• The Queen Mary remains safe and structurally sound. Urban Commons, LLC, (UC) has confirmed that they are not in default on The Queen Mary ground lease. Reserves are sufficient and have been planned to ensure long-term preservation of the ship.
• US$200+mn estimate in capital expenditure overstated. Management has assured us that the repair costs estimated were quoted a few years back, and included many items that were non-essential to maintaining the actual structural integrity of The Queen Mary.
• Attractive dividend yield of 7.8% even in worst case scenario. We have also performed a worst case scenario analysis where we remove all rental income contributions from The Queen Mary (c.15% of NPI). Dividend yield still remains attractive at 8.2% for FY20, with a reduced Target Price of US$0.56. Based on current prices, we believe the market has priced in the worst case scenario, thus leaving limited downside.
• Maintain OUTPERFORM. We maintain our OUTPERFORM recommendation for EAGLE HOSPITALITY TRUST (SGX:LIW) with a reduced Target Price of US$0.72, as we priced in a higher market risk premium and therefore cost of equity. Our Target Price now still represents a total upside of 40.5% (inclusive of FY20 dividend of 11.4%).

What's New

• We refer to the article dated 23 October 2019 entitled “Eagle Hospitality Trust could get wings clipped as key asset The Queen Mary sinks into disrepair” by The Edge Singapore and related articles.
• See more on Eagle Hospitality Trust Announcements; Eagle Hospitality Trust Latest News.

The Queen Mary Remains Safe and Structurally Sound

• Shane Fitzgerald, SE, DBIA, partner at John A. Martin (“JAMA”) & Associates, Inc, the marine engineering company which Urban Commons had hired prior to Eagle Hospitality Trust’s IPO has reassured that “JAMA used a 3D finite element model (FEM) to accurately evaluate critical structural components of the ship which led to a nominal amount of steel plate reinforcements in the hull and tank tops, but overall and as a result of these structural upgrades, The Queen Mary remains in excellent structural condition.”.
• Urban Commons has also disclosed that they are in partnership with the City of Long Beach to establish a perpetual funding mechanism that will ensure continued resources into the future to ensure The Queen Mary’s viability. In addition, Urban Commons’s Capital Improvement Fund Reserve commits 2% of revenues in 2019 and 3% of revenues thereafter for repairs and maintenance.
• Finally, the asset is also secured under a triple net master lease (i.e. the lessee has agreed to pay property expenses such as real estate taxes, building insurance, and maintenance, in addition to rent and utilities).

US$200+mn Estimate in Capital Expenditure Overstated

• Management has confirmed that the estimated ship repair costs from 2-3 years ago took into account repairs needed to ensure that The Queen Mary is sea-worthy – that it is in a good enough condition to sail on the sea. It also included costs such as bringing in a team from the UK and housing them in the US for a year to assist with said repairs.
• However, we note that as the ship will not be sailing on sea, it is only most imperative that the ship remains structurally sound – and Urban Commons has been “very responsive, and they intend to not only meet those deadlines, but they want to make sure they fulfil those obligations.” as quoted by the Long Beach Press Telegram in an article dated 19 October 2019.

Valuation & Action

Maintain OUTPERFORM with lower Target Price of US$0.72.

• We raised our market risk premium, raising our cost of equity to 10.5%, to account for the uncertainty as we await further updates and Urban Commons’s reply to the City’s letter. See attached PDF report for Eagle Hospitality Trust’s valuation details.
• Our DPU forecasts remain status quo, at US 6.6cts for FY20, representing a yield of 11.4%.
• See Eagle Hospitality Trust Share Price; Eagle Hospitality Trust Target Price; Eagle Hospitality Trust Analyst Reports; Eagle Hospitality Trust Dividend History

Risks

• Finalisation of U.S. tax regulation (Section 267A) anticipated at year end;
• recession worries and foreign exchange risk;
• declining RevPAR and occupancy numbers in line with macro forecasts.

Source: KGI Securities Research - 25 Oct 2019