EH-Reit attributes 38% fall in portfolio value to pandemic pressures, market risks

IN a response to queries from the Singapore Exchange (SGX), Eagle Hospitality Reit (EH-Reit) on Tuesday attributed a nearly 40 per cent fall in its portfolio value since listing to a challenging outlook due to the Covid-19 pandemic, as well as comparatively higher risks in the markets where the properties are located.

EH-Reit reported a 38.1 per cent decline in its portfolio value in a Dec 8 circular that it issued about a proposed change of managers, related matters and a termination proposal. This fell outside the projected average decline in values across the US, which the independent valuer expected to range between 15.1 per cent and 28.1 per cent.

However, these estimates were based on surveys conducted in April 2020, and the independent valuer noted that the outlook has worsened since then. It added that, on a weighted average basis, the property valuation decreases of 38.1 per cent (on an "as is" basis) and 23.8 per cent (on a stabilised basis) are within the expected range cited by other industry experts.

EH-Reit's manager said the range was "not meant to be all encapsulating but a general view provided by surveys conducted by industry experts at the time", and that because of the uncertain outlook, declines are likely to vary from market to market.

For example, EH-Reit's Queen Mary Hotel has high exposure to the mass events and groups business, a sector that is expected to take longer to recover.

The manager added that the independent valuer had considered investors' demand for additional risk premiums to reflect the near-term soft outlook, increased cost profile and recovery timeline for the industry. As a result, it used a higher and wider range for the terminal capitalisation rate and discount rate than it did in 2018, prior to EH-Reit's initial public offering (IPO).

Market fundamentals have also changed significantly since the IPO, changing the valuer's forecast of strong macroeconomic and industry fundamentals in the US to a challenging outlook instead. While revenue per available room was up 2.9 per cent year-on-year at the end of 2018, it is forecasted to finish 2020 down 57.5 per cent from 2019.

"A recovery to pre-Covid levels is expected to take at least three to four years with hotels mostly reliant on fly travel and meetings, incentives, conferences and events expected to be some of the last to recover," EH-Reit's manager said. "As such, fundamentally, this trend negatively impacts near-term cashflows and overall valuations."

SGX also queried the increase in capitalisation rates for seven of EH-Reit's properties, which rose by 2 per cent or more, and asked what the new managers' plans would be to reduce the capitalisation rates.

EH-Reit's manager said the increase in capitalisation rates was a result of the current market dynamics, in which yields being demanded for hotel assets have increased because of Covid-19 and investors factoring in recovery time.

It expects improvements in capitalisation rates to be driven primarily by general market improvements and market recovery in hospitality, as well as the securing of credible and creditworthy third-party master lessees for the hotels in the medium to long term. The independent valuer defined "medium term" as the next five to seven years.

In the near term, capitalisation rates will likely be brought down by increases in net operating income through proactive asset management initiatives, the manager said.

Trading in Eagle Hospitality Trust's stapled securities - comprising EH-Reit and Eagle Hospitality Business Trust - was voluntarily suspended on March 24 this year.