SINGAPORE (July 10): Increasingly, questions are arising from last May’s initial public offer (IPO) of Eagle Hospitality Trust (EHT). Among other things, was the IPO an elaborately thought out financially engineered transaction to net the sponsor, Urban Commons, the monies? What due diligence was undertaken by the sole financial adviser and issue manager? Now, FTI Consulting has been tasked to find answers.
On June 5, the Monetary Authority of Singapore (MAS) and the Criminal Affairs Department (CAD) of the Singapore Police Force announced they have launched a joint investigation into current and former directors as well as officers responsible for managing EHT, in connection with suspected breaches of disclosure.
“The scope of the investigation will be widened if the evidence obtained reveals that other offences may have been committed,” the MAS announcement said.
Without running ahead of the investigations, it appears increasingly clear that Urban Commons had no intention of honouring the agreements set out in the prospectus. Almost from day one — the final prospectus is dated May 16, 2019 and the first day of trading was May 26, 2019 — the problems started.
In an ill omen, EHT’s units closed at US$0.73 ($1.02) on the first day of trading because one of the underwriting banks sold four million units at US$0.73. Since then EHT never recovered to its IPO price of US$0.78 and rather ignobly ended its trading life at US$0.137, valuing the trust at US$119 million. The number of units as at May 15, when EHT’s 1QFY2020 results were released, was 872.75 million. EHT’s unit price stayed above US$0.60 from its IPO till October. Prices took a dive when the Yuan family started selling. Although the divestment started in August last year, it was only in October that it became a torrent. All the time though, the net asset value of EHT stood at around US$0.88.
On Aug 19 last year, the Yuan family — which were shareholders of a couple of funds holding the ASAP6 properties and had subscribed to the IPO — started selling. ASAP6 comprised six out of 18 properties, namely Sheraton Denver Tech Center, Crowne Pla-za Dallas Near Galleria-Addison, Hilton Houston Galleria Area, Hilton Atlanta Northeast, Renaissance Woodbridge and Doubletree by Hilton Salt Lake City.
The Queen Mary alert
The Edge Singapore realised something was amiss when the Long Beach media reported that The Queen Mary Long Beach, EHT’s second largest asset, needed a large amount of funds for its upkeep. In October last year, we had said based on documents and news reports that Urban Commons had failed to meet obligations under The Queen Mary ground lease agreement to make certain repairs. In addition we pointed out that the City of Long Beach’s economic director had warned Urban Commons about the possibility of a default. EHT’s manager promptly denied this.
Finally, on June 21 this year, EHT’s manager acknowledged that Urban Commons had defaulted on certain lease agreements with the City of Long Beach.
Last year, The Edge Singapore viewed documents showing that Urban Commons was paying a ground lease of around US$300,000 per annum for The Queen Mary. But according to EHT’s IPO prospectus, Urban Commons sold The Queen Mary Long Beach into the REIT for US$139.7 million and the valuation adopted was US$159.4 million.
These valuations were based on a 20-year master lease where the annual revenue was forecast at US$78.7 million and gross operating profit was forecast at US$23 million. These forecasts were however inflated, given that the fixed rent from Urban Commons’ master lease was meant to be US$10.4 mil-lion a year, with rental escalation of 2% per annum from 2020 onwards.It also begs the question whether Urban Commons was likely to pay that rent — but that answer is no.
The Queen Mary was acquired in April 2016 by Urban Commons, and renovation works impacted revenues. “From FY2017 to FY2018 as the property continues to stabilise, gross operating revenue increased by 5% from US$57.8 million to US$60.6 million, and gross operating profit increased by 72.7% from US$6.5 million to US$11.2 million,” the prospectus says of The Queen Mary. How revenues could surge to US$78 million by 2020 requires a leap of faith or a vivid imagination.
Series of default notices
On June 21, EHT’s manager announced that Urban Commons had not paid transient occupancy taxes (TOT) and tourism business improvement district (TBID) assessments to the City of Pasadena (for its hotel there) from May 2019 to February this year. EHT was listed in May 2019. This is probably an indication that Urban Commons hatched an elaborate scheme to take the IPO monies.
