SINGAPORE (Nov 4): Eagle Hospitality Trust did not have an auspicious beginning on the Singapore Exchange. Apart from the retail portion’s not being fully subscribed, EHT securities fell below the IPO price of 78 US cents on the first day of trading on May 24. Units in the trust have fallen more since then, ending at 56 US cents on Oct 31.
A trend that has not escaped observers is the regular selling by cornerstone investors, in particular Claydon Hill Investments and Compass Cove Assets. Claydon Hill had divested five or six hotels into EHT. Since Aug 20, Claydon Hill’s stake has fallen from 16.3% to 13.4%, while Compass Cove Assets’ stake is down to 12.41% from 12.99%. Wealthy Fountain Holdings, which belongs to Tong Jinquan, a cornerstone investor at IPO, has sold down its stake from 7.61% to below 5%.
Concerns over the trust’s second-highest value asset and largest contributor to net property income (NPI) (see table), the Queen Mary Long Beach, a retired ocean liner, just will not go away. This is because of a 2017 marine survey report that has been recently cited by the City Council of Long Beach, California in relation to repairs that need to be done to the ship.
Repairs needed
On Sept 23, John Keisler, Long Beach director of economic development, wrote to the City in his memo: “There are several Queen Mary and Dome projects that will take place over the coming months, while other projects described in the marine survey report are expected to be completed over many years.”
Keisler subsequently wrote two letters to EHT sponsor Urban Commons about the need for repairs to the ship, on Oct 1 and 25. In response to queries by SGX, EHT’s manager disputes the marine survey results presented by the City, which identified short- and long-term repairs costing at least US$235 million ($319.8 million) (see Saving Queen Mary).
The next step for the Queen Mary, according to Keisler, is lifeboat removal at US$2.3 million and shell and bridge wings replacement at US$4.7 million. This ties in with the US$7 million that EHT’s manager mentions in its reply to SGX queries. “Presently, the City only requires repairs with respect to the noted items, which have a total estimated cost of up to US$7 million; such items will be paid for by Urban Commons utilising the multiple capital reserve mechanisms built into the leases,” EHT’s manager replied on Oct 29.
Not quite clear on lease terms, valuation in REIT
According to the City’s Sept 18, 2018 report on the Queen Mary, the council approved a 66-year lease with Urban Commons in November 2016, for the operation, management and preservation of the ship; and rights to develop the 64-plusacre site adjacent to the vessel.
The ground lease terms comprised a base rent for the ground lease of US$300,000 a year, passenger fee rent of about US$2.1 million a year split between Urban Commons and the City, pass-through rent of US$89,000 a year and 10% of net site revenues after a priority rate of return of 9%.
In May this year, the Queen Mary ground lease was sold into EHT for US$139.7 million. At the time, the prospectus pointed out that this was a “discount” to the ship’s valuation of US$159.4 million by HVS and US$179.7 million by Colliers. The valuation is based on the discounted cash flow method for the 66-year lease. Urban Commons is the master lessee for the Queen Mary, on a triple net lease, with a base rent of US$10.5 million a year.
In May, during the IPO process, EHT’s prospectus said the sponsor negotiated a revised ground lease with the City (collectively with two other ground leases for adjacent land and water from the City and/or Port of Long Beach known as the Queen Mary Ground Lease) extending the term significantly, and ensured early capital expenditure contributions of US$23.5 million from the City, to reopen and repurpose unutilised public and revenuegenerating spaces, including restaurants and event venues, as well as perform structural works on the ship.
Did IPO proceeds go towards capital reserve?
Urban Commons raised US$453 million from the IPO of EHT. The prospectus said the proceeds would go towards payment to the vendors for the purchase price of the initial portfolio; payment of the related acquisition costs of the initial portfolio; payment of issue and debtrelated costs; and working capital.
Whether these monies will go towards the upkeep of the ship is not clear, and EHT’s manager had not replied to questions on the sale of the 66-year lease into the real estate investment trust (REIT) at press time. In an earlier interview, in June, Salvatore Takoushian, CEO of EHT’s manager, assured The Edge Singapore that reserves were in place to address the ship’s repairs. These are stipulated in the lease agreement with Urban Commons and the City.
Details of the reserves are in the City’s September 2018 presentation. The Base Maintenance and Replacement Plan (BMRP) is to be funded by Urban Commons from a percentage of site revenues, and the Historical Preservation and Capital Investment Plan (HPCIP) is to be funded by the Queen Mary rental streams. The City committed US$23 million for urgent repairs through the HPCIP, of which US$5.8 million are from existing reserves and US$17.2 million in bonds. The City and Urban Commons agreed to invest up to 10 years of rent revenues towards the servicing of the bonds.
What happens to Queen Mary in event of default?
In the event of default of the Queen Mary ground lease terms by Urban Commons, the City has the right to terminate the ground lease only after a 60-day cure period, or longer, if more time is reasonably necessary, EHT’s manager says.
If the City terminates the ground lease and takes control of the ship, it is unclear what part of the lease or ship EHT’s security holders will be entitled to.
At any rate, UOB Kay Hian has calculated that if the ship were excluded from the portfolio, EHT’s FY2020F distribution per unit would drop by 22% from 6.60 US cents to 5.12 US cents, while its net asset value per share would drop from 89 US cents to 69 US cents. The 18 assets in the REIT were valued at US$1.27 billion as at June 30, but would fall to US$1.1 billion without the Queen Mary. At the same time, gearing would rise to 42.4%, from 37.5% as at June 30. EHT reports its 3QFY2019 results on Nov 13.
Urban Commons remains an unknown sponsor to local investors. It is also the master lessee of the hotels in the portfolio, not just of the Queen Mary. Its total master lease rents, according to the prospectus, amount to US$58.2 million. EHT’s forecast NPI for FY2020 is US$78.3 million.
Substantial security holders are obviously concerned. That is the reason why, despite EHT’s unit price’s fall to 56 US cents, yields remain at 9.14%, excluding the Queen Mary’s contribution, and at 11.8%, including her contribution. This could also be the reason the likes of Wealthy Fountain decided to cut its losses and move on.
