EH-Reit manager, trustee ordered to protect unitholders; regulators studying possible breaches

Singapore

THE Monetary Authority of Singapore (MAS) has ordered the manager and the trustee of Eagle Hospitality Real Estate Investment Trust (EH-Reit) to take steps to protect the rights and interests of EH-Reit's unitholders.

In a statement on Monday, MAS and the Singapore Exchange Regulation (SGX RegCo) said they are looking into possible breaches of laws, regulations and listing rules in relation to issues surrounding the Reit. Regulatory and enforcement actions will be taken where appropriate, they added.

Trading in stapled securities of Eagle Hospitality Trust (EHT) - a stapled group including EH-Reit - was halted on March 19, before being voluntarily suspended on March 24. EHT had announced on March 19 that Urban Commons (UC) - EHT's sponsor and the master lessee of its properties - did not provide the full sum of security deposits (SDs) due under the master lease agreements (MLAs) to EHT. (see amendment note)

Of the US$43.7 million in SDs due around EHT's listing date of May 24, 2019, only US$28.7 million was placed as at March 19 this year, representing a shortfall of US$15 million.

Bank of America (BofA) has since sent a notice of default and acceleration to EH-Reit for a US$341 million loan. BofA is the lenders' administrative agent. EHT has delayed its maiden dividend to stapled security holders as a result of the default.

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It has since emerged that UC has failed to make timely rent payments since December 2019.

MAS has directed the Reit manager to get approval from EH-Reit's trustee, DBS Trustee, before making any payments or transfers of the Reit's funds. DBS Trustee must ensure it has given its approval before any payments or funds transfers are made from EH-Reit to anyone.

The trustee, which has a fiduciary responsibility towards unitholders, is also required to set out the actions it will take to protect unitholders' interests, MAS and SGX RegCo said.

Separately, the Reit manager must restore its minimum base capital and financial resources to comply with MAS's requirements. It has been in breach of these requirements since December 2019. These breaches were reported to MAS in April 2020.

MAS and SGX RegCo's statement came hours after EHT's managers said the lenders for EHT's US$341 million loan have restricted access to several bank accounts of EH-Reit's subsidiaries and its master lessees.

While discussions are ongoing with BofA and the lenders during a temporary forbearance period, the managers have instructed DBS Bank (Hong Kong Limited) not to cause or permit any withdrawals or transfers from the distribution bank account. EHT's account with the bank holds funds that are sufficient to pay its distribution in full.

Outstanding rents

In a statement responding to queries from SGX, EH-Reit's manager clarified on Monday morning that its master lessees have not paid their fixed rents for the months of January, February and March 2020. These were due in February, March and April, respectively. The variable rent for 2020's first quarter, due in April, is also unpaