Eagle Hospitality Trust - UOB Kay Hian 2019-08-29: Quality Full-service Hotels At An Undeserved Discount

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EAGLE HOSPITALITY TRUST (SGX:LIW)

Eagle Hospitality Trust - Quality Full-service Hotels At An Undeserved Discount

• EAGLE HOSPITALITY TRUST (SGX:LIW) is a pure play focusing on full-service hotels in major US MSAs located near corporate HQs, leisure attractions and international airports. 94% of its hotel rooms is branded under Marriott, Hilton and IHG, providing access to > 300m loyalty members. Its master leases are structured with fixed rents making up 66% of total rents.
• 77% of Eagle Hospitality Trust's initial portfolio by valuation completed major refurbishment in 2018/19, providing uplift in RevPAR in 2019/20.
• Initiate coverage with BUY. Target Price: US$1.02.

Eagle Hospitality Trust Background

• EAGLE HOSPITALITY TRUST (SGX:LIW) is a pure US hospitality stapled group which was listed on the Singapore Exchange in May 19.
• Eagle Hospitality Trust has 18 hotels across 8 states in the US. Its investment objective is to enhance returns to stapled security holders and to capture opportunities for future income and capital growth through proactive asset management and enhancement, prudent capital management and identification of suitable asset acquisition opportunities.
• The initial portfolio consists of two vendors, namely the USHI portfolio which owns 12 hotels and the ASAP6 portfolio which owns 6 hotels. U.S Hospitality Investments LLC is the vendor of the USHI portfolio, and their common equity interests are indirectly owned by the co-founders of the sponsor (Howard Wu and Taylor Woods) on a 50/50 split. The ASAP6 portfolio was acquired from third-party vendors using the IPO proceeds.
• The sponsor of Eagle Hospitality Trust is Urban Commons, LLC, a privately-held real estate investment and development firm founded in 2008 and headquartered in Los Angeles. The sponsor had more than US$1b of total assets under management as at Dec 18.
• See attached PDF report for more information on the structure of Eagle Hospitality Trust, Eagle Hospitality Trust’s properties and Eagle Hospitality Trust’s management team.

Investment Highlights

WELL-LOCATED TO CAPTURE GROWTH IN TOP-TIER CITIES

• Hotels located in established MSAs (metropolitan statistical areas). About 57% of Eagle Hospitality Trust’s hotel rooms are located in the top 10 MSAs in the US, and 95% in the top-30 MSAs. This is higher than the average of 50.1% and 76.4% respectively for US lodging REITs. These established cities boast strong economies and sustained growth, giving Eagle Hospitality Trust’s portfolio good RevPAR growth potential.
• MSAs are dynamic cities with greater affluence and higher population density. These MSAs are also expected to register higher GDP growth projected at a weighted 3.1% over the next five years. The strong growth is expected to boost future lodging demand and drive RevPAR growth (average for the US: 2.3%).
• Close proximity to diverse demand generators. Eagle Hospitality Trust’s hotels are situated close to large corporate offices, popular tourist and leisure hotspots, and major airports serving as major airline hubs. About 47.5% of Eagle Hospitality Trust’s rooms are located close to corporate headquarters, technology parks and universities while another 39.5% are located near amusement parks and leisure landmarks. The remaining 13% are close to international airports with high passenger traffic. The diverse demand generators provide income diversity and stability. Guests at the 18 hotels are evenly split between corporate (49%) and leisure (51%), giving Eagle Hospitality Trust a well-balanced guest profile.
• Primarily freehold hotel portfolio. 17 of Eagle Hospitality Trust’s 18 hotels are freehold properties, accounting for 87% of total portfolio by valuation. The Queen Mary Long Beach is the only non-freehold asset in the portfolio, which has a long balance lease tenure of 63 years and is on a triple-net lease.

FULL-SERVICE HOTELS SHELTERED BY HIGH BARRIERS TO ENTRY

• Higher barriers to entry for full-service hotels. Supply growth is expected to be limited for full-service hotels, given higher development costs and labour requirements. This is especially true in MSAs where labour costs tend to be even higher and hotels command premium pricing, such as New York and Los Angeles. Eagle Hospitality Trust will benefit from this dearth of supply through higher RevPAR growth during the next few years.
• Less susceptible to competition from Airbnb. Accommodation alternatives such as Airbnb cater primarily to price-sensitive customers looking for an experience different to that of standardised hotels. Select-service hotels, with similar price points and relatively no-frills characteristics, are likely to face fierce competition from bookings through Airbnb. On the other hand, full-service hotels are less susceptible to the threat of Airbnb as the atmosphere as well as ancillary services (onsite F&B options, in-room dining choices, porter service etc) provided are difficult for Airbnb operators to replicate, giving Eagle Hospitality Trust’s portfolio greater resiliency.
• Regulatory clampdown on Airbnb in many states. The legality of Airbnb has been challenged and rules have subsequently been tightened and enforced in some states where Eagle Hospitality Trust’s hotels are located. An example would be Los Angeles where homeowners are not allowed to rent out properties that are not their primary residence, and are only permitted to rent out their homes 120 days in a year. Also, in New York City, Airbnb hosts are not allowed to list more than one home at a time.

