The long-awaited circular on the options from Eagle Hospitality Trust (EHT) was issued late on Dec 8. Unitholders get to vote on as many as four resolutions. The EGM is on Dec 30, but the last date and time to lodge proxy forms and to pre-register for the EGM is on Dec 27, 2pm. (EHT is a stapled security and comprises a dormant business trust (BT) and a REIT, EH-REIT.)
None of the resolutions are friendly to minority stapled securityholders. The choices are stark. In Resolution 1, EH-REIT’s trustee (which is DBS Trustee) proposes that SCCPRE Hospitality REIT Management, owned by SC Group, be appointed as the new manager.
Resolution 2 is a vote to change the trust deed so that SC Group can get a base fee for FY2021 and FY2022. EHT’s base fee was originally 10% of distributable income, of which there is none. The trust deed changes the base fee to a minimum of US$4.5 million ($6 million) or 10% of distributable income, whichever is higher. Resolution 2 is an extraordinary resolution requiring 75% approval.
Resolution 3 is to appoint a new trustee manager of EH Business Trust, which would also be a unit of SC Group. Resolution 4 is related to Resolution 2 and asks securityholders for permission to issue 140 million new stapled securities — which is around 16% of EHT’s stapled securities in issue — for the fees to SC Group. The issue price would be based on the NAV of EHT per stapled security which was US$0.171 as at Sept 30, if EHT remains suspended. The 140 million stapled securities will be for the payment of base fees to the SC Group as REIT manager and trusteemanager for FY2021 and 2022.
Resolutions 1 to 4 are interdependent and if any one resolution does not pass, then stapled securityholders get to vote on Resolution 5, for a voluntary winding-up of EHT.
Questions on due diligence at IPO
The original 20-year master leases at IPO clearly boosted valuations when the IPO prospectus claimed that EHT’s 18 properties, including an 80-year old ship, the Queen Mary Long Beach, were valued at US$1.2 billion, raising questions on due diligence by the investment banker. A sharp knife has been taken to this valuation and the portfolio was last valued at US$726.9 million, and US$899.6 million on a stabilised basis.
EHT’s equity as at Sept 30 stood at US$148.9 million, as total liabilities are US$630 million and total assets are US$778.9 million. According to the circular, the net proceeds from a sale of assets at the very best would be US$0.171 per stapled security. The breakeven discount is 11.9%; that is, if the assets are sold below book value, stapled security holders could get nothing. While nothing is certain, as a caveat, if the US hospitality sector gets going again during the sale period, the hotels could fetch more than NAV. But this outcome is unlikely in the near term.
Financing costs are likely to be a high bar. EHT defaulted on its loans, and is operating under forbearance from its lenders. Bank of America had share pledges for 15 hotels, one hotel has a mortgage from Wells Fargo, and two hotels were financed by CMBS (commercial mortgage-backed securities). The cost of this debt, if renewed, is high. Cost is around 10% for a US$125 million tranche, and including $360 million debt, average cost will be 6.7%. As other REITs are getting debt ranging from below 2% to around 3.5%, 6.7% is high.
But consultants and the trustee see it as better than the option of liquidating the assets. Moreover, the debt has been negotiated based on a change in manager. For instance, according to the circular, a proposed bridge facility will be conditional on the appointment of the new manager and “definitive documentation”.
Without additional new capital from the proposed bridge facility, there may be no reasonable prospect for EHT to continue as a going concern. In a release on Nov 9, the trustee and its consultants say that without new managers, the relevant lenders may not be willing to grant any further forbearance and/or waivers in respect of payments and other obligations under the EHT debt facilities.
Minority investors may believe that Resolution 5 offers them the best chance to get some cash back. But they may need to check the major securityholders’ list and the arithmetic. Gordon Tang holds 8.57%, and Janet Yeo — through Gold Pot in which Tang has an interest — holds 5.88%. If these two securityholders vote for Resolutions 1 to 4, EHT could get a new manager. We do not know who has been “brought over the hill”, so to speak, but DBS Trustee and its consultants are actively engaging these securityholders.
The argument for Resolutions 1 to 4, the trustee and its consultants reason, is that the new managers will try to stabilise the operations of the properties and EHT, and satisfactorily resolve the outstanding issues including loan defaults. This includes implementing a plan to re-open the properties, negotiating hotel management agreements and franchise agreements, securing capital investment, restructuring EHT’s borrowings and rebalancing EHT’s portfolio.
As the existing master lease agreements have been terminated by the master lessors, the new managers would need to activate EH Business Trust to be the master lessees of the properties. Once the new master lessors obtain possession of the properties, the new manager’s plan is to work closely with hotel managers and franchisors to reopen and operate the hotels so that revenue can flow.
While some unitholders have pointed out there is no alignment with the new manager, the effort to kick-start operations and rehabilitate the hotels would require compensation. SC Group will be taking its $4.5 million base fee in units for only two years, after which the fee structure will revert to 10% of distributable income. We will know whether EHT gets a new lease of life, or winds up in liquidation with a sale of assets by the end of this year.