Singapore investors came to know Urban Commons because it was a sponsor to a short-lived stapled security Eagle Hospitality Trust (EHT), and almost all of them are unhappy at the way developments unfolded at EHT and its manager. Whether the collapse of EHT, suspension and eventual delisting of EHT units impacts the Singapore Exchange (SGX) as a hub for REIT listings with overseas assets remains to be seen.
It is also unclear whether promoters and sponsors could continue to use EHT’s model to reap financial benefits for themselves. The attraction of the SGX and the S-REIT model as a listing venue for REITs and business trusts is the external manager model, where the promoter or sponsor is paid a fee through its ownership of the REIT manager. Sponsors can control their REITs with just 20% ownership — in some cases less — and through controlling the manager.
From day one of trading in EHT units, one of the investment banks underwriting the IPO, Bank of America, sold its stake at 73 US cents ($0.98). This was below the IPO price of 78 US cents. EHT’s IPO price was purportedly at a discount to its IPO net asset value of 88 US cents. In the end the NAV turned out to be an engineered NAV with financially engineered valuations, making EHT one of the most obvious financially engineered REITs to be listed on SGX — but not the only one.
According to the Long Beach Post and other US press, EHT’s unitholders were not the only ones suffering losses. A long line of investors, vendors and employees have lined up to litigate against Urban Commons. The Long Beach Post describes these investors as doctors, lawyers, bankers and mortgage brokers who invested in Urban Commons’ hotel investments.
Another line of businesses which provided services to Urban Commons’ hotels have not been paid. These include small businesses and vendors who provided services to the hotels including the Queen Mary Long Beach.
As reported by the Long Beach Post, Urban Commons’s business model was to get investors to buy memberships in the hotels (these hotels were eventually injected into EHT’s IPO portfolio). Each hotel was turned into a limited liability company (LLC). Singapore investors who looked at EHT’s prospectus will find this sounds familiar.
A handful of hotels were near major airports, such as Four Points by Sheraton at San Jose Airport. Some were at resort destinations such as Holiday Inn Resorts Orlando Suites in Florida and, of course, The Queen Mary Long Beach.
Worse than expected
Apparently, the city of Long Beach had already released a document stating — in early 2019 before the IPO — that Urban Commons was not maintaining The Queen Mary which required some US$250 million of repairs. Some of the Queen Mary’s service vendors and employees were being paid late or not at all, the Long Beach Post said.
When this came to light shortly after EHT’s IPO, The Edge Singapore put this to the previous manager, who swatted it away. He said that Urban Commons had already spent US$23 million in capex to upgrade and maintain the Queen Mary. It has since come to light that the US$23 million were bonds raised by the city of Long Beach.
When asked about the valuation of The Queen Mary, the previous manager said it was valued based on its cash flows. Eventually, we realised that The Queen Mary was indeed valued by its cash flows. Except that her cash flows were capitalised for 20 years, and that was the valuation that Singapore investors paid — US$139 million. However, all Urban Commons was up for was US$300,000 a year in the ground lease, and that was not even paid.
What we did not know was that Urban Commons had already had investors in EHT’s portfolio of 17 hotels (excluding The Queen Mary), which it sold into EHT for the IPO. The prospectus stated that the assets came from two portfolios, UHSI Portfolio and the ASAP6 Portfolio. These two entities were in the small print, and we assumed that the two vehicles were private equity companies with investors.
When EHT was listed, we assumed those investors were compensated with the US$568 million raised, or by the issuance of units as was stated in the prospectus.
What happened was that Urban Commons acquired the ASAP6 portfolio just before the IPO, and compensated the vendors of the ASAP6 portfolio with units. It is now clear that the properties in the USHI portfolio had investors as well who lost all their money.
Soon after the IPO, the vendors of ASAP6 — which consisted of a Taiwanese family — started selling their units continuously, obviously creating selling pressure on EHT. Finally, in March last year, EHT’s manager announced it had defaulted on a US$341 million loan from Bank of America. At present, a Commercial Affairs Department (CAD) investigation is ongoing.
Suffice to say that the Monetary Authority of Singapore (MAS) ordered the manager to be removed last year. DBS Trustee, the trustee of the REIT, and the financial adviser Moelis took over to attempt to find a new manager. This was not voted through and in January, EHT entities filed for Chapter 11 protection in the US bankruptcy court. DBS Trustee and Moelis oversaw the Chapter 11 process, with most of the hotels — 15 as at July 30 — sold. The Queen Mary was returned to the city of Long Beach.
The aftermath
Under the Chapter 11 process, 14 hotels were sold for US$481 million. On July 30, DBS Trustee announced a buyer for Crowne Plaza Dallas Near Galleria-Addison (which was not part of the 14 properties) for US$15.5 million. Two remaining hotels have yet to be divested. The monies raised from the sale were not sufficient to pay the secured and unsecured creditors (see table) excluding equity holders, which amounted to approximately US$592 million.
On July 17 at a Securities Investors Association Singapore (SIAS) dialogue session, DBS Trustee pointed out that between April and December last year, various payments under the Master Lease Agreements such as real estate taxes, transient occupancy taxes, penalties and interest, premiums for mandatory insurance, capital expenditure requirements due to poor maintenance and care of the hotels, all had not been paid. Certain expenses related to the franchisors’ fees and expenses dating back to 2019 had also not been paid.
DBS Trustee has also revealed the DBS Bank along with a syndicate of banks took over the US$341 million that EHT had defaulted on.
During a SIAS question and answer session with DBS Trustee and Moelis, investors asked: What level of due diligence (market reputation, financial resources) was done by DBS and SGX on the sponsor at the time of the IPO?
Even prior to Covid-19 effect on the US hospitality market, it would appear that the sponsor has insufficient financial resources to support the master lease rental payments, which is the key supporting point for the asset valuations injected into the REIT at IPO. Many feel that insufficient due diligence was conducted. Could the situation have been avoided?
The reply investors received was: “The listing application process was assessed by the regulators, the Sponsor, the underwriters, and their respective legal advisers, at the time of the IPO, and potential risk factors involved were disclosed in EHT’s IPO prospectus. The listing application process and due diligence were guided and supported with advice provided by an experienced team of external professional parties, including reporting accountants, independent valuers, an independent market research consultant, and legal advisers.”
It is telling that since February and March last year, when Elite Commercial REIT and United Hampshire US REIT listed and led by Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) respectively, no REITs have listed on the SGX. Is this because of the damage done to Singapore’s reputation as a REIT hub for foreign listings? Or is it because of Covid-19?
In the meantime, Dasin Retail Trust has fallen to a new low of 43 cents. Its major unitholder Zhang Zhencheng, pledged 38 million units with CGS-CIMB, and every few days, Dasin Retail Trust’s manager announces that a couple of hundred thousand units are force sold.
Investors are clearly concerned given the EHT fiasco is so fresh in everyone’s mind. Dasin’s yield is high, at around 11% based on its 1H2021 distribution per unit of 2.98 cents, and net asset value of $1.46 as at June 30 translates into a P/ NAV of just 0.38 times.
Still, there continues to be market talk of new listings. The sponsors of a commercial REIT with Australian assets which planned an IPO in late last year appeared to get cold feet. City Developments (CDL) has announced plans to list its UK commercial properties in a REIT. Possibly a Japanese logistics portfolio with a Japanese sponsor is in the works to list here, and even a pure data centre property trust in the form of a business trust could make its way to the SGX.
So far this is talk. And the year is getting old.
Photo: Queen Mary at Long Beach / Reuters