MASTER LEASES PROVIDE RESILIENCY

• Master leases structured for stability and resiliency. Under the master lease agreement, Eagle Hospitality Trust’s rental revenue is made up of fixed and variable rent from each hotel over the term of the lease. Each master lessee will provide a security deposit to the REIT by way of cash or letter of credit, equivalent to nine months of fixed rent.
• Fixed rents make up 66% of Eagle Hospitality Trust’s total rent. Besides providing downside protection, this is also expected to be sufficient to cover fixed costs such as landlord expenses (property tax and insurance) and finance costs.
• Variable rents provide upside growth exposure and is pegged to the gross operating revenue (GOR) and gross operating profit (GOP) of each hotel. This will give Eagle Hospitality Trust exposure to revenue growth and improvements in operational efficiency at the hotels. In particular, 71.3% of variable rents projected for year 2020 are pegged to GOR, which provides upside from RevPAR and non-room revenue growth and lesser exposure to margin volatility, further improving Eagle Hospitality Trust’s cash flow stability vs directly-operated assets.
• MLA improved post-IPO. The managers of Eagle Hospitality Trust have worked with the sponsor to improve the Master Lease Agreement (MLA) post-IPO for the 18 hotels, which involves a potential incremental rent stream to the REIT. The amendment provides additional rent from the lessee to the lessor under certain scenarios where profit margins are higher. It stipulates that if GOR is lower than budgeted but profitability remains high, the lessee will provide additional rent from any positive EBITDA of each of the properties up to the budgeted gross rent. According to management, the amendment only provides additional rents and will not result in lower aggregate rent payable to the REIT.

LEVERAGING ON MAJOR BRANDS TO EXTEND REACH

• Renowned hotel brands. Some 94% of Eagle Hospitality Trust’s hotel rooms are branded under the top three global hotel groups, namely Marriott (Westin, Renaissance, Four Points and Sheraton brands), Hilton (Hilton, Embassy and DoubleTree brands) and IHG (Holiday Inn and Crowne Plaza brands). This affiliation provides Eagle Hospitality Trust’s portfolio strong brand recognition and loyalty programmes, as well as large reservation networks. The operational scale of these chains of hotels also provides Eagle Hospitality Trust better negotiating power over suppliers and travel agencies.
• Access to loyalty programmes and networks. With almost all the hotels branded under Marriott, Hilton or IHG, Eagle Hospitality Trust will be able to tap into a pool of over 300m loyalty members via Marriott Bonvoy, Hilton Honors and IHG Rewards Club. Eagle Hospitality Trust will be able to benefit from their large reservations systems and robust marketing platforms, which will in turn contribute to increased demand for Eagle Hospitality Trust’s hotel rooms.

HOTELS RECENTLY RENOVATED

• Minimal capex requirements post-listing. Eagle Hospitality Trust will invest US$174.4m from 2013 to 2019 (2018: US$102.9m, 2019F: US$44.0m) to refurbish its hotels in line with brand standards. 77% of its initial portfolio by valuation has completed major refurbishment in 2018 and 2019. These newly-refurbished rooms will help drive RevPAR growth and minimise capex going forward, which frees up debt headroom for future acquisitions.
• Upside potential from fully-renovated hotels. Full refurbishment of rooms and public spaces as well as other major works were completed for eight hotels in 2018 (capex: US$102.9m), giving Eagle Hospitality Trust upside to RevPAR for 2019 as the stabilisation period ranged from 6-18 months. In addition, US$44m of capex has been earmarked for 2019, providing further potential upside for RevPAR in 2020. For 2Q19, RevPAR for 13 fully-upgraded hotels was US$107.30, 38.8% higher than the US$77.30 for five work-in-progress (WIP) hotels. The higher RevPAR is driven by higher average daily rate (ADR) and occupancy. In particular, ADR and occupancy growth are expected to improve significantly following the completion of renovations at The Queen Mary Long Beach (repurposing of unutilised public spaces and structural integrity stabilisation works) and The Holiday Inn Orlando Suites-Waterpark (full renovation of rooms and public spaces).
• Sponsor plans for iconic Queen Mary Hotel. The sponsor has announced plans to expand The Queen Mary Hotel’s entertainment offerings to improve guest experience. Since Oct 17, the sponsor has expanded the ship’s event schedule through its partnership with leading music concert promoter Goldenvoice Productions. This has brought over a dozen concerts to the ship. Goldenvoice has attracted 150,000 concert goers to the ship over the course of the partnership.

Eagle Hospitality Trust Valuation

Undeserved discount.

• Eagle Hospitality Trust provides attractive distribution yield of 10.1% and yield spread of 8.4% for 2020F.
• Our target price of US$1.02 is based on DDM (required rate of return: 7.5%, terminal growth: 1.0%).
• See attached PDF report for detailed analysis on Eagle Hospitality Trust’s financial statements.

Jonathan Koh CFA UOB Kay Hian Research | Nicola Ho UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-29

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