SINGAPORE (April 20): Eagle Hospitality Trust’s portfolio - comprising of 18 assets including the famed Queen Mary - was valued based on its master leases by two valuers. The master lessee, Urban Commons, is also the sponsor and owner of EHT’s manager. In responses to the queries from the SGX, EHT’s manager revealed that the master lessee has not paid the master lease rent, as part of the master lease agreements, for the months of January, February and March this year.  

“The fixed rent for the months of January 2020, February 2020 and March 2020 which were due in February 2020, March 2020 and April 2020 respectively, have not been paid. The variable rent for the first quarter of 2020, which is due in April 2020, has also not been paid,” EHT’s manager said in response to queries from SGX.

The announcement added that all fixed rent payments for the months from May 2019 to November 2019 have been paid by Urban Commons within the same month on which the fixed rent was due. For the month of December 2019, a substantial portion of the fixed rent was paid within the same month on which the fixed rent was due, with the balance paid in January.

As part of the master lease agreement, Urban Commons had agreed to furnish a security deposit representing 75% of the annual fixed rent of the portfolio to EHT, which was US$43.7 million. At the time of the IPO in May last year, the sponsor funded US$23.7 million in cash and would provide the balance US$20 million by way of a letter of credit (LoC). Urban Commons managed to eke out a further US$5 million in cash, bringing total security deposits to US$28.7, but US$15 million short of what was announced in the prospectus.

According to various statements, EHT’s manager and the REIT trustee (which is DBS Trustee), Urban Commons had 180 days to find a ‘cure’ for not providing the full security deposit.

When asked by SGX whether DBS Trustee was aware of the deviations of the payment terms of the master lease rental and if so why it agreed to it and did not disclose this breach to unitholders, the trustee replied: “The REIT Trustee did not consider the financial resources of the Master Lessees at the relevant times as the REIT Trustee’s concerns were on preserving the master lease agreements, which were an essential feature of the structure of EHT as set out in the Prospectus.”  It should be noted that DBS was the sole financial adviser and manager of EHT’s IPO.

On Mar 24, EHT’s manager announced that it had defaulted on a US$341 million loan from Bank of America and its units were suspended from trading on the SGX. The default was blamed on Urban Commons failure to pay the agreed rent.

In the meantime, the Monetary Authority of Singapore announced, on Apr 20, that it has directed EHT’s manager to restore its minimum base capital and financial resources to comply with MAS’ requirements; the manager has been in breach of these requirements since December 2019, MAS reveals. The breaches were uncovered and revealed to MAS this month, the regulator adds.

DBS Trustee is regulated by MAS and there are penalties if the trustee did not act in full compliance of the Code on Collective Investment Schemes. The trustee has a duty to act in the best interests of unitholders.  

EHT’s saga could dent the reputation of professional valuers in Singapore further. Their reputation was already negatively impacted in 2016 and 2017, when Sabana Shariah Compliant Industrial REIT attempted to acquire master leased properties at higher valuations than if they were rented at market rents. At the time, minority unitholders drew attention to inflated valuations, and questioned the duty required of trustee and REIT manager.

This time round, the regulators are scrutinising sponsor, REIT manager and trustee.