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UBS reviewing 'buy' call on Eagle Hospitality Trust after event of default

UBS has placed its "buy" rating on Eagle Hospitality Trust (EHT) under review, after the US-based hotel trust called for a voluntary trading suspension on Tuesday while it deals with a loan default.

Last Friday, EHT was served a notice of default in relation to a US$341 million syndicated loan. The default was triggered after EHT's master lessees came up short on their rent payments to EHT. This was in spite of EHT itself having met its own debt obligations to the lenders so far. The lenders have demanded immediate payment of the US$341 million sum. 

EHT plans to sell some assets and undertake a strategic review to deal with the cash crunch, but it will be difficult for the Reit to realise the full value of its assets in this current environment, said UBS analysts Kok Wai Fai and Michael Lim.

They wrote in a note on Tuesday: "Distressed selling could pose downside risks to its (EHT's) book value. We estimate every 10 per cent decline in its hotel prices would lower its book value by 16 per cent. We estimate a 61.5 per cent decline could wipe out all unitholders' equity."

UBS was one of the joint global coordinators, joint bookrunners and underwriters for EHT during its initial public offer (IPO) in May last year. DBS Bank was the sole financial adviser and issue manager for the IPO.

The Covid-19 pandemic was the key driver behind the sponsor's payment delinquencies. The UBS analysts wrote: "The hospitality market globally and in the USA continues to deteriorate at an accelerated pace due to the global Covid-19 pandemic. According to data from STR, US average hotel occupancy fell 24.4 percentage points year-on-year to 53 per cent during the week of March 8-14, with some states as low as around 30 per cent. The operational challenges resulted in significant share price underperformance for the US-listed hospitality Reits, which fell 42-82 per cent in the year to date."

All of EHT's hotels are master leased to Urban Commons, which is also the Reit's sponsor. In turn, Urban Commons has agreements with hotel franchisors and hires third-party managers to operate the assets. 

In essence, most operational aspects are outsourced and there is no direct contractual relationship between EHT and hotel managers or franchisors, which can be a double-edged sword, the analysts wrote.

"While common in the US lodging market, it appears complex by Singapore Reit standards. We think this lack of control could limit EHT's ability to carry out its strategy. Conversely, we believe the argument that this structure creates more flexibility for replacing a poorly performing hotel operator and brand is also valid."

EHT stapled securities last changed hands at 13.7 US cents on March 19 before trading was halted. 

As a result of the event of default, EHT is restricted from making its first-ever distribution payment of 3.478 US cents declared in February.