Early Retirement Masterclass students are generally not taught anything about the Margin of Safety when making investments because it is something that matters only in rare cases.
One particular rare case surfaced this week when the CEO of Eagle Hospitality Trust’s sponsor was sent a letter by the Economic Development Director of Long Beach City claiming that terms of the lease agreement for The Queen Mary had not been met trigger a drop in the stock price. The Queen Mary, a decommissioned ocean-liner-turned-hotel, is one of the most contentious assets owned in the trust.
Retail investors do not have the luxury to perform a detailed investigation into each asset of hospitality trust, but they can definitely read analyst reports and blogger summaries.
Prior to reading these reports, however, retail investors need to ask themselves what is the ONE ISSUE that will determine whether they should get into an investment.
The idea of reducing a potential investment into one issue is possibly the hardest part of retail investing. I developed this from my adventures in SMU Law School where we were made to figure out the ratio decidendi of a case.
Legal cases are voluminous reading involving sometimes hundreds of pages of text. I’ve sent the greater part of my three years in SMU arguing what is the holding for each case – there is always a different opinion when it comes to these things.
If you can convince yourself that there is one primary issue that animates an investment thesis, further research on this one issue will give you a decent chance to predict a favourable or unfavourable outcome on an investment bet.
Let’s now look at Eagle Hospitality Trust.
In my opinion, the central issue is that Eagle Hospitality Trust “It’s all about Mary”. Because of The Queen Mary, the trust is offering double-digit yields in a world economy that even has negative-yielding bonds in Europe.
With this in mind, we are now ready to turn to the analyst reports, all written by highly motivated financial analysts who do this full time.
The question we have in our minds is now very simple: What is the value of Eagle Hospitality trust if Queen Mary is taken totally off its books?
- UOK Kay Hian’s report on 25 October 2019 claims that without The Queen Mary, the net asset value is $0.69 with 5.12cts dividend in 2020.
- KGI securities have fair value pegged to $0.72 and 7.8% yields in the worst-case scenario.
With these numbers, getting into Eagle at its current price at $0.545 is great bargain.
Even if the prices are to move closer to the net asset value at $0.65, you would have earned about 20% with an additional 7.8% dividend yield san The Queen Mary.
To me, this looks like a reason to increase holdings in this stock.
For leveraged investors, doubling up on Eagle Hospitality Trust is still fraught with danger.
On the surface, returns can potentially reach (27.8% x 2 – 3.5%) or 52.1% – but this is no arbitrage investment – your portfolio volatility may spike when you add Eagle into your portfolio.
Over the short term, negative sentiment may push the counter down even further, and brokerages may reclassify the stock to a lower tier to prevent leveraged investors from getting a reasonable financing rate to make this bet work. Investors can also get a nasty surprise if Queen Mary turns out to be worth a negative value.
As for me, these numbers too compelling for me to resist adding more into my portfolio.
I entered into a leveraged position at $0.58 and, regrettably, am sitting on some losses at the time of writing.
If things get better, I might be hailed an investing genius, otherwise, I would be seriously cut by a falling knife.
Editor’s Thoughts
A margin of safety does not typically apply to dividend investors (though I am not saying it should not apply), whose sole focus is almost always on the long term capability of management to pay out consistent dividends while maintaining current share prices.
Obviously, this strategy has its advantages and disadvantages. Utilising the idea of a “margin of safety” is a good way for retail investors to incorporate risk management into their investment ideas. It’s how you bulletproof your invested capital, so to speak.
The fundamental idea, thus, across all investment strategies, is that investors must learn to identify good ways to incorporate risk management in their approach.
- Am I buying at absurdly cheap prices?
- Am I hedging with options?
- Have I identified the conditions to exit a stock?
These are all good questions investors should ask themselves in order to truly develop a more nuanced approach to investing. This is but one method. I hope this has been a fruitful read for all of you.
P.S. This is how we constantly improve our strategy to build an early retirement portfolio
SGX filing shown many SSH were selling their shares again these few days
Two of Eagle Hospitality Trust’s large unitholders have sold part of their stakes, while remaining above the 5 percent threshold to be considered “substantial” stakeholders, filings to SGX said Friday.
