Eagle Hospitality Trust's saga raises question mark over adequacy of IPO disclosure rules
THERE is always an element of opportunism to initial public offerings (IPOs). It's natural for companies to want to fetch the best price they can get for their assets.
But once a company becomes a public company, it also owes a duty to shareholders to be as forthcoming with information as possible, even if it is negatively perceived.
Panic selling tends to happen when investors feel that they've been blindsided. Confidence, once shaken, takes time to rebuild.
Eagle Hospitality Trust (EHT), a newcomer to the Singapore Reit market, recently found itself in a nest of intrigue.
It all began with an old ship, the Queen Mary, that bobs up and down in a California bay as a gigantic floating hotel. The City of Long Beach leases the ship to EHT, which in turn sub-leases her to the Reit sponsor Urban Commons (UC).
UC is responsible for all critical ship repairs. If UC defaults on its obligation, the responsibility then falls to EHT, and if it can't comply, it loses its leasehold interest in the QueenMary, which is a significant 12.57 per cent of the Reit's total portfolio value.
When media reports last month raised questions about whether UC might be falling behind on its commitments or kicking the can down the road for repairs, EHT units took a hit.
By the time EHT clarified that it wasn't losing the QueenMary, the initial misgivings had broadened to a fierce selloff and an inquiry into the quality and standing of the sponsor.EHT units have lost 41 per cent of their value from their IPO price of US$0.78.
As EHT confirmed to The Business Times last week, UC had inked a deal to buy six hotels from a family office known as ASAP Holdings on March 12 this year, just 11 weeks before the May 24 debut of the EHT IPO. UC then flipped these hotels to EHT.
During the IPO book building, when demand for EHT units turned out to be weaker than expected, three key executives of ASAP - Frank, Norbert and Jerome Yuan - helped pull the deal through by taking a combined 33.4 per cent stake in EHT by way of a private placement.
It turns out that the Yuans weren't prepared to take a long-term view of their investments. Frank Yuan has been paring his stake since August. Norbert Yuan has been cashing out since October. Other placees like Qian Jianrong and Tong Jinquan have also trimmed their exposure in recent months.
That UC and its bankers placed so many units in the hands of investors with a short term view to get the IPO through the door sends a poor signal to the market.
The optics are particularly bad given that the Yuans are long-time syndicators of US hotels who probably have a better read on the property cycle than the Singapore public.
Investors didn't like what they were seeing. Some reacted with alarm.
And EHT's simplistic approach to disclosure - which was to say no more than it is required to - was not helpful in shaping the market narrative. Things might have been different if EHT had been more transparent.
In the IPO prospectus, the Yuans' links to EHT's portfolio were never disclosed. Reits are only required to disclose the details of the properties that they acquire; there is no requirement to disclose the details of prior transactions.
Since the Yuans sold their hotels to UC instead of injecting them into the Reit directly, they and ASAP are counted as "third party" vendors to EHT, not sponsors.
The Yuans were also able to offload their units immediately after the IPO because they bought their units through a placement exercise, which does not subject them to a lock-up period as a sponsor would be.
Since EHT didn't own the six ASAP hotels until two months before the IPO, EHT did not have to produce historical financials for assets it had only just acquired. Therefore, investors can't compare the projected cashflows to historicals to see if they are conservative or aggressive.
There are lessons to be learned, in view of the sharp loss of investor confidence in EHT.
Top of the list is that retail investors must be convinced that the interests of the Reit sponsor are aligned with theirs.
This is best served by going beyond what the disclosure rules require to ensure that shareholders aren't caught by nasty surprises.
More can be done to protect investors' faith in Singapore's Reit market and the Monetary Authority of Singapore (MAS) should review if the current disclosure regime needs further fine-tuning.
MAS should clarify if deals struck between a Reit sponsor and third parties shortly before an IPO should be disclosed and described in prospectuses with more detail.
After all, the purpose of a prospectus is to give the public a fair picture of the nature of the assets that are behind a Reit's headline yield, and to help investors understand the sponsor's motivations for selling these assets.
