SINGAPORE (May 22): This afternoon, we received an open letter from a unitholder of Eagle Hospitality Trust. The unitholder is clearly concerned that interest payments on the REIT’s loans - US$506.6 million as at Dec 31, 2019- may have been suspended, and the loans may be in default. In fact, in a filing to the SGX, EHT’s manager has already said that EHT has already defaulted on a US$341 million loan because the sponsor, Urban Commons which has two shareholders, Howard Wu and Taylor Woods, did not honour its master lease payments to the trust.

We had drawn unitholders attention on a few occasions to EHT’s valuation. The first warning sign was the manner in which Queen Mary Long Beach, where the sponsors pay a lease to the City of Long Beach of just US$300,000 a year, was sold into the REIT for around US$139.7 million and valued at US$159.4 million. The sponsors would have collected around US$565 million from the IPO proceeds.

Because of the loan default the unitholder suggests that EHT needs a white knight to come in as soon as possible to stabilise the position. “The position” refers to protection from creditors or judicial management for the REIT to reorganise its debts and its interest payment schedule.

“It is possible that creditors may call in an administrator to carry out a forced sale of assets to protect their positions. As we know, this is the worse time to be selling hotel assets and if a foreclosure is carried out, unitholders will suffer,” the EHT unitholder says in the letter.

Based on the filings made by the manager, it is pretty obvious that the sponsors who are also the master lessees, are unable to furnish a full security deposit since May 2019, and unable to pay the master lease rents this year.

At IPO, EHT’s supposed valuation was around US1.2 billion for its 17 freehold properties and the Queen Mary, and its net asset value was supposedly 88 US cents. It listed at 78 US cents, a supposed discount to NAV. Yet, on the first day of trading Bank of America, one of the underwriters sold some 4 million units at around 73 US cents.

At IPO, EHT’s valuations were high - perhaps artificially so- because the two valuers, HVS and Colliers, used a discount to cash flow method to obtain each property’s net present value. Each hotel’s market value was calculated using a master lease based on the property’s 10-year annual rent. Ten of the REIT’s properties are (meant to be) on long leases of 20 years plus 20 while the remaining eight of the properties are on long leases of 20 years plus 14, all commencing on the date of the IPO in May last year.

It is important to draw a distinction between Sabana Shariah Compliant Industrial REIT, which we covered extensively in 2016-2017, when unitholders attempted to remove the manager, and the current case involving EHT. Removing EHT’s manager will not solve anything. Instead, the sponsors, Wu and Woods, should come to Singapore to explain whether they intentionally took the IPO proceeds and decided not to fulfil their fiduciary duties as had been stated in the prospectus, or they were overtaken by events, and blame Covid-19.

EHT’s disgruntled unitholder agrees in the letter. “I am therefore of the strong view that the removal of the existing Manager is NOT the right way to proceed. It will take far too long and carries great risks which include (A) Risk of not being able to find a suitable party [or white knight] quickly (B) Risk of legal challenges from the current Manager (C) Risk of Creditors starting the foreclosure process.”

The best way forward for minority unitholders to recoup anything from EHT would be to request our regulators to start an investigation into how EHT was able to list on the SGX, with a particular focus on the due diligence done by the investment banker that brought the IPO to Singapore.  

EHT’s units have been suspended since Mar 24 this year.