EHT listing should have been a no-no with SGX

OVER the past week, The Business Times has done some excellent reporting on Eagle Hospitality Trust (EHT). Listed just five months ago, it has already managed to destroy almost 40 per cent of shareholder value. The catalyst has been the controversy around the Hotel Queen Mary, but the real issue is simply the quality of the Reit.

Two major red flags in the IPO prospectus show that it should never have been allowed to list.

Valuations: Six out of 18 hotels (or a third of EHT's portfolio) lack any valuation numbers, so investors are essentially buying these assets blindfolded. (see amendment note) Based on their 2018 net property income (NPI) of US$45 million, the remaining 12 hotels are valued at a high capitalisation rate of 4.9 per cent (US$910 million valuation). Similar-quality US hotels trade at cap rates of 8 to 8.5 per cent.

To make the valuation more believable, 2020 NPI for the 12 hotels is projected to grow by 37 per cent from US$45 million in 2018 to US$61.5 million. The cap rate now jumps to 6.7 per cent. One can literally arrive at any valuation using fantasy projections. Professional valuers and investment banks have strong conflicts of interest and no skin in the game. One cannot rely on their judgment alone.

Sponsor credibility: This is by far the most important criterion for Reits. It was only because of strong sponsors that S-Reits such as CMT and CDL sailed through the global financial crisis. The sponsor of EHT, Urban Commons, is a mystery; the prospectus did not contain any information on its financials.

That is a rather big miss, considering that the sponsors are on the hook for making regular master lease payments and providing support for refinancing the debt on maturity. Investors buying the Reit on "guaranteed" master lease payments should note that the strength of these leases is only as strong as the entity making the payments.

All negatives are masked when the going is good and the Reit is able to make a few dividend payments. Investors get sucked in because of the perceived yield, only to lose their capital when the market hits turbulence and the true fundamentals of the Reit come to the fore.

SGX should avoid a "tick-the-box" mentality when approving IPOs. A few low-quality Reits can destroy the reputation of the entire Reit sector, similar to what happened with S-chips more than a decade ago.

Bobby Jayaraman

Amendment note: Due to an editing error, an earlier version of this article incorrectly stated that the six out of 18 hotels comprised a third of ASAP's portfolio. They are in fact a third of EHT's portfolio. The article has been amended to reflect this.

READ MORE: Peer review of reports on EHT's Queen Mary in the works