SINGAPORE (Nov 18): KGI Securities is maintaining its “outperform” call on Eagle Hospitality Trust (EHT) with a target price of 61 US cents – down from the previous 72 US cents.
This call comes despite EHT missing its forecasts across several key financial metrics for 3Q19 ended September. The REIT’s income available for distribution came in at US$14.4 million ($19.6 million), 1.2% lower than the projected US$14.5 million at its initial public offering (IPO) on May 25.
EHT also booked a distribution per stapled security (DPS) of 1.649 US cents, 1.3% less than the forecasted 1.67 US cents.
In its earnings call on Sept 30, the REIT’s manager said the misses were attributable to the group’s 10.6% revenue drop to US$21.5 million compared to the forecasted US$24.1 million.
This brings the first nine months of 2019 (9M19) revenue to US$31.0 million, some 7.9% lower than the forecasted US$33.7 million in the REIT’s prospectus.
EHT noted that the lower revenues were mainly due to a combination of macroeconomic headwinds and the Category 5 Hurricane Dorian hitting Orlando Waterparks in Florida. The attraction is the REIT’s second largest asset.
Consequently, net property income for the quarter came in at US$20.1 million or 2.7% lower than the projected US$20.6 million.
Despite these misses, EHT’s manager remains bullish. In its outlook statement, the REIT said that its portfolio continues to benefit from the ramp-up following significant recent asset enhancements of US$174 million across 3Q19.
KGI Securities analyst Amirah Yusoff agrees, highlighting how the asset enhancements have resulted in “steady stablisation” for the group.
“RevPAR improved considerably across this quarter to 109% from 97.4% at IPO, in comparison to the competitive set of each asset,” says Amirah in a Monday report. “Runway for RevPAR gains is still present as the RevPAR spread between EHT’s work-in-progress assets and upgraded properties remains at 28%.”
Notably, EHT’s results were in line with the brokerage’s estimates as the REIT’s active expense management helped restore balance to distributable income, offsetting the revenue underperformance.
In particular, Amirah opines that the Hurricane Dorian’s damage to EHT’s key asset – Holiday Inn Resort Orlando Suites – should not be underestimated.
“Rent attributable to this asset was down US$0.6 million from forecasts this quarter, as occupancy nosedived to 27% (FY19 forecast: 76.7%) for a couple of weeks following news of the natural disaster,” says Amirah.
“Notwithstanding that, EHT will not be covered by insurance for this incident as the asset was not directly impacted by Hurricane Dorian,” she adds.
Although the brokerage has slashed its target price to 61 US cents as a result of pricing in a higher beta of 0.8 (previous: 0.66) in addition to the previously increased market risk premium of 12.0%, Amirah highlights how this still represents a total upside of 25.5%.
“While management has clarified and reassured us with regards to many of the issues that have been raised over the past few weeks, we have been unable to fully rule out the risks related to the Sponsor and The Queen Mary ship,” says Amirah.
According to the brokerage, some key risks for the REIT include the finalisation of US tax regulations that are expected to happen at the end of the year, recession worries and foreign exchange risks as well as declining RevPAR and occupancy numbers in line with macro forecasts.
As at 1.01pm, units in Eagle Hospitality Trust are trading 1.5 cent higher, or 2.8% up, at 55 US cents. This translates into a price-to-book (P/B) ratio of 0.5 times and a dividend yield of 12.5% according to KGI valuations.
