11-11-2019, 10:34 AM
(08-11-2019, 11:58 AM)valueinvestor Wrote: [ -> ]An extensive comment written by " Silence" @Investingnote forum:
The Curious Case of Eagle Hospitality Trust $Eagle HTrust USD(LIW.SI)
This locally listed REIT has been making the headlines for all the wrong reasons these last few weeks. The share price has plummeted from the IPO price of US0.78 to US0.46 (as of 6 Nov 2019), buffeted by concerns over its key asset (Queen Mary) and incessant selling by substantial shareholders, even at prices below IPO price.
The selling by substantial shareholders, in particular, has sparked concern on whether there are any other skeletons left in the closet. This is compounded by the less than transparent relationship between substantial shareholders (ASAP) and the sponsor (UC). There are gripes over the 6 properties that ASAP had sold to UC shortly before they were injected into EHT and concerns on whether the valuations are inflated.
Who is ASAP?
ASAP is the largest Chinese owned Private Equity firm that focuses on acquiring Hospitality and Commercial Real Estate with Asset Management throughout the entire U.S.A.
To put it simply, ASAP buys distressed property, stabilizes the portfolio before executing an exit strategy. The value that is created from turning a distressed property into a functioning one is captured by ASAP and its investors. ASAP is currently available only to AIs (accredited investors).
Check this out to see how ASAP makes money for their investors.
http://voyagela.com/interview/meet-frank-y...
Look at their buying criteria: high investors return, cities with high potential and way below replacement costs. This has led them a portfolio of more than 32 hotels all over USA with total asset value of more than US$1.2billion. Their capital appreciation of more than 300%-400% is also impressive.
If you consider that this is a private equity investment, the returns seem just about right and the investment is restricted to AIs only.
ASAP seems to have built up a commendable track record.
ASAP and EHT
Besides the 6 properties that are directly sold to UC, ASAP actually appears to be involved in some way or another in all 18 of EHT&rsquo s properties. The 18 properties were all mentioned as part of ASAP&rsquo s portfolio and also appear to part of the 32 hotels referenced in the earlier voyagela interview.
Interestingly, when ASAP pitches for new projects, it has also mentioned its unique SG REIT exit plan as a key differentiating factor which can provide more than 30% more premium than sale price in US markets.
Anyone wonders which REIT they are referring to?
I guess in practice, it is possible to pull this off legally through various structuring arrangements.
Just like it is possible for ASAP to legally end up with 33% off the IPO without appearing under any regulatory scrutiny. Does Singapore need to improve our disclosure regime?
https://www.businesstimes.com.sg/companies...
Why would ASAP subscribe for IPO if it is meant to be an exit strategy?
There are potentially several reasons that I can think of but we may never know for sure.
Do note that the public tranche for the IPO was very poorly subscribed and if the placement tranche is equally poorly subscribed, would the entire IPO be called off? This would mean months and even years of hard work and planning going to waste.
Perhaps this forced ASAP to take a higher stake then they would have otherwise be comfortable with?
Do also note that as an exit strategy, the premium for exiting though a SG Reit can provide PE investors more than 30% premium than other comparable exit strategies so ASAP is logically not losing out even as it pares down its stake at lower than IPO prices.
This would also explain why you keep seeing the Yuans sell as substantial shareholders &ndash because it is meant to be an exit strategy duh.
The intent, may have been to slowly sell down its stake hopefully without depressing the price too much to capture a greater portion of the SG listing premium. Of course, due to unforeseen circumstances, the price plummeted and once the price falls below a certain level, it may not make sense for them to keep on selling.
Tax reasons as a substantial shareholder may also be another valid consideration to reduce their stake.
Do note also that as ASAP entered through the placement tranche, it is not subjected to any lockup arrangements which gives it an advantage to liquidate its stake.
Is the REIT a dumping ground?
There are grouses that properties are being injected into the REIT which have a low cost base and some people speculate that the REIT is being used as a dumping ground for low quality or overvalued assets.
I think that this line of thinking is not necessarily true because it is precisely the nature of this PE to buy distressed property at a firesale price and sell it at normal pricing once the property is stabilised. The price that the property is bought and the price that is being injected to the REIT is not necessarily indicative of any dumping as long as the transaction is at arm&rsquo s length. It represents the different value being captured at different parts of the value chain.
The premium that one can get from an exit strategy through a SG Reit vs other US exit strategy is also not necessarily indicative of dumping overvalued assets. Because of different tax considerations as well as structuring arrangements, it is conceivable that an exit strategy through a SG Reit can yield a legitimate premium over other US exit strategies.
To be honest, it actually seems to be a very clever way of structuring the whole deal.
Furthermore, it is in the sponsor&rsquo s interest to ensure the REIT does reasonably well so they can continue to use it to recycle capital. Based on how the master lease and management incentives are structured as well as the improvements done before IPO, it does appear that the sponsor is looking to make this a success.
Does EHT provide good value at today&rsquo s prices?
Well&hellip your guess is as good as mine.
I would say that the drastic fall in share price does provide some margin of safety, given that the operational performance of EHT seems to be stable. In fact the first earnings report was arguably slightly better than forecast and we will learn more in the next report due soon. Ultimately, the points discussed above relate to what happened in the past and may not be so relevant to EHT&rsquo s operational performance going forward which would be the key driver of the share price.
In fact, what has been demonstrated is that ASAP (and by extension UC) appear to be shrewed operators with a proven track record. EHT now looks like they have got &lsquo 2 backers&rsquo which is not necessarily a bad thing in view of the pedigree of ASAP. Given that they can turn multiple distressed properties into functioning and stabilised income generating assets, you probably want them on your side of the team to be involved in managing the properties.
As master lessee, the sponsor also has an incentive to run the properties well given that there is additional upside for themselves if the properties do well. Look at how the master lease is structured with fixed and variable rent components. EHT has stability in performance due to the fixed rent portion but it also means that relatively speaking, the master lessee has more upside from the properties doing well. The management fees of the managers are also structured to incentivise the managers to provide investors with stable and growing distributions.
So it appears that the incentives for unitholders and the managers are aligned. And as mentioned above, there is an added incentive on the sponsors to prove that this model works so that they can continue to use this as a vehicle to recycle capital.
P.S.
Insider sales without any &lsquo known reason&rsquo is likely driving uncertainty over the share price. Understanding the context of the entire situation provides plausible reasons why this could be so and it could purely be for an innocuous reason like recycling capital. Buying in by substantial shareholders or insiders could be a strong sign that the bottom has been reached.
It is also interesting to note that so far, the lowest price that substantial shareholders have been selling appears to be at US0.55. Anyone recognise the 30% discount from IPO price corresponding to the ~30% value premium from a SG REIT exit.
The irony is that at this current level, EHT is trading at close to levels that ASAP looks for when it hunts for distressed properties: below replacement cost, close to 15% cash on cash returns etc.
The selling pressure from substantial shareholders is unabated.
Norbert Yuan from ASAP divested 5 million shares at $0.445 last week.