The long awaited circular on Eagle Hospitality Trust’s options was issued late on Dec 8. Stapled securityholders get to vote on as many as four resolutions. The EGM is on Dec 30, but the last date and time to lodge proxy forms and to pre-register for the EGM is at 2pm on Dec 27. (EHT is a stapled security and comprises a dormant business trust (BT) and a REIT, EH-REIT.)
None of the resolutions are friendly to minority stapled securityholders. The choices are stark. In Resolution 1 EH-REIT’s trustee (which is DBS Trustee) proposes SCCPRE Hospitality REIT Management Pte. Ltd, owned by SC Group, 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 to base fee to a minimum of US$4.5 million or 10% of distributable income whichever is higher (clearly US$4.5 million). The independent financial adviser says the base fee is on "normal commercial terms and is not prejudicial to the interests of EHT and its minority stapled securityholders". Resolution 2 is an extraordinary resolution and may need a 75% vote in favour to pass.
Resolution 3 is to appoint a new trustee manager of EH Business Trust.
SEE: Eagle Hospitality Trust trustee proposes SCCPRE Hospitality REIT Management as new REIT manager
Resolution 4 is related to resolution 2 and asks securityholders for permission to issue 140 million new stapled securities - which is around 16% of EHT’s stapled securities in issue. 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 140 million stapled securities will be for the payment of base fees to the SC Group and the new trustee manager for the BT (also SC Group) for FY2021 and 2022.
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.
EHT’s equity as at Sept 30 stood at US$148.9 million, as total liabilities are US$630.0 million and total assets are US$778.9 million. According to the circular, the net proceeds from a sale of assets at the very best would be US$0.171 per stapled security. The breakeven discount is 11.9%, that is if the assets are sold below book value by as much as 11.9%, stapled securityholders could get nothing. While nothing is certain, as a caveat, if the US hospitality sector gets going again during the sale period, the hotels could fetch more than NAV. But this outcome is unlikely.
Minority investors may believe that resolution 5 offers them the best chance to get some cash back. But they may need to check the major securityholders list. Gordon Tang holds 8.57%, and Jane Yeo - through Gold Pot in which Gordon Tang has an interest - holds 5.88%. If these two securityholders vote for resolutions 1 to 4, EHT could get a new manager. We do not know who has been “brought over the hill” so to speak.
Another point to note is that some of the debt has been negotiated based on a change in manager. According to the circular a proposed bridge facility will be conditional on the appointment of the new manager and ‘definitive documentation’. Also, the issue of alignment in the immediate term may need to be addressed. In Singapore's external manager model, REIT investors look for interests of managers and sponsors to be aligned with those of minority unitholders and stapled securityholders. It is not clear that the new manager's interests are immediately aligned with EHT's minority stapled securityholders.
Separately, for the purposes of the EGM. can minority investors get to vote for resolution 5? The arithmetic does not look in favour of this. We will know by the end of the year.
