On Dec 22, Urban Commons, the erstwhile sponsor of Eagle Hospitality Trust (EHT), said through a press release that a substantial amount of EHT’s cash of around US$25 million “has been spent on professional consultants who are, surprisingly, not collaborating with the sponsor to find a way forward for the benefit of securityholders”. EHT is a stapled security comprising EH-REIT and EH-Business Trust. EH-Business Trust is now dormant but would be activated in the event that SCCPRE Hospitality Management, a unit of SC Group, is voted in as REIT manager, as proposed by DBS Trustee and its consultants Moelis & Company.
Urban Commons put forward a plan to resuscitate EHT with two resolutions to be voted on in an EGM on which details are as yet unknown. Resolution 1 is to recapitalise the trust through a rights issue to raise US$50 million at US$0.075 per unit. Resolution 2 is to retain the current REIT manager.
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“We are working hard to engineer the best deal possible for securityholders, by considering a variety of different options for the REIT. This includes a whole spectrum of possibilities, such as the possible entry of a white knight, as well as the potential refinancing or a unique recapitalization plan that suits this unique scenario,” says Howard Wu, founder and principal at Urban Commons.
“While securityholders may feel they are left with few choices, we believe that presenting additional options at our proposed EGM will help them see the potential for their REIT, as well as our continued commitment to help weather the storm,” Wu adds
By way of background, and as disclosed in the prospectus, the sponsor was required to provide 75% of the annual fixed rent across the 18-asset portfolio in security deposits. That works out to be US$43.7 million (representing nine months of fixed rent) in security deposits. At the time of the IPO, the sponsor funded US$23.7 million in cash. The sponsor indicated in the prospectus that they would provide the balance of US$20.0 million by way of letter of credit on or around listing date. This did not materialise.
In May, according to an EHT announcement, EH-REIT was in default of a US$341 million loan from Bank of the West in the United States. This was because Urban Commons as master lessee had failed to pay its master lease rent. Elsewhere, Urban Commons defaulted on management agreements to the extent that 15 out of 18 properties (including Queen Mary Long Beach) are currently not operational.
SCCPRE was chosen as a candidate for incoming REIT manager in an RFP (request for proposal) exercise which started in July this year. On Dec 8, DBS Trustee acting on behalf of unitholders issued a circular with five resolutions to be voted on in an EGM at 2pm on Dec 30. Urban Commons took part in the RFP process where its proposal involved recapitalisation through a rights issue.
SEE:EHT sponsor expresses doubt over SC Capital's proposal to replace existing REIT manager
Under SCCPRE’s proposal there are four interdependent resolutions that need to be voted on before SCCPRE can be appointed the new manager. SCCPRE’s plans to stabilise the REIT include negotiating a US$125 million facility with bankers to provide sufficient liquidity to reopen EHT’s properties and provide the trust with sufficient working capital for two years.
While EHT’s securityholders have no good options, the SCCPRE proposal is less dilutive, with a timetable to stabilise the properties such that they would eventually be operating cash flow positive by 2023.
Of course, one of the pertinent questions that needs to be answered was put to SCCPRE during a recent dialogue session by a securityholder. “Will SCCPRE pursue legal recourse or civil liabilities against DBS Trustee, the issue manager, the financial adviser, the ex-reit manager and sponsor for this sham IPO after their appointment?” The sole issue manager and financial adviser was DBS Bank.
SCCPRE is perhaps not the right entity to answer this question. The question should be rephrased thus to DBS Trustee, DBS Bank, and SGX RegCo: was due diligence properly undertaken for EHT’s IPO and who is liable for the loss of US$565 million in IPO monies? Any answers? Perhaps an answer to this question would make securityholders more amenable to vote in favour of resolutions 1 to 4 as set out in the Dec 8 circular.