Eagle Hospitality REIT..... Ignoring Red Flags are deadly

Many of us think that REITs are very safe investments. We treat it like a Government Saving Bonds which pay regular dividends with a stable price valuations. This is only true if the REIT doesn't involved debt financing and the rental tenure never expired. Eagle Hospitality REIT (EHT) is a good example of why we should value REIT similar to any regular companies when come to risk analysis.

EHT went for IPO last year with the offering price at US$0.78 per share. The share price had never raise above the IPO ever since. It continued to slide until its last trade at US$0.137 before its suspended trading on Mar-24 this year. It had lost about approx. 80% of its share value since IPO just less than a year.

EHT had been plagued with many issues since listings. I will not discussed in details on what goes wrong with EHT as it was well researched by the media. You can easily find those analysis articles online. The biggest news you can find about EHT is regarding their trophy asset, the "Queen Mary Cruise".

The stock currently on trading suspension. EHT was served with notice of default on loan amount US$341mil. The dividend payments to shareholders also suspended. I would like to highlights some of the red flags as sign of distress during its listings. If you have spotted those red flags early, it could have prevented many from making terrible decision investing in REITs like EHT.

Red Flag #1: Co-founders and Cornerstone Investors Paring Down Stakes

Since IPO, Temasek had sold down its stake from 10% to 2.93%. I'm not sure if Temasek still holdings anymore share now. The owners of the Urban Commons (UC) also reducing their stakes. Making the matters worst, all the major shareholders had sold down their holdings including Claydon Hill from 16.3% to 2%. Why are they selling if they think this REIT is worth investing? Are they losing confident in the company's future prospects?

Red Flag #2: Complicated Financial Structure and Asset Ownership

The financial structure of this company is so complicated. I'm not sure who has the actual ownership of all the properties. If the REIT had full ownership of the properties, why EHT does not collect all the revenue generated from its properties directly rather than through master lease agreements with single entity, UC? It is high risk when the leasing agreements with single entity defaulted on the payments. The financial structures is so complicate and the asset ownership is unclear. Currently, they had defaulted the loans due to the Master Lessees (UC) unable to paid them rent obligations.

Red Flag #3: Directors and Executives Resigned

Good management team is essential in leading company to the next phase of growth. There were multiple announcement of resignations from directors and executives doesn't really paint a good picture of the company's future. The final nail strikes when the CFO, Fred Chee resigned for personal reason shortly after joining the company for 8 months. Why there are so many resignations within a short period of time? There could be some on-going concerns with the company which only the insiders like the executives knows. Something that we should take note when come to investing.
     

My trade went wrong
I invested in EHT when it dropped 30% from its IPO price. I bought it at 54 cents which I thought was a good bargain given its forecasted yield was good. Ignoring all the red flags and inaction from my parts was my grievous mistake. In total, I had invested US$5,400 for 10 lots which I'm prepared to write off as total losses from my portfolio.


 Key factors to consider when selecting a REIT to buy:

1. Having good sponsor as substantial shareholder.
2. Having good management team that stay with the company.
3. Having clear ownership structure and diversified master leasing agreements
4. High interest coverage to ensure sustainable debt interest payments.
5. Diversified tenants with long WALE.      

 When economy is in healthy state, every business is thriving. REITs becomes very attractive investments among "yield hunters" as they are  structurally obligated to pay out 100% of the profits they make every year. However, this has a "double edged sword" effects when come to the risk management. When the crisis hit, REITs may not have enough cash to buffer for debt payments as rentals yield dropped. They don’t have the capacity to buyback shares and make attractive acquisitions during crisis unlike other major corporations.

All investments come with certain level of risks. Never assume asset backed investments like REITs are risk free.

Personal Notes:
Past weeks of furious selling in the market had leave a mark in the history book as the fastest bear market. Have we reach the bottom of the bear market? I don't have the answer to that yet. But this extreme fear in the market had open up a window of opportunity to position ourselves for the next bull market cycle.

I had been waiting for this moment for 11 years and I'm glad that the wait is finally over. Is it the right time to buy stocks now? Well, the opportunity will favor those who willing to take risk and the doors will open for those who knocks.

-WILLIAM CHENG

Please click the links below for more interesting reads:

Links MANULIFE US REIT....... COVID-19 Crisis

Links  FORMULA for successful stock picking

Links Investment Psychology....Investor's worst enemy

Links ALIBABA HK IPO..... (Investment Profit Overdrive)

Links Boom and Bust in 2019 revealed

Links CAPITALAND....... Land of Capital Growth

MANULIFE US REIT....... COVID-19 Crisis

The World stock markets swing between fear and greed so dramatically for the past weeks. I had not seen such extreme volatility before in the market since the Great Financial Crisis in 2008. Let's refer to the Greed/Fear indicator. Right now the we are at the extreme fear due to all the uncertainty surrounding the COVID-19.

The market does not like uncertainty due to difficulty in prediction what is going to happen next. Is the virus situation going to get worst and when will it going to recovered? No one know the answer but we can decide what to do next. The market crisis always provide great opportunity to invest but the question is:
                                                  Do you have the courage to take the leap?

 Today, I would like to write about MANULIFE US REIT. This SGX counter caught my attention when it got furiously sold down US withholding tax crisis in 2018. So, here are my analysis and thought for this stock. Hope you will enjoy reading it and profit from it!

Valuation Assessment

I would like to assess the valuation for this REIT from 2 perspectives:

1) Net Asset Value and P/BV

The net asset value currently stood at USD0.80 per unit based on the latest annual report. Gearing ratio is 37.7%. Based on last Friday closing price, the P/BV is around 0.75 which is way under value. MUST had been trading about 1.1 times P/BV for the most part of 2019. This is really a once in the lifetime chance to trade at this low valuation since its IPO.

2) Market participation in public offering

Back in 2019, there have been 2 trench of new shares offering at MUST for acquiring new asset such as 400 Capitol, California mentioned below. First, the new share under private placement of 91,325,000 units at USD$0.876 per share was fully subscribed. Second, new share under Preferential offering of 72,855,000 units at USD$0.86 per share was also fully subscribed. You can determined the real demands as the investor's willingness to participate at much higher price because they saw the potential of higher valuation for this REIT. So buying at the current price which is much lower than the new private placements share last year is a very good bargain deal.  

Portfolio Risk Assessment

This REIT had shown strong profit growth mainly through new acquisitions since IPO and had WALE more than 5 years. Long WALE is a good indicator that this REIT will likely able to mitigated short term crisis like COVID-19 successfully. It should able to maintain a healthy occupation rate with secured rental rate during the WALE period. This should removed some of the renewal risk and downward adjustment to the rental rate.      

 

MUST properties are classified as either Trophy or Class A which reflects the excellence quality of assets. The tenure of all its buildings are listed as freehold, which mean the asset valuations should be stable and the income should not be affected by the age of the buildings. I don't see much long term risk associate with asset valuations at this moments.

To sum up what I like about this REIT:

1. High dividends yield. >10%.
2. Good book value, P/BV is very low.
3. Good sponsors > Manulife.
4. Good asset quality and freehold - Reduced long term risks.
5. Long WALE- Reduced shot term risks.
6. Benefit from strong US economy and currency.

 

Perfect trade - Profit from market inefficiency

 

Previously, MUST was hit by US withholding tax crisis, rumor about US imposing 30% Tax on US REIT. The share price took a hit dropping from 95cents to 70cents. I took this opportunity to buy at the peak of the crisis and benefit from the recovery after the crisis over. Very similar setup trade that I have done for KEPPEL KBS US REIT trade. You can refer to my previous blog for the details.

 

                             The links : KEPPEL KBS US REIT...... Take the JUMP!

 

 

You can refer to my previous blog for the details. I would not want to repeat the details again here.

 

The Best time to buy is now?

 

This stock always trade at premium due to the strong sponsor and asset quality. So the best time to buy a quality stock at a cheap valuation is when there is a crisis. This COVID-19 had cause this stock to plummet to the level that never seen before since IPO.

At this valuations, this is a bargain of a lifetime. Yes, you may think it is too risky to buy now as COVID-19 situation in US is getting worst, it may cause many business to shuttered its doors and domino effects on the broader economy. Well, Success always favors those who take risk and after every storm there is a rainbow.

 

 

 

-WILLIAM CHENG

  

 

 

 

Please click the links below for more interesting reads:
 

Links FORMULA for successful stock picking

Links Investment Psychology....Investor's worst enemy

Links ALIBABA HK IPO..... (Investment Profit Overdrive)

Links Boom and Bust in 2019 revealed

Links CAPITALAND....... Land of Capital Growth

 

FORMULA for successful stock picking

Picking the right stock to invest can increase your odd of winning. Knowing what to buy is very important step toward profitable trade. Even if you buy at the wrong timing and the stock started to drop after you bought, a good company will always provide a positive return in longer term. Like horse racing game, you need to select the best, the fittest horse to bet, getting the best return on your investment.

However, there are so many companies listed in the market, 700+ stocks in SG market, 900+ in Malaysia and 7,000+ in US market. The odd of successful picking apple among the lemons may look similar to buying 4D numbers. That is why you need to have a right formula for stock screening that give you the highest probability of success. Everyone has their own ways of selecting stocks. To evaluate your stock picking acumen, the effectiveness of your formula will be determine by the rate of return (ROI).

Today, I would like to reveal my secret formula for successful stock picking. I can’t say that my methods is perfect nor it suit everyone style of investment, but you can use this as reference to enhance your own methods. Are you ready? Here are my best ingredients for successful stock pickings!

Big Cap or Small Cap stock

Size does matters. Small Cap companies are more easily manipulated by market punters. For short term investment, price gains in small Cap can easily outpace mega Cap stock. But small Cap also post much higher risks for longer term horizon due to lack of financial stability. I have witnessed many small Cap companies went underwater during economy crisis due to cash flow issue. Small Cap companies also lack ability to compete with big corporations. One of the best examples is smart wearable battle between Apple and Fitbits. Fitbits and Pebbles used to monopolize wearable smart watch before Apple launched its iconic watch. But look at what happen to Fitbits and Pebbles now? Beside strong financial muscle, strong branding is also another plus for Mega Cap. Base on my past experience, my biggest losers are mostly small cap counters. My view can be biased, but I will always choose Big Cap over small Cap now as my selection criteria.

Verdict: I Preferred Mega Cap stocks       

Intrinsic valuation: PE or PEG ratio

The PE ratio (Price/Earning) is widely used by almost everyone who want to determine the intrinsic value of a stock. Have you ever received advice from market analysts not to buy stock that have P/E ratio more than 10? Sometimes I have coffee talk with my friends, they would told me they won’t buy certain stock because its PE ratio was high >10 as seem excessively over-valued. For me, I don’t really use PE ratio as a gauge for stock valuation. I will still buy stock with high PE >30 if it has huge growth potential. I prefer to use PEG ratio (Price/Earning vs. Growth) when selecting companies. PE ratio only useful for matured company with matured market and can only use to compare within the industry sector. Some business sectors will have higher PE valuation than others. We can’t use PE>10 rules and apply to all industries. It is too complicated, and I won’t write too details in this blog.

Verdict: I Preferred using PEG ratio 

Megatrend

The type of business that the company involves is very important to ensure continuation of growth prospects. Companies that has products that drive a new megatrend among the consumer is the best business to own. A megatrend is a shift in attitude and consumption’s behaviors that has great impact on global environment. A company that can innovate will continue to stay relevant to the megatrend shift. Example, online movie streaming had become global megatrend as the new generations spend more time on the internet as compare to older generations on TV box. The most popular streaming company Netflix had explosive increase in subscribers, reflected very well on its stock price which increase d 500% over 5 years. So, megatrend is the most important ingredients in my winning formula.

Brand Equity value

Branding is very important it can create high followers that drive demands for its products, both current and future products launch. This will ensure the growth will continue in foreseeable futures. Each brand has its value. You can refer to the world’s most valuable brands report from Forbes each year to determine its value. In 2019, Apple brand was ranked 1^st with $205 billions price tag. Can brand turn into tangible asset? Yes, you can. In 2006 Ford motor turning the iconic blue Ford oval, one of the world’s most famous trademarks, into collateral to secured $23bil loans. So, strong brands always part of my consideration when come to stock picking.    

My winning formula

Here is the summary of my winning formula for stock picking.

Formula = Mega Cap + PEG + Megatrend + Branding


Adios!

-WILLIAM CHENG

Please click the links below for more interesting reads:

Investment Psychology....Investor's worst enemy

ALIBABA HK IPO..... (Investment Profit Overdrive)

Boom and Bust in 2019 revealed

KEPPEL KBS US REIT...... Take the JUMP!

CAPITALAND....... Land of Capital Growth