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SC Group chairman has a plan for Eagle Hospitality Trust, but will investors let him in?

The Edge Singapore
The Edge Singapore 12/18/2020 07:00 AM GMT+08  • 5 min read
SC Group chairman has a plan for Eagle Hospitality Trust, but will investors let him in?
Eagle Hospitality Trust's trustee is recommending a unit owned by SC Group to be the new manager of the trust.
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Suchad Chiaranussati, the founder and chairman of SC Group, is something of an environmentalist. His office is in a charming blackand-white bungalow reminiscent of colonial times, and boasts a plant biosphere, where plants grow with the help of moisture from the air.

In an interview over Microsoft Teams, Chiaranussati focused on something else besides his beloved plants — Eagle Hospitality Trust (EHT), which is a stapled security and comprises a dormant business trust (BT) and a REIT, EH-REIT.

EHT’s unitholders will be voting on Dec 30 on as many as four resolutions. In Resolution 1, EHREIT’s trustee (which is DBS Trustee) proposes that SCCPRE Hospitality REIT Management, owned by SC Group and controlled by Chiaranussati, 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 up to 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 up to 140 million stapled securities will be for the payment of base fees to the SC Group as REIT manager and trusteemanager for FY2021 and FY2022.

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. While the EGM is on Dec 30, the last date and time to lodge proxy forms and to pre-register for the EGM is at 2pm on Dec 27.

Chiaranussati is not new to managing a hotel REIT. In 2012, SC Group — which has assets under management of US$7.3 billion — took over and turned around Japan Hotel & Resort (JHR), a JREIT. “We took JHR from a failed REIT and turned it around,” Chiaranussati says. “We feel EHT needs the care of steady hands and rational decision-making to turn it around,” he says. A definite plus for SC Group is the intention to change EHT’s name at some point in the future if the vehicle survives.

Queen Mary’s contribution

In the meantime, Chiaranussati will have to deal with Queen Mary Long Beach, and 17 hotels, of which 15 are closed. “We looked at the assets. They are not all bad assets. There were some properties, which, due to the condition of the local market and competitive environment, may not be desirable to own. And the Queen Mary. Nevertheless, she was generating some cash flow,” Chiaranussati says.

According to him, Queen Mary’s net operating income (NOI) contributed around US$12 million to EHT in 2019. “The Queen Mary provides 10-15% of distributable income. Circumstances around her might look questionable. If you sell her today, it will create no value and EHT loses US$12 million a year. We will do some renegotiation with the City of Long Beach. We will restructure and [attempt] to get some economic value out of it, then consider whether we want to dispose of her,” Chiaranussati explains.

A Bank of America US$125 million facility — subject to SCCPRE Hospitality REIT Management taking over as manager — should be sufficient for both operating expenditure and some capital expenditure for the next two to three years, says Loh Hwee Long, CEO of SCCPRE Hospitality REIT Management.

“We are not taking over a portfolio that is running. It is a cold start, 15 of 18 assets are closed so there is a ramp-up effect, and negative cash flow for the initial year. As we ramp up, we can get assets up and running. We hope to bring the portfolio to cash-flow-positive in a reasonable amount of time and that will help to fund forward capital requirements,” Loh elaborates, indicating that EHT could be cash-flow positive by 2022.

First though, SCCPRE Hospitality REIT Management will have to be voted in by Resolutions 1 to 4 at the EGM on Dec 30. On Nov 30, the Monetary Authority of Singapore (MAS) directed EHT’s trustee to remove the manager and appoint a new one. On Dec 10, Urban Commons, which owns the manager, filed an appeal to the Minister of Finance against this directive. “Notwithstanding the appeal, the Direction from MAS dated Nov 30 currently stands and the trustee affirms its intention to comply with the MAS direction,” EHT’s trustee says.

A PhillipCapital research note cautions: “There appears to be limited options for securityholders: Accept the new managers or undergo a winding-down or sale of existing assets. With the approval, additional funding of US$125 million will be provided to allow the assets to re-open and maybe revalued upwards. Downsides are dilution of the share price through issuance of new share for management fee payment, should the stock resume trading again. There is also risk of the restructuring failing or the proposed bridging loan conditions not being met. Post relisting, there is also the need for another round of equity financing.”

Chiaranussati for his part is aware that securityholders are in a bind. “From day one, when we came into this situation, we had not considered the option of liquidating. That will harm the interest of securityholders. We looked at whether this asset can be turned around and if so, can we recover some money back to the 3,049 unitholders. We’re coming in to turn [Eagle] around.”

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