EAGLE HOSPITALITY TRUST (SGX:LIW)
Eagle Hospitality Trust - Hearing From The Horse’s Mouth
- We expect positive remarks from the City of Long Beach to allay unfounded fears. The City of Long Beach has clarified that the letter dated 1 Oct 19 is not a notification of default. The estimated cost of works required is US$7m, which could be covered by existing capital reserves.
- In a written response to Urban Commons, the City states that it “values the continued progress Urban Commons has made to improve the structural integrity of the historic Queen Mary”. The sell-off last Friday was irrational. See Eagle Hospitality Trust Share Price.
- Maintain BUY and target price at US$1.02.
WHAT’S NEW
- EAGLE HOSPITALITY TRUST (SGX:LIW) made two announcements on 28 Oct 19 (Monday) to provide further updates on Queen Mary. See Eagle Hospitality Trust Announcements; Eagle Hospitality Trust Latest News.
- Scope of request for information. In a letter dated 1 Oct 19, John Keisler, the Director of Economic Development of the City of Long Beach, requested that Urban Commons (UC) provides information within 30 days regarding its plan to address the followings:
- Exterior paint on the hull, funnels and top of house areas,
- Repair of expansion joints, including missing plates,
- Bilge repair and rust remediation,
- Side shell and lifeboats, and
- General maintenance.
- John Keisler has clarified that the letter is a formal request for information by the City of Long Beach and does not constitute a notification of default.
- Cost of work required estimated at US$7m. Sponsor Urban Commons (UC) provided the City of Long Beach with the requested plan to address the above items on 22 Oct 19. The total cost is estimated at up to US$7m and the works required could be completed within the next two years. The most significant component in terms of cost and safety is the side shell repair and lifeboat removal. Roberts Construction Inc has submitted a bid of US$4.8m to complete the side shell repair and lifeboat removal.
- Positive remarks from City of Long Beach. The City of Long Beach has acknowledged the receipt of UC’s response. In its letter to UC dated 25 Oct 19, John Keisler said that “the City is confident that Urban Commons has a plan in place to resolve the remaining structural issues” and “the City values the continued progress Urban Commons has made to improve the structural integrity of the historic Queen Mary”.
- Eagle Hospitality Trust does not bear the cost of repairs. Capex associated with the Queen Mary is not the responsibility of Eagle Hospitality Trust. EHT QMLB, LLC, an affiliate of UC, is responsible for making repairs and maintaining the Queen Mary.
- Double layer of reserves. Eagle Hospitality Trust has been working closely with the City of Long Beach to establish a perpetual funding mechanism called the Historical Preservation Capital Improvement Plan (HPCIP) fund that will provide continued resources to safeguard The Queen Mary’s viability. This is funded by passenger fees collected from Carnival Cruise Line Terminal. UC has committed to fund a Capital Improvement Fund (CIF) equivalent to 2% of revenue in 2019 and 3% of revenues thereafter for repairs and maintenance, including ordinary maintenance and capital items. According to management, the two reserves could support capex of US$4.5m per year.
STOCK IMPACT
An iconic landmark.
- The Queen Mary is a decommissioned ocean liner that has been converted into a 347-room hotel with banquet facility. It is a landmark attraction at Long Beach, California. We estimated that Queen Mary accounted for 12.6% of Eagle Hospitality Trust’s portfolio valuation and 15.9% of net property income. In 2018, The Queen Mary achieved ADR of US$144.40, occupancy of 69.8% and RevPAR of US$100.70 in 2018.
Worst-case target price at US$0.80.
- Assuming the valuation of Queen Mary is written down to zero and it no longer contributes to rental income, Eagle Hospitality Trust’s 2020F DPU would drop by 22% from 6.60 US cents to 5.12 US cents, while its NAV/share would drop 21% from US$0.87 to US$0.69. Our target price for Eagle Hospitality Trust will also correspondingly drop from US$1.02 to US$0.80.
- (See Eagle Hospitality Trust Dividend History; Eagle Hospitality Trust Target Price.)
EARNINGS REVISION/RISK
- We maintain our current earnings forecasts.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of US$1.02 is based on DDM (required rate of return: 7.5%, terminal growth: 1.0%).
SHARE PRICE CATALYST
- RevPAR uplift from recently-renovated hotels.
Jonathan Koh CFA
UOB Kay Hian Research
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Nicola Ho
UOB Kay Hian
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https://research.uobkayhian.com/
2019-10-29
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