SINGAPORE (Apr 24): The suspended Eagle Hospitality Trust is a stapled security comprising of EH-REIT which is the active part of the stapled security, and a dormant business trust. In May last year, EHT raised some US$565 million in an IPO. The portfolio comprises 18 assets valued at US$1.27 billion. The portfolio includes the famed Queen Mary Long Beach, a stationary ship that was valued at US$159.4 million.
Queen Mary’s valuation is based on its cash flow. According to valuers HVS and Colliers, Queen Mary’s master lease is for 20 years with an option to extend for a further 14 years. Its base rent is meant to be US$10.4 million a year, and variable rent amounting to 8% of gross operating profit. Among the conditions for Queen Mary’s hefty valuation, and also for the other 17 properties, includes a rental guarantee from the REIT’s sponsor for nine months, the master lease rent, and the variable rent.
Urban Commons is the sponsor of EHT. The owners of Urban Commons, Howard Wu and Taylor Woods, own the manager too. Urban Commons is the master lessee of the properties and pays a ground rent of US$300,000 a year to the City of Long Beach for the Queen Mary.
In the prospectus, HVS, a US valuer, says an estimate of a hotel’s market value under a master lease is based on estimates of the asset’s 10-year annual rent. In addition to the 10-year net rent cash flow forecast, the projected cash flow for year 10 is increased by an estimated growth rate to arrive at the new cash flow for year 11, and capitalised for the remaining term of the property tenure. HVS then applies a DCF rate to arrive at the total investment amount under the master lease arrangement.
Colliers, the second valuer said its valuations were based on the “proposed master lease structure as provided by the client”.
In general, valuations are based on current rents and cash flow, outlook for rents and future cash flow, market transactions, capitalisation rates and discount rates.
Ten of the REIT’s properties are on long leases of 20 years plus 20, while the remaining eight of the properties (including Queen Mary) are on long leases of 20 years plus 14, all commencing on the date of the IPO.
HVS and Colliers would have done the valuations in good faith. But, in a market as deep as the US, there would have been ‘comparables’ with which the valuers should have compared the properties - if not the Queen Mary.
IPO proceeds not used for rental guarantees or master lease rents
Retail investors in Singapore may not have had an opportunity to question the valuers to ask for a second valuation for the properties, excluding the master lease. In Singapore’s external REIT manager model, the trustee has to act in the interest of unitholders. If unitholders could not gain access to question the valuers, the trustee should have done so. In EHT’s case, the trustee and DBS’ equity capital markets division are units of DBS Group Holdings.
During the IPO, while the retail portion of EHT’s IPO was not fully subscribed to, DBS private bank took up around 17% of EHT units for its private banking clients, according to the prospectus. Among the cornerstone investors were Gold Pot, owned by Gordon Tang, Ji Qi, the founder of Ctrip, Qian Jianrong, the former CEO of Chiwayland, and Tong Jinquan.
Tong and Qian have since sold down their stakes to below 5%. The Yuan family, which sold six hotels (the ASAP6) into EHT, also took units. However, they sold steadily from Aug last year to last month when they divested their entire stake to Gordon Tang.
What did Urban Commons do with all the monies it collected, after disbursing fees? We don’t know but they didn’t use it for the rental guarantees, nor, are they using it to pay the master lease rents.
In responses to the queries from the SGX, EHT’s manager revealed that the master lessee has not paid the master lease rent for the months of January, February and March this year.
The announcement by EHT’s manager added that all fixed rent payments for the months from May 2019 to November 2019 have been paid by Urban Commons within the same month on which the fixed rent was due.
As part of the master lease agreement, Urban Commons had agreed to furnish a security deposit representing nine months of the annual fixed rent of the portfolio to EHT, which was US$43.7 million. At the time of the IPO in May last year, the sponsor funded US$23.7 million in cash and would provide the balance US$20 million by way of a letter of credit (LoC). Urban Commons managed to eke out a further US$5 million in cash, bringing total security deposits to US$28.7, but US$15 million short of what was announced in the prospectus.
Hong Kong Style fines?
In 2019, Hong Kong’s securities regulator imposed large fines on international investment banks for failing in their role as sponsors for Chinese IPOs. It also suspended the Hong Kong licence of UBS Securities for a year. The sole financial adviser and manager of EHT’s IPO was DBS.
EHT’s plight only came to light this year when the REIT defaulted on a US$341 million loan from Bank of America. The Monetary Authority of Singapore has since revealed EHT’s manager has been in breach of its minimum base capital and has been directed by MAS to restore the base capital.
MAS and SGX RegCo have said they are looking into possible breaches of relevant laws and regulations as well as listing rules and will take regulatory and enforcement actions where appropriate.
