Eagle H Trust needs an independent manager

THE best way to restore confidence in Eagle Hospitality Trust (EHT) is for the current Reit manager to be replaced by one that is competent and independent of EHT's sponsor and master lessee Urban Commons (UC).

This should be done through an open tender run by EHT's financial advisers, to extract the best value for EHT unitholders who face potential dilution if a new controlling party comes in while EHT's units are suspended at rock-bottom prices.

EHT's current Reit manager, Eagle Hospitality Reit Management, was appointed by UC. At the moment, its non-executive chairman is Howard Wu and its non-executive deputy chairman is Taylor Woods.

Both Mr Wu and Mr Woods have since announced that they will resign from their board positions, effective May 26. But both continue to wield substantial influence over EHT as joint owners of both UC as well as of the Reit manager. Given their track records, it will be to EHT unitholders' benefit if a new manager is appointed whose interests are more aligned with those of minorities.

UC delivers few benefits

In the latest plot twist to the EHT saga, it was announced last week that EHT could be on the hook for a portion of the US$44.6 million hotel management liabilities racked up by UC. This is because EHT had been used as a guarantor for UC's obligations to some hotel managers.

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Unbeknownst to the board of the Reit manager, these so-called "non-disturbance" agreements had been drawn up by Mr Wu and Mr Woods from Oct 31, 2019 to Feb 14, 2020. Hotel managers for 16 of EHT's 18 hotels have since reported payment failures by UC.

In doing so, Mr Wu and Mr Woods effectively transferred payment risks off UC and on to the shoulders of EHT unitholders.

The prejudicial guarantee agreements were never internally reported or disclosed until last week, in clear breach of the Reit manager's own compliance policies. Mr Wu and Mr Woods blamed the oversight on board "miscommunication".

This recently uncovered transgression is only the latest in a pattern of material disclosure breaches that have plagued EHT since its initial public offering (IPO) in May last year.

There are now sufficient grounds to argue that the Reit manager of EHT, its directors and substantial shareholders (Mr Wu and Mr Woods) have failed in their duties to unitholders.

Some unitholders would now like to see the Monetary Authority of Singapore cancel the Reit manager's capital markets services licence entirely and remove it from control. Furthermore, UC's presence and influence at EHT may also be unnecessary.

UC said in a statement on Wednesday that it aims to bring on board a new strategic partner "at the manager level" to stabilise operations. It said it has been speaking to potential Asia-based partners since six months ago.

Market sources told The Business Times that UC is leaning towards a partnership with the Chiu family of Hong Kong-listed Far East Consortium International. A spokesperson for Far East Consortium International said: "It is our company policy not to comment on any rumours."

But the selection of this partner appears to still be in the control of UC. News of the partnership was announced to EHT unitholders via a letter from UC that was posted on SGXNet.

While UC is EHT's Reit sponsor in name because it divested its assets into the Reit, the benefits of having UC as a sponsor are questionable.

UC never took up a controlling stake in EHT. The master lease agreements (MLAs) that UC has with EHT, marketed by IPO bankers DBS as an "essential" feature of EHT because they formed the basis for the valuations of EHT's hotels, are now of little value. UC has failed to provide EHT the income support it guaranteed, resulting in EHT failing to deliver unitholders the promised IPO dividend yield.

EHT said last week: "There is no visibility on whether the master lessees (UC) will remedy these delinquencies, if at all."

Safeguard investors' interests

The resignations of Mr Wu and Mr Woods mean that they can no longer undertake transactions on behalf of the manager, which is a relief.

Hopefully, however, this will not be the last that EHT unitholders hear of them.

Corporate governance advocate Mak Yuen Teen said: "I think the regulators could make a case for breach of duties by the directors to the manager and to the unitholders."

Prof Mak also believes that the rest of the board should consider civil action against Mr Wu and Mr Woods for breach of duties, and take steps to avoid any cover-ups.

"Having some new independent directors (IDs) who are not tainted by what has happened may be a good idea," he added. "I don't think unitholders will have much faith in the current IDs either."

These directors and DBS Trustee should also act quickly to safeguard the interests of EHT's unitholders.

In the US, the newly enacted Coronavirus Aid, Relief, and Economic Security Act offers a number of relief programmes for struggling hotel businesses.

As the master lessee and operator of EHT's hotels, UC can apply for loans backed by the US government. EHT's manager should ensure that any cash is used in unitholders' interests and not redirected to UC's other obligations.

EHT has become the first Reit in Singapore's history to be suspended 10 months after its IPO without paying a cent to investors. Its story is a striking illustration of how the externally managed Reit model can be exploited to take advantage of minority investors when a sponsor's interests are not aligned with those of minorities.

Both MAS and the Singapore Exchange Regulation (SGX RegCo) have assured investors that they are looking into the matter.

Looking into it

MAS told BT: "As per our media release of April 20, MAS is currently looking into the issues surrounding EHT, including these latest developments. If breaches of MAS requirements are substantiated from our review, we will take the appropriate actions. At this point in time, we are unable to share any further information or details."

How MAS and SGX RegCo deal with Mr Wu and Mr Woods, as well as DBS Bank, the financial adviser and issue manager for EHT's IPO, will be closely watched.

The actions of MAS will set the standards of what constitutes acceptable behaviour from issuers and bankers within the Singapore Reit market.