Excerpts from UOB Kay Hian report
Analysts: Jonathan Koh, CFA & Nicola Ho
Eagle Hospitality Trust (EAGLEHT SP)
Quality Full-service Hotels At An Undeserved Discount
|EHT is a pure play focusing on full-service hotels in major US MSAs located near corporate HQs, leisure attractions and international airports.
94% of its hotel rooms are branded under Marriott, Hilton and IHG, providing access to >300m loyalty members.
Its master leases are structured with fixed rents making up 66% of total rents.
77% of its initial portfolio by valuation completed major refurbishment in 2018/19, providing uplift in RevPAR in 2019/20.
Initiate coverage with BUY. Target price: US$1.02.
Eagle Hospitality Trust
• Located in top MSAs and near demand generators. About 57% of Eagle Hospitality Trust’s (EHT) hotel rooms are in the top-10 metropolitan statistical areas (MSAs) in the US, and 95% in the top-30 MSAs.
About 47.5% of EHT’s rooms are near corporate headquarters, technology parks and universities, 39.5% near amusement parks and leisure landmarks, and the balance near international airports.
• Higher barriers to entry for full-service hotels. Supply growth is expected to be limited for full-service hotels, given higher development costs and labour requirements. EHT will benefit from this dearth of supply through higher RevPAR growth over the next few years.
• Master leases structured for stability and resiliency. Fixed rents make up 66% of EHT’s total rent. Variable rents are pegged to the gross operating revenue and gross operating profit of each hotel and provide upside to growth in RevPAR and operating efficiency. Each master lessee provides a security deposit at nine months of fixed rent.
• Leveraging major brands to extend reach. Some 94% of EHT’s rooms are branded under the top-3 global hotel franchisors, namely Marriott, Hilton and IHG. This affiliation provides EHT with strong brand recognition, large reservation networks and access to over 300m loyalty members.
• RevPAR uplift from recently-renovated hotels. EHT will invest US$174.4m from 2013 to 2019 to refurbish the hotels in line with brand standards. About 77% of its initial portfolio by valuation has completed major refurbishment in 2018 (capex: US$102.9m) and 2019 (capex: US$44.0m).
RevPAR for fully-upgraded hotels is 38.8% higher than that of hotels undergoing renovation.
EHT will benefit from stabilisation of newly-upgraded hotels that last 6-18 months after renovation. We expect portfolio RevPAR to improve from US$93.90 in 2018 to US$107.75 in 2019 and US$110.64 in 2020.
• Undeserved discount. EHT provides attractive distribution yield of 10.1% and yield spread of 8.4% for 2020F.
• Unique structure different from that of other US REITs. EHT’s holding company in the US, US Corp, is a domestic corporation. EHT is not subject to restriction on shareholding that applies to US REITs (which cannot be 50% owned by five or fewer individuals).
However, non-US holders owning 10% or more of EHT cannot claim Portfolio Interest Exemption and is subject to 30% US withholding tax.
• We forecast DPU of 3.9 US cents for FY19 (7-month period from 24 May 19 to 31 Dec 19) and 6.7 US cents for FY20.
• Initiate coverage with BUY. Our target price of US$1.02 is based on DDM (required rate of return: 7.5%, terminal growth: 1.0%).
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• RevPAR uplift from recently-renovated hotels.
Full report here.