Eagle Hospitality Trust's lower-than-indicated IPO price of US$0.78 offers 'more potential upside'

Singapore

EAGLE-EYED investors would have noticed that Eagle Hospitality Trust (EHT)'s initial public offering (IPO) pricing of US$0.78 a unit turned out to be lower than an earlier indicative range of US$0.80 to US$0.81.

According to the prospectus registered on Thursday, projected annualised yield will be 8.2 per cent for the forecast period from May 1, 2019 to Dec 31, 2019 and 8.4 per cent for 2020. This is up from the 7.9-8 per cent range for forecast period 2019, and 8.1-8.2 per cent range for 2020 spelled out in its preliminary prospectus late last month.

Salvatore Takoushian, chief executive and president of the managers, explained why in an interview with The Business Times on Friday.

"With respect to composition of book, if you want to attract certain investors, you take that into consideration with your pricing strategy and from our vantage point, we want to create more opportunity and more potential upside for investors," he explained.

Based on the revised yield, the discount to appraised value for the portfolio will be about 12.3 per cent as compared to the previous 11 per cent, which spells good value for investors, he pointed out.

These decisions were made following its IPO roadshow and "independent of" factors relating to the recent listing of ARA US Hospitality Trust, he added.

ARA US Hospitality Trust had priced the IPO of its 38 Hyatt select-service US hotels at US$0.88 each and projected yields of 8 per cent for 2019 and 8.2 per cent for 2020. It began trading on May 9, and closed on Friday at US$0.865. Market watchers have also noted that while EHT had lodged its preliminary prospectus on April 25 - shortly after ARA US Hospitality Trust did - trading for EHT will only commence on May 24.

Noting that EHT had covered its books as of May 6, Mr Takoushian offered several reasons for the longer time to market. "We wanted to ensure a strong composition within our book."

The recent market volatility was another factor. He added: "Given the timing of the ARA transaction, we wanted to give the market a little opportunity to digest that and really appreciate the unique proposition that Eagle represents and our differentiated merits."

The stapled group comprises Eagle Hospitality Real Estate Investment Trust (EH-Reit) and Eagle Hospitality Business Trust (EH-BT).

EHT, backed by US-based property investor and developer Urban Commons, seeks to raise gross proceeds of US$565.8 million. Its founders and co-owners Howard Wu and Taylor Woods will take a combined 15.2 per cent stake post listing.

Its portfolio comprises 18 full-service hotel properties with a total of 5,420 rooms and an aggregate valuation of about US$1.27 billion.

Most are located in the 30 largest metro areas in the US and almost all are branded Marriott, IHG and Hilton.

Mr Takoushian said that the benefit of full-service hotels is that such hotels have more diversified revenue streams by providing services like weddings. Fixed expenses also make up about 60 per cent of its expenses as compared to select-service hotels where he thinks about 85 per cent are fixed.

He said the key to EHT's strategy for listing was to embark on significant renovations for the properties ahead of its listing, with US$103 million of works completed last year, and a further US$45 million of works finished in the first quarter of this year.

He acknowledged those works affected the financial performance of some of the properties but reckoned that EHT will reap the returns on investment in the next couple of years, while allowing it to preserve capital and not suffer further disruptions going forward.

Asked about repairs for its Queen Mary, a hotel aboard a docked ocean liner in California, he said the capital expenditure needed would be in the region of US$50-60 million. Urban Commons has put in US$25 million for that. There are also reserves that can be used to re-invest in the ship in the next few years.

Two-thirds of EHT's rental income is fixed, and the remaining variable rent is pegged to gross operating revenue and gross operating profit with the proportion differing for the properties based on their margins, Mr Takoushian said.

Post listing, Mr Takoushian's plans to improve portfolio performance include repositioning its Orlando hotels to capture more conference business, particularly during the less busy period. EHT also plans to tap on excess land at its Pasadena, California property.

There are also two pipeline assets which EHT could acquire once they stabilise. At listing, EHT is expected to have an aggregate leverage of about 38 per cent, which provides debt headroom of some US$170 million for future capital expenditure or acquisitions.

Mr Takoushian said any future acquisition would strike "an appropriate balance between debt and equity".

The public offer opened on Thursday and will close on May 22.