully exposed to variable rents.

Key Figures of Yield, P/B Ratio and Gearing

In a simplistic sense, we can view Eagle’s IPO from the lens of a typical REIT investor looking at Yields, P/B Ratio and Gearing. Our friends over at Financial Horse has a more detailed look at the numbers, do also look out at the article from our friends at Risk N Returns on the numbers as well.

Source: Eagle Hospitality Trust IPO Prospectus

As at the Listing Date, EHT is expected to have a gearing of of approximately 38.0%, which provides debt headroom of approximately US$170mil. From a debt maturity profile, Eagle has a reasonably spread profile and have no refinancing needs until 2021.

Source: Eagle Hospitality Trust IPO Prospectus

From a valuation angle, Eagle will list with an US$0.88 NAV per Stapled Security. Given that the units are offered at US$0.78, Eagle will trade at an initial valuation of 0.886x Price-to-Book ratio.

We have taken an extract from REITScreener.com to do a quick comparison with other Hospitality trust. Eagle offers the highest yield among the hospitality trusts and among the lowest P/B Ratios, behind only Far East Hospitality Trust. Gearing ratio is on the higher side compared to other hospitality trusts.

Source: REITScreener.com

The Portfolio and Acquisition Pipeline

Eagle’s initial portfolio will consist of 17 real estate assets and 1 building – the Queen May Long Beach. All the real estate is freehold and cater generally to the upscale market – sporting luxury names such as Sheraton, Hilton, The Westin, Renaissance and Crowne Plaza. There are a few Holiday Inn assets which are catered to the midscale market.

Source: Eagle Hospitality Trust IPO Prospectus

To get an idea of what the assets look like, here are a few photos which we have compiled from the sponsor’s website:

Source: Holiday Inn Orlando, Urban Commons LLC

Source: Holiday Inn Orlando, Urban Commons LLC

Based on the prospectus, we note that 77.2% based on the value of portfolio has been refurbished since 2018.

Source: Eagle Hospitality Trust IPO Prospectus

Looking at the portfolio, a number of assets stand out which I will describe here:

• Holiday Inn Hotel & Suites Anaheim – This property attracted our attention due to its adjacency to Disneyland.
• Four Points by Sheraton San Jose Airport – The property attracted our attention due to its proximity to the San Jose public airport in California (SJC) and near major Silicon Valley corporate campuses. Among the many airports in California, San Jose Airport ranks 5 busiest after LAX, SFO, SAN and OAK.
• The Westin Sacramento – A luxury asset located at the heart of California’s capital city, on the Sacramento River a close proximity to the convention centre and “Old Town” historic Sacramento.
• Doubletree by Hilton Salt Lake City Airport – Located in the immediate vicinity of Salt Lake City International Airport, and in close proximity to nearby popular attractions including Salt Palace Convention Center and Great Salt Lake.
• The Queen Mary Long Beach – This asset deserves an entire dedicated section on its own which we have covered in next section

The portfolio certainly contains some eye-catching high-quality assets, but mixed in with other average assets.

The prospectus has further laid out another US$18.6 million identified for asset enhancements initiatives in the future including:

• The Queen Mary Long Beach
  • Renovate rooms and surrounding lands for developing
• Holiday Inn Resort Orlando Suites – Waterpark
  • Divide the hotel into two sections – one of family and tour groups and another for corporate travellers to drive strong group business during off-peak hours
• Holiday Inn Hotel & Suites San Mateo (2021, US$6 million)
  • Create additional meeting spaces

There are 2 sponsor pipeline assets for Eagle:

• Ramada Hialeah (acquired in Jun-2014) is a 224-room hotel located in Miami, Florida, just seven miles from Miami International Airport
• The Wagner (acquired in Sep-2019) at the Battery is a 298-room hotel located in lower Manhattan in New York City, close Wall Street and the One World Trade Center tower and memorial site

Ramada Hialeah is currently being redeveloped while The Wagner only recently acquired by the Sponsor.

The History of The Queen Mary

The RMS Queen Mary is a retired British ocean liner that sailed from 1936 to 1967 under the Cunard-White Star Line banner when it entered service. Cunard-White Star formed as an operating company to control the joint shipping assets of both Cunard Lines and White Star Lines when both companies experienced financial difficulties during the Great Depression. You will remember White Star Lines as being the owner and operator of the infamous RMS Titanic and that of HMHS Britannic.

The Queen Mary was the flagship of the Cunard Line from May 1936 until October 1946 when she was replaced by The Queen Elizabeth. She was officially retired from service in 1967 and made its last voyage to Long Beach, California, United States, where it now remains permanently moored. Its two engine rooms, three of the four propellers, and all of the boilers have been removed. The ship is now deemed as a building as it is permanently immovable. Currently the ship serves as a tourist attraction featuring restaurants, a museum and a hotel with 347 rooms.

In April 2016, UC assumed a 66-year master lease of The Queen Mary at an estimated cost of US$143m. UC spent US$23.5mil on repurposing of unutilised spaces and structural works on The Queen Mary and this was finally completed in December 2018. According to the valuation in Eagle’s IPO prospectus, The Queen Mary has been valued at US$159.4mil and has an occupancy rate of 69.8% as of FY2018.

UC originally revealed a US$250mil plan in early-2016 to redevelop the adjacent 45 acres of parking with a boutique hotel, restaurants, a marina, an amphitheater, jogging trails, bike paths and possibly a huge Ferris wheel. However, it seems like these plans are on-hold as we are not able to find any progress on them. Here are some of the links found online with regards to UC’s original plans for The Queen Mary:

• Queen Mary operator seeks to raise millions in public offering on Singapore Stock Exchange
• A new plan has emerged to save Long Beach’s Queen Mary and it won’t come cheap
• First look at Queen Mary Island, the proposed $250M attraction at Long Beach’s troubled ship
• Huge Entertainment District to Surround Queen Mary in Long Beach
• Plans revealed for $250-million Queen Mary Island complex next to the historic ship in Long Beach

Source: The Queen Mary Redevelopment for Urban Commons, Gensler

Source: The Queen Mary, Urban Commons LLC

Source: The Queen Mary and the Surroundings, Travel Weekly

During the time that UC reveal their plans, a 396-page marine survey of the ship surfaced and specifies that “urgent” repair work is needed an will cost as much as £235 million. The summary of these marine survey can be found in the article entitled Years of neglect could imperil the Queen Mary’s future, experts say and Queen Mary: Mayday for a Scottish monument. I quote some of the excerpts from the 2 articles above:

• One veteran naval architect has told Scotland on Sunday that the ship’s condition is so perilous that she could sink if attempts were made to tow her
• After years of neglect, the historic vessel could face some internal structural collapse within the next decade unless major action is taken soon
• The ship’s hull is corroded so severely from the inside that certain areas, including the ship’s engine room, could be prone to flooding
• “poorly planned” and “poorly executed” conversion has exacerbated corrosion in the ship’s underbelly and jeopardized its structural integrity

The point on the 396-page marine survey of the ship has not specifically mentioned in the IPO prospectus, but the prospectus specifically singles out The Queen Mary as an asset that is subjected to damages due to wear and tear.

The Queen Mary is on a triple-net-lease basis and therefore tenants are responsible for the maintenance, property tax and insurance of the asset. However, structural works and capital expenditure is still the liability of the owners.

Source: Eagle Hospitality Trust IPO Prospectus

Here are some fun facts about The Queen Mary:

• Named by Time Magazine as the Top-10 most haunted places
• On 23 February 2006, RMS Queen Mary 2 saluted her predecessor using their airhorns as she made a port of call in Los Angeles Harbor, while on a cruise to Mexico
• The Walt Disney Company once owned The Queen Mary and tried unsuccessfully to turn the area into DisneySea and PortDisney.

The Queen Mary – Real Estate or just a Building?

Real estate is defined as immovable property consisting of land and the buildings on it, along with its natural resources. Therefore, to qualify for real estate, there must be land – and in the case of The Queen Mary, there is no land!

This begs the question if The Queen Mary should be classified as real estate in the first place – or is it simply just a building?

It is common accounting practice to revalue land especially freehold land, hence we get capital appreciation on the land over the long term. However, buildings are usually depreciated as they are subjected to wear and tear which increases the maintenance cost over time.

Given that land appreciates, and buildings depreciate, without land would The Queen Mary just simply depreciate over its lease period?

Without the land to revalue The Queen Mary, could the asset simply cause a drag on the gearing of Eagle?

Knowing that Singapore listed REITs have a 45% gearing limit and Eagle will be listed with an initial gearing of 38%, this leaves Eagle with very little to debt headroom to maneuver. Would The Queen Mary’s depreciation cause a drag on its valuation and hence its gearing over the long term?

As also pointed out in the earlier section, would there be a risk of The Queen Mary requiring urgent repairs, structural works and other asset enhancements going forward in the future to maintain and refurbish it? Certainly with a risk of wear and tear on The Queen Mary singled out in the prospectus, we would think it is prudent for management to provision for capital expenditure on The Queen Mary, yet we were not able to identify any such provisions the IPO prospectus.

For some perspective to the risk surrounding The Queen Mary, investors should note that:

• The Queen Mary consist of 6.4% of the total hotel rooms of Eagle’s portfolio
• The Queen Mary is forecasted to contribute 14.5% Eagle’s portfolio Revenue
• The Queen Mary is forecasted to contribute 16.4% Eagle’s portfolio Net Property Income (NPI)

The ProButterfly Take on Eagle

There are some things to like about this trust including its 66% base rental on fixed rates and several attractive assets including a few that are in close proximity to airports and some that are close to Disneyland. We also like the many upscale and midscale brands offered such as the likes of Sheraton, Hilton, The Westin, Renaissance, Crowne Plaza and Holiday Inn.

The Yield and valuation offered is also very attractive.

However, our concerns surround the unpredictability of The Queen Mary and the potential cost to be incurred to upkeep it. Considering many before UC has already tried and failed to convert the ship into a sustainable business, why would be different this time?

Our other concerns we have are with regards to its long book building exercise shown from its almost 4 weeks from lodgement of its preliminary prospectus to the final IPO prospectus and the final offer below the initial indicated offer price. Clearly, if this was an attractive offer, many of the institutional and high-net-worth investors would have snapped it up immediately without needing such a long book building exercise period.

Given that ARA’s US Hospitality Trust debuted and traded below its IPO price of US$0.88 to close the week at US$0.86, we see no reason to rush into Eagle’s IPO when we could possibly get it cheaper in the open market given the possibility that the prices could adjust downwards.

Source: Yahoo! Finance

We will give this IPO a miss.