The unfolding coronavirus is a complete disaster out of nowhere. Not only has the virus rocked the global markets, it has also brought the entire aviation, hospitality and tourism sectors to a complete standstill. Being a player in the US hospitality sector, Eagle Hospitality Trust is not spared from the carnage. But what made the crisis at Eagle Hospitality Trust so extraordinary is that within a year of listing in SGX mainboard, this REIT had been dogged by various negative publicity.
In November 2019, The Edge Singapore revealed toxic inspection reports and a letter from the City of Long Beach to Urban Commons, sponsor of Eagle Hospitality Trust. In that letter, it was alleged that Urban Commons failed to meet obligations under The Queen Mary ground lease to make certain repairs required under the lease agreement.
Since that episode, the unit price of Eagle Hospitality Trust spiralled out of control, falling from USD0.70 to USD0.50. Amid the outbreak of the coronavirus, the unit price got bombed out to reach the abysmal level of USD0.14. But this is not all.
On 19 March 2020, the REIT announced trading halt and revealed that it has received a notice of default from Bank of America, who is acting as the administrative agent for the lenders under the Facilities Agreement. Is this the beginning of the end for Eagle Hospitality Trust?
Investors must be worried whether Eagle Hospitality Trust will become another Hyflux. Ironically, when people invest in REITs, the expectation is that REITs provide a steady income source. Never in their wildest dreams are they expecting to lose their entire investment capital. In my assessment, I doubt Eagle Hospitality Trust will become a sinking ship like Hyflux but this is not to say this this is a counter worth investing. Previously, those who chose to buy on the dip must be punching the wall right now. In this article, I will share my opinion on the plausible outcome of this REIT.
There are similarities between EHT and Hyflux cases. But there are also differences. Both encountered negative operating cash flow before the creditors issued default notice. In my previous article, I had raised red flag for EHT when it recorded net cash from operating activities amounting to USD13 million in the 2nd quarter financial statement. This is highly unusual among the REITs because most of them recorded positive net cash from operating activities. The difference between Hyflux and EHT is that one is a business trust whilst the other is a REIT. The latter, being REIT, has gearing limit of 45%, thereby limiting the damage in terms of leverage (business trusts do not have such limit).
Note that this is an opinion article and not meant to be a financial advice. Please do your due diligence or engage financial advisors before investing in the stock market. Furthermore, I am not vested and have never invested in this counter before. Whether Eagle Hospitality Trust unit price will surge or collapse has no impact on me. Thus, this article is not meant to induce readers to make any form of investment decisions.
Eagle Hospitality Trust sinking
The latest saga concerns a notice of default issued by the lenders amounting to USD341 million. As a REIT, it is not uncommon that Eagle Hospitality Trust is highly leveraged. For the banks to trigger the notice of default, there should be [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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