Is there a difference between the net loss (or net profit) of a company and the gross operating profit of its sole asset?

Of course, there is but it is sorely unappreciated in a Long Beach Post report the other day (6 Dec 2019).

The online publication reported that the Queen Mary operator, Urban Commons Queensway (UCQ), suffered a US$6 million net loss in 2018.


It went on to talk about “discrepancies” that are (apparently) vexing city officials of Long Beach in California.

The “discrepancies” are said to arise because of certain information contained in Eagle Hospitality Trust’s IPO Prospectus.

longbeachpost12.19

The Long Beach report (snippet above) cited the IPO prospectus as saying that Queen Mary achieved "total profit of $11.2 million in 2018, up from $6.5 million in 2017.”

Total profit?

But that’s not what the IPO Prospectus said. Instead, page 154 said, as follows:

gop QM12.19

Gross Operating Profit. Not "total profit".

Gross Operating Profit is the basis on which an 8% variable rent is payable to Eagle Hospitality Trust, on top of a fixed rent. (More on this below).

Now how about the US$6 million net loss suffered by the operator, Urban Commons Queensway (UCQ)?

Firstly, it's UCQ, not Urban Commons LLC.

UCQ is one of several subsidiaries of Urban Commons LLC, which is the Sponsor for the Eagle Hospitality Trust.

UCQ's net loss in 2018 was due to factors including but not limited to:

•​ depreciation and amortization (a significant non-cash expense);

•​ interest expense on borrowings (that have been fully extinguished as a result of the IPO of Eagle Hospitality Trust which paid US$139.7 million for The Queen Mary);

•​ loss of revenue as operations were impacted by US$23.5 million of renovations and operational disruptions.


Eagle Hospitality Trust has clarified these and other inaccuracies in the Long Beach Post report, in a 9 Dec filing to the Singapore Exchange.


queen bar tripadvisorBar on board The Queen Mary. Photo: TripAdvisorOur interest having been piqued, we decided to scour the IPO Prospectus for clarity on The Queen Mary – in particular, what Eagle Hospitality Trust is telling investors about how Queen Mary is forecast to perform.

The financial numbers extracted from pages 158-165 are presented below.

Taken together, they strongly suggest that this ship is a nice asset to have even if there are outstanding issues regarding its physical condition.


But hey, the reality is this ship, which is over 80 years old, is not anymore in its prime. 


1. The Queen Mary is expected to contribute to Eagle Hospitality Trust's revenue and Net Property Income as follows:

Contribution

Forecast Period 2019 (US$’000)

% of portfolio

Projection Year 2020 (US$’000)

% of portfolio

Revenue

8,475

14.5%

12,449

14.1%

Net Property Income

8,475

16.4%

12,449

15.9%

Forecast period: 1 May 2019 to 31 Dec 2019.


2. The Queen Mary will contribute Fixed Rent of US$10.4 million per annum in Forecast Period 2019 with a rental escalation of 2.0% per annum from Projection Year 2020 and onwards.

Annual Fixed Rent (US$)

Variable Rent

US$10.4 million/
US$10.608 million

8.0% of Gross Operating Profit

 

3. The Queen Mary's revenue streams and expenses and profit: 

Room Revenue

F&B Revenue

Other & misc income

Gross Operating Revenue

Operating expenses

Gross Operating Profit

Gross Operating Profit Margin

Forecast Period 2019 (US$’000)

10,551

14,363

33,201

58,115

(38,848)

19,266

33.2%

Projection Year 2020 (US$’000)

15,564

21,096

41,611

78,271

(55,260)

23,011

29.4%



4. The Queen Mary's performance metrics for its rooms. Revenue per available room (RevPAR) is calculated by multiplying average daily room rate (ADR) by the occupancy rate: 

Forecast Period 2019

Projection Year 2020

ADR (in USD)

160.6

162.4

Occupancy Rate

77.5%

75.9%

RevPAR (in USD)

124.5

123.2


There are forecasts and projections for all the other 17 assets (hotels) in the Eagle Hospitality Trust portfolio.

How reliable the forecast period 2019 numbers are will be known pretty soon, in perhaps 8 or so weeks, when Eagle Hospitality Trust announces its FY2019 results.

Certainly the forecasts/projections must have been put together with great care. After all, what is not well known is that there was a reporting auditor, KPMG LLP in Singapore, who scrutinised the work and put down the following words in the Appendix of the IPO prospectus:  

Profit Forecast
Based on our examination of the evidence supporting the relevant assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the Profit Forecast. Further, in our opinion the Profit Forecast, so far as the accounting policies and calculations are concerned, is properly prepared on the basis of the assumptions, is consistent with the accounting policies set out on pages C-13 to C-21 of the Prospectus, and is presented in accordance with International Financial Reporting Standards (but not all the required disclosures) as issued by the International Accounting Standards Board (“IASB”), which is the framework to be adopted by EH-REIT in the preparation of its financial statements.

Profit Projection
The Profit Projection is intended to show a possible outcome based on the stated assumptions. As EH-REIT is newly established without any history of activities and because the length of the period covered by the Profit Projection extends beyond the period covered by the Profit Forecast, the assumptions used in the Profit Projection (which include hypothetical assumptions about future events which may not necessarily occur) are more subjective than would be appropriate for a profit forecast. The Profit Projection does not therefore constitute a profit forecast. Based on our examination of the evidence supporting the relevant assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the Profit Projection. Further, in our opinion the Profit Projection, so far as the accounting policies and calculations are concerned, is properly prepared on the basis of the assumptions, is consistent with the accounting policies set out on pages C-13 to C-21 of the Prospectus, and is presented in accordance with International Financial Reporting Standards (but not all the required disclosures) as issued by the IASB, which is the framework to be adopted by EH-REIT in the preparation of its financial statements. Events and circumstances frequently do not occur as expected. Even if the events anticipated under the hypothetical assumptions occur, actual results are still likely to be different from the Profit Projection since other anticipated events frequently do not occur as expected and the variation may be material. The actual results may therefore differ materially from those projected. For the reasons set out above, we do not express any opinion as to the possibility of achievement of the Profit Forecast and Profit Projection. Attention is drawn, in particular, to the risk factors set out on pages 72 to 106 of the Prospectus which describe the principal risks associated with the Offering, to which the Profit Forecast and Profit Projection relate and the sensitivity analysis of the Profit Forecast and Profit Projection set out on pages 173 and 175 of the Prospectus.

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