Meanwhile, EHT’s manager announced on April 24 that the master lessees of 16 hotels had received notices of default from their respective hotel managers caused by the failure of the master lessees (that is Urban Commons) to provide and maintain sufficient working capital for the hotels’ operations, and additional defaults resulting from the failure to pay management fees and failure to make funds available for the payment of hotel operating expenses.
The master lessees of the three hotels in Denver received further notices of default be-cause of the failure by Urban Commons to pay key money (see sidebar) of US$3.85 million.
On June 21 this year, EHT received a notice of default from the City of Long Beach in relation to the lease agreement with The Queen Mary because Urban Commons failed to pay monthly TOT amounts to the City of Long Beach for 2019 and 2020.
These defaults and announcements are all indications that the sponsor had no good intentions for the IPO.
In his governance for the stakeholders website, associate professor of Accounting at NUS Business School Mak Yuen Teen asks a ques-tion that was on the mind of investors, analysts and even the media: “Trusts are generally highly dependent on sponsors. What is critical are the financial wherewithal and integrity of the sponsors. What due diligence did DBS Bank, as the issue manager for the listing, do with regards to this?”
It appears that we will get a reply soon. EHT’s manager said that FTI will start “a forensic accounting investigation of the Sponsor and the Master Lessees”. The scope of work agreed with FTI for the forensic accounting investigation includes, reviewing the financial statements of the master lessees while comparing the source and uses of funds.
“Depending on the initial outcome and findings of the inves-tigation, the scope of the investigation may be extended,” EHT’s manager says.
Urban Commons is owned by Howard Wu and Taylor Woods. They collected US$565.8 million from the IPO last year. Of this, there would have been fees paid to DBS Group Holdings and so on. That should have left them with more than US$500 million. So, what did they do with the money? Where are the monies? Are they in Cayman registered companies? These questions must be answered if Singapore wants to remain as a thriving REIT hub.
Will the Eagle fiasco impact REIT IPOs and hub status?
“The EHT fiasco has definitely negatively affected the reputation of Singapore’s REIT market which has otherwise been a runaway success over the last 10 years,” notes Havard Chi, director of research at Quarz Capital Asia.
The substantial valuation gap between the REITs with GLC sponsors and corporate governance versus the “independent REITs” which sometimes have similar asset quality as the GLC-linked REITs, is a reflection of the dichotomy, he adds.
Clearly, there was a governance lapse. NUS Business School’s Mak says in EHT’s case, the public tranche was under-subscribed, so maybe retail investors were already sceptical.
“If we look at CapitaLand Mall Trust, which I believe is the first REIT — its prospectus was 311 pages. EHT is not even the record. Yet, important things were not disclosed, and many issues that you expect Singapore Exchange (SGX), the issue manager, trustee, the various other professionals to question were just overlooked,” he says.
Chi says some of the relationships in the external manager model could prove troublesome. “The cross ownership and close relationship between the sponsor, REIT manager and the REIT’s major unitholders can some-times result in critical conflict of interest issues due to the competing goals, influence and lack of independence of each party as can be seen in EHT’s case. These issues can in turn be severely detrimental to minority unitholders,” Chi observes.
Regulation with a lighter touch might incentivise more issuers to list in Singapore, but to the detriment of investors. So far, REITs whose sponsors are not familiar to us, such as Sasseur REIT, EC-World REIT, and Dasin Retail Trust have, to date, paid regular distributions per unit (DPU), unlike EHT.
Yet, the Eagle fiasco could have far-reaching consequences and Singapore’s role as a REIT hub could suffer. “We have already seen a decline of retail interest in listed companies, and we may now be seeing a decline in interest in REITs too, especially as quality is probably declining and investors are left to fend for themselves, with little accountability for the issue manager, trustee and other professionals. I think the listings side of SGX shares a lot of the responsibility too as they just took a hands-off position (with no comments on important omissions) and let the other professionals rubber stamp everything,” Mak explains.
Chi agrees. “Investors who now have learned from this debacle will only continue investing in Singapore REITs and support new IPOs if they believe that their rights are protected. Capital is mobile, investors can allocate to other equity markets where their rights and interests can be better protected,” Chi says.
But not all is lost. “While MAS and SGX have done a tremendous job so far, we urge them to increase their oversight of the REIT sector particularly relating to corporate governance, emphasise on the elimination of conflict of interest issues and ensure independence among the key REIT parties to ensure fair treatment of minority unitholders,” Chi concludes.
