RnR Weekly is a recurring series where I cover the past week’s major news stories and earnings results in the markets from a SIngaporean perspective.
In this week’s edition, I discuss the Eagle Hospitality Trust selloff and go over Capitaland Mall Trust / Capitaland Retail China Trust earnings.
How the Eagle has fallen
Eagle Hospitality Trust (EHT) has had a horrible week. As an investor in EHT, I was also annoyed at the price drop.
Staring down growing unrealised losses is nothing new to me, having caught a couple of falling knives in my investment journey. That said, you never feel good when you suffer losses.
In my experience, I’ve never made money by panicking and selling in a rancorous market. As such, it is probably appropriate to calmly and objectively assess the situation before taking action, if necessary.
I’ve written rather extensively in the past on Eagle Hospitality Trust and its controversial asset, the Queen Mary, in my IPO review and Follow-up on the Trust post-IPO. If you wish to get more background on this issue, do have a read before proceeding. In the interest of time, I shall not repeat myself.
Timeline of events
This whole episode started when local Long Beach news websites picked up a story that the City had sent a letter to EHT’s Sponsor, Urban Commons, on 1st October demanding them to remedy certain potential breaches on the lease by month end.
- Queen Mary Leaseholder Not Meeting Obligations, City Says – Long Beach Business Journal
- Years of Queen Mary inspection reports show little repair progress has been made, despite new operator – Press-Telegram
These news stories were picked up by The Edge Singapore on 23rd October, who published an article based on these news stories.
- Eagle Hospitality Trust could get wings clipped as key asset The Queen Mary sinks into disrepair – The Edge Singapore
Trading Halt and Announcement
On the 24th, EHT requested for a trading halt which lasted an entire day. Subsequently, the SGX announcement from the manager covered the following topics:
- Urban Commons is not in default on the Queen Mary ground lease
- The Queen Mary remains safe and structurally sound
- Quoted Long Beach Economic Director John Keisler’s positive comments on the Sponsor in the Press-Telegram and Long Beach Post articles shared earlier
- Marine Engineering company engaged as part of the IPO attests to structural integrity of the ship
- Highlighted certain measures like the HPCIF and CIF reserves that help fund maintenance works, some which I’ve highlighted in my follow up.
- Highlighted that the Queen Mary is on Triple Net master lease, which means the Sponsor covers capex and maintenance costs, which I’ve also mentioned in my follow up.
I’ve been reading through the comments on the various Telegram chats I’m part of and the comments have been largely brutal, with only a smattering of believers. Sentiment is largely been reflective of the steep 1 day decline with all sorts of conspiracy theories being spawned.
Revisiting my investment thesis
In my Follow up article, I spelt out why I feel that maintenance expenses for the Queen Mary is not exactly a concern, with the only risk being that the ship is so structurally unsound that it is closed or in the worst case, sunk. I also computed a conservative valuation where I backed out the value and income from the Queen Mary from DPU and NAV.
The latest events did not bring any additional new information to the table, other than more saber rattling from a zealous city inspector. Although the letter from the City seemed to suggest certain breaches by the Sponsor, latest comments from the City suggest that they have been remedied.
It has however, finally succeeded in bringing the issue of the Queen Mary to the consciousness of all investors, even to those woefully ignorant. This offers a chance for weak hands to be shook out of the stock to hopefully build a more stable investor base.
As such, there is no need to revise any assumptions I made in my original investment thesis. I’ll just update my computation using latest unit prices.
Even on a conservative basis, it looks ridiculously cheap.
My 2 cents
My blog is called Risk N Returns for a reason. With no risk, there is no return. The key is to know the upside and how you manage your downside. I’ve presented the upside, how you manage the downside is by using position sizing and limiting the amount you invest to money you can afford to lose. I’ve always loved a good speculation, but I’ve never went all in on a single risky counter.
To illustrate, although I lost 15.5% on EHT yesterday, my portfolio only declined 0.50% overall. That’s the importance of diversification and position sizing.
If you are an existing investor like me, I think its too late to get off the roller coaster now. Just enjoy the ride.
For potential investors, I think you need to decide for yourselves if you want to trust management or not. The metrics are theoretically attractive now, only poor management can screw up the entire thing.
As for me, I nibbled a bit yesterday and will be looking to liquidate some of my non-core investments to finance further purchases over the coming weeks if necessary.
Please do your own due diligence before investing.
Earnings Watch - CMT and CRCT Earnings
We turn to more positive news as CMT and CRCT announced a strong set of results in their latest quarterly reports this week. Let’s take a closer look.
Capitaland Mall Trust Q3 Earnings
A healthy set of earnings results with growth in DPU larging thanks to leasing activities in Westgate and pioneer contribution from Funan. An honourable mention include 1.2% YTD positive rental reversions. Some concerns include drop in sales per sf and relative poor performance of Clarke Quay.
From a valuation standpoint it seems fair to slightly overvalued. The REIT has already gone XD, adding to my dividend income for this year.
Capitaland Retail China Trust Q3 Earnings
A healthy set of earnings results as well from CRCT. Beyond the eye popping rental reversions and earnings growth figures for the year, investors will need to observe Capitamall Minzhongleyuan and Capitamall Qibao with negative rental reversions for the year and declining occupancy.
As a small sidetrack, I’ve actually passed by Qibao before on a work trip and I know that it is in the Hongqiao district of Shanghai, a major transport hub. The district is facing lower rents due to the noise from the trains and planes from the nearby Hongqiao airport and Hongqiao railway station. As such, it is not very surprising to see this slight downward trend in occupancy.
Similar to CMT, from a valuation standpoint it seems fair. The REIT does not pay any dividends this quarter.