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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


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