Eagle Hospitality Trust, or Eagle for short, launched its initial public offering (IPO) on Thursday evening. This is the second real estate investment trust (REIT) focused on US pure-play hotel properties and comes hot on the heels of ARA US Hospitality Trust (SGX: XZL), or ARA for short, which just listed on 9 May 2019. For Eagle, the public offer opened at 9 pm on 16 May 2019 and will close on 22 May 2019 at 12 noon. Trading will commence on 24 May 2019 at 2 pm.
Eagle is backed by US-based property investor and developer Urban Commons LLC and is a stapled group that consists of a REIT (Eagle Hospitality REIT or EH-REIT) and a Business Trust (Eagle Hospitality Business Trust or EH-BT). Investors now have another option when it comes to participating in the growth of the US hospitality market, as Eagle’s portfolio is substantially different from ARA’s portfolio.
The below table I’ve compiled compares both IPOs (Eagle and ARA) and I’ve also detailed eight things investors should know about Eagle.
1. The initial portfolio for Eagle will consist of 18 full-service hotel properties with a total of 5,420 rooms across eight states in the US. The portfolio’s aggregate valuation is around US$1.27 billion.
2. The projected yield for the IPO is an annualised 8.2% and is projected to increase by 2.4% next year, meaning investors can expect a yield of 8.4% for 2020.
3. Net property income (NPI) was US$47.4 million for 2018 but is projected to rise to US$51.1 million this year. For 2020, NPI is projected to hit US$81.3 million. US$174 million had been spent on capital expenditure since 2013, and the REIT has earmarked a further US$18.6 million for more asset enhancement initiatives (AEIs).
4. The occupancy rate for fiscal year 2018 (FY 2018) was 73.6%, with the projected occupancy rate rising to 78.5% this year. Revenue per available room (RevPar), a common metric for hotels, stood at US$93.90 last year and is projected to rise to US$107.70 this year. Drivers of the increase in RevPar include additional rooms available after the completion of renovation works in 2018, contracts entered into with corporate clients and government agencies (to provide better revenue visibility), and also better revenue management.
5. The REIT has a Master Lease structure with the hotels, and fixed rent accounts for 66% of the rental income. This helps to ensure visibility for at least two-thirds of rental income, with the rest varying based on occupancy and RevPar levels. There is also alignment between the sponsor and Eagle as the founders collectively own a 15.2% stake in the REIT.
6. There are three major hotel brands whose hotels are included in the initial portfolio – Marriott, Hilton and Intercontinental Hotels Group (IHG). These brands take up 29%, 24% and 41% of the total number of rooms within the portfolio, respectively, with the remaining 6% belonging to an independent brand.
Source: Eagle Hospitality Trust IPO Prospectus
7. In the chart above, you can see that these three premium hotel brands have the highest number of rooms and also the largest loyalty programmes within the hotel industry. This attests to their global status, while the high number of loyalty members also creates “stickiness” and encourages repeat patronage.
8. As for future growth, the sponsor has pipeline assets that may be injected into the REIT. Urban Commons, being one of the largest developers and investors in hotel assets, also has good sourcing capabilities to sniff out yield-accretive deals which will benefit unit-holders by raising future distribution per unit.
The Foolish take
Eagle seems like a promising IPO backed by a committed and experienced sponsor, and their initial portfolio contains branded hotel names with strong occupancy rates and healthy RevPar. The forecast yield of 8.2% is enticing as it is higher than that offered by ARA, and the forecast growth in yield is also slightly higher than that of ARA.
Investors should note that even though these two IPOs have a lot in common (i.e. US-based, hotel portfolios), the type of hotels, brand names, and gross operating margins are very different. Eagle has more upscale full-service hotels that command better brand loyalty and recognition but which also generate a lower gross operating margin of ~39%, versus ARA’s Hyatt-branded upscale select-service hotels with a gross operating margin of around 50%. Eagle is more diversified though, with three major hotel brands versus just one for ARA. Investors who wish to gain exposure to both types of hotels and all four brands may also consider owning both REITs.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.