Claydon Hill Investments disposed of 1.26 million Eagle Hospitality Trust units in a market transaction at US$0.659 each on 25 October, Frank Shih Chi Yuan said in a filing to SGX. Claydon Hill Investments is wholly owned by Frank Yuan, the filing said.
The company’s direct interest and Frank Yuan’s deemed interest each fell to 14.99 percent from 15.13 percent due to the transaction, the filing said.
On Friday, the Business Times reported Frank Yuan, Eagle Hospitality Trust’s largest unitholder, was also the CEO of ASAP Holdings, which sold six hotels to the founders of the trust’s sponsor, who then injected them into the REIT. ASAP Holdings has also advised Eagle Hospitality Trust’s sponsor on at least five other hotel acquisitions, the article said. The relationships were disclosed previously, although the parties said they weren’t required to do so, the Business Times reported.
In addition, Compass Cove Assets disposed of 2.53 million units at US$0.58 in a market transaction on 29 October, Norbert Shih Hau Yuan said in a separate filing to SGX. Compass Cove Assets is wholly owned by Norbert Yuan, the filing said.
Compass Cove Assets’ direct interest and Norbert Yuan’s deemed interest each fell to 11.71 percent from 12 percent previously, due to the transaction, the filing said.
In a later filing, Norbert Yuan said Compass Cove disposed of 2.09 million units at US$0.558 each in a market transaction on 30 October.
As a result, Compass Cove Assets’ direct interest and Norbert Yuan’s deemed interest each fell to 10.85 percent from 11.09 percent previously, the later filing said.
) the plot thickens , for the Yuans 🙂
So the story looks like this (my theory): the Yuans sold 6 hotels at double the price to EHT (from 1xxm to 2xxm), but EHT ” forced” them to subscribe the IPO for 2xxm. Effectively Yuans get paid in EHT shares for the 6 hotels. EHT didn’ t really pay anything, but get a high ” book” value so can artificailly inflate the IPO price.
No wonder Yuans are selling like no tomorrow: whatever cash they can get from the shares, are the actual cash proceeds for their hotels. So their floor is 50%, 39c. Yuans are not the sponsor neither the manager, they have no interest in the reit. They just want to get the cash. The pice collapse not his problem. Anything above 40c doable.
For the REIT price, valuation at 50% price to ” book” start to look correct since book is inflated. Give it another 20% discount for weak sponsor (hotel reit dun get 100% price to book, 80% to 90% only). Looks like the fair price floor is reaching. (Shame to Colliers and HVS who ” value” them at whatever price UC asked)
Guys, relax, it’ s quite fun to watch this. I’ m vested at 55c for quite a big size and I’ m not worried. The hotels are real, revenues are real, and we are not far from fair value. At 50c I will add some more.
(btw I read somewhere the other 12 hotels Yuans ” advise” UC at the acquisition only, not UC buy from the Yuans. Can someone with deeper info check this ? )
It will be painful to watch for sure for vested individuals like myself, but that’s the price of buying instruments that have double digit yields. I am holding onto the bitter end.
This tanked today to 0.475. What is your view?
Yes, I have been cut by a falling knife. I am holding onto my position for now and see no reason to let go given the possibility of such juicy dividend yields. As the price goes lower below 45cts, I may increase my position.
There is no juicy lo g term yields. The counter party to the Master Leases to each hotel is opaque and can just expiry quickly …its like buying Malaysian property with guaranteed rental for 3 years…after that the rent plunge and so does the property.
The master lease structure used by EHT can easily be abused to deceive investors.
Hi I am sgbuffett from sgtalk forum.
I have issued warning to sell and get out.
This EHT asset valuation is heavily inflated and with. $465M in debt …my assessment is the stock is not a buy at any price level.
Detail analysis is found in my thread.
https://sgtalk.org/mybb/Thread-Eagle-REITs-5-months-after-IPO-be-warned-GET-OUT
Plse be warned. I am a deep value investor and typically do forensic analysis before risking my money my various stock picks and warnings can be found in sgtalk forum.
is there still margin of safety for now?