• Sponsor Urban Commons clarified that The Queen Mary remains safe and structurally sound. It will respond to the letter sent by John Keisler, Economic Development Director of Long Beach City, by 31 Oct 19.
• Assuming the valuation of Queen Mary is written down to zero and it no longer contributes to rental income, EAGLE HOSPITALITY TRUST (SGX:LIW)’s 2020F DPU is expected to drop by 22% to 5.12 US cents, NAV/share by 21% to US$0.69 and our target price from US$1.02 to US$0.80. See Eagle Hospitality Trust Dividend History.
• Maintain BUY with target price of US$1.02.

What’s New

Allegations made regarding sponsor’s obligations.

• According to an article carried by The Edge on 23 Oct 19, John Keisler, Economic Development Director of Long Beach City, has sent a letter to Taylor Woods, CEO of Eagle Hospitality Trust’s sponsor Urban Commons (UC) on 1 Oct 19 claiming the company had failed to meet the terms of a lease agreement for The Queen Mary. He cited issues such as failing paint, necessary repair works for the ship’s side shell and expansion joints. He warned that a default would take place at end-October and demanded a plan for urgent fixes within 30 days. See Eagle Hospitality Trust Latest News.
• Eagle Hospitality Trust has made an announcement in relation to the above claims:
  • Sponsor asserts it is not in default of ground lease. Urban Commons has clarified that The Queen Mary remains safe and structurally sound. Urban Commons is preparing a response to directly address the letter sent by John Keisler, which includes specific maintenance items that have been completed, are underway and planned in the future for the long-term preservation of the ship. The response will be made by 31 Oct 19.
  • Marine engineering company evaluated structural integrity of ship. Urban Commons hired John A. Martin & Associates (JAMA) prior to Eagle Hospitality Trust’s IPO to ensure that the ship’s structural condition was sound. JAMA has evaluated critical structural components of the ship and concluded that the ship was in excellent structural condition due to structural upgrades, such as steel plate reinforcements in the hull and tank tops.
  • US$23.5m capex invested pre-IPO. Prior to Eagle Hospitality Trust’s listing, capex of US$23.5m was undertaken for The Queen Mary in 2018 involving major life safety and structural projects.
• These included the repair of the fire and life safety system ship-wide, replacement of additional major structural repairs and renovations. See Eagle Hospitality Trust Announcements.

Double layer of reserves.

• Eagle Hospitality Trust has been working closely with the City of Long Beach to establish a perpetual funding mechanism called the Historical Preservation Capital Improvement Plan (HPCIP) fund that will provide continued resources to safeguard The Queen Mary’s viability. This is funded by passenger fees collected from Carnival Cruise Line Terminal. Urban Commons has committed to fund a Capital Improvement Fund (CIF) equivalent to 2% of revenue in 2019 and 3% of revenues thereafter for repairs and maintenance, including ordinary maintenance and capital items.
• According to management, the two reserves could support capex of US$4.5m per year.

Stock Impact

An iconic landmark.

• The Queen Mary is a decommissioned ocean liner that has been converted into a 347-room hotel with banquet facility. It is a landmark attraction at Long Beach, California.
• We estimate Queen Mary accounted for 12.6% of Eagle Hospitality Trust’s portfolio valuation and 15.9% of net property income. In 2018, The Queen Mary achieved ADR of US$144.40, occupancy of 69.8% and RevPAR of US$100.70.

Worst-case target price at US$0.80.

• Assuming the valuation of Queen Mary is written down to zero and it no longer contributes to rental income, Eagle Hospitality Trust’s 2020F DPU would drop by 22% from 6.60 US cents to 5.12 US cents, while NAV/share would drop 21% from US$0.87 to US$0.69. Our target price would also drop from US$1.02 to US$0.80.
• See Eagle Hospitality Trust Share Price; Eagle Hospitality Trust Target Price; Eagle Hospitality Trust Dividend History.

Earnings Revision / Risk

• We maintain our earnings forecasts.

Valuation / Recommendation

• Maintain BUY. Our target price of US$1.02 is based on DDM (required rate of return: 7.5%, terminal growth: 1.0%).

Share Price Catalyst

• RevPAR uplift from recently-renovated hotels.

Source: UOB Kay Hian Research - 25 Oct 2019