• DPU in line with our estimates. reporteEAGLE HOSPITALITY TRUST (SGX:LIW) d distributable income of US$14.4mn for 3Q19, or DPU of 1.649 US cts. Despite revenue underperformance, active expense management helped restore balance to distributable income.
• Displaced demand due to exogenous events. Occupancy of Eagle Hospitality Trust’s second largest asset, Orlando Waterparks Florida, plunged to 27% upon the declaration of a Category 5 hurricane emergency over the Labour Day weekend, affecting revenues by US$0.6mn.
• Maintain OUTPERFORM. We maintain our OUTPERFORM recommendation with a reduced Target Price of US$0.61, as we priced in a higher beta of 0.8, on top of the previously increased market risk premium of 12.0%. Cost of equity currently stands at 12.2%, due to uncertainties relating to the Sponsor and The Queen Mary asset. Our Target Price now still represents a total upside of 25.5% (inclusive of FY20F dividend of 12.3%).

Revenue Miss; DPU in Line With Estimates

• Eagle Hospitality Trust reported distributable income of US$14.4mn and DPU of 1.649 US cts for 3Q19.
• Revenue YTD (since listing on 23 May 2019) of US$31.0mn missed IPO forecast of US$33.7mn (-7.9%), while NPI YTD of US$28.1mn missed IPO forecast of US$28.8mn (- 2.5%).
• Income available for distribution and DPU YTD at US$20.0mn and 2.30 US cts were however just marginally below estimates by -0.5% and -0.6% respectively. This was due to expense savings from property tax payments, and reduced interest expenses after interest rate swap arrangements came into effect.

Orlando Waterparks (Florida) Hit by Category 5 Hurricane

• Florida, where Eagle Hospitality Trust’s Holiday Inn Resort Orlando Suites (Waterpark) asset is located in, was hit by Hurricane Dorian, a Category 5 hurricane storm. Rent attributable to this asset was down US$0.6mn from forecasts this quarter, as occupancy nosedived to 27% (FY19 forecast: 76.7%) for a couple of weeks following news of the natural disaster.
• Orlando waterparks stand as Eagle Hospitality Trust’s second largest asset by rental revenue (14.1%) for FY19F, behind the Queen Mary ship (15.3%). Management shared that Florida is not usually a hot spot for natural disasters, and a hurricane event of this scale and severity is an ‘anomaly’. Notwithstanding that, Eagle Hospitality Trust will not be covered by insurance for this incident as the asset was not directly impacted by Hurricane Dorian.
• Without the US$0.6mn loss in revenue, DPU would have been 1.71 US cts (+3.7% actual) based on a 100% payout ratio.

Steady Stabilization After Asset Enhancements

• RevPAR improved considerably across this quarter to 109% from 97.4% at IPO, in comparison to the competitive set of each asset.
• Asset enhancements for the last five properties as set out for this year had been completed in 2Q19, as part of Eagle Hospitality Trust’s initial asset enhancement plans amounting to US$174mn. Runway for RevPAR gains is still present as the RevPAR spread between Eagle Hospitality Trust’s work-in-progress assets and upgraded properties remains at 28%.

Valuation & Action: Maintain OUTPERFORM With Lower Target Price of US$0.61

• 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. Therefore, we raise our cost of equity to 12.2%, assigning a higher beta of 0.8 (previous: 0.66).
• Our DPU forecasts remain status quo, at US 6.6cts for FY20F, representing a yield of 12.3%.

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 - 15 Nov 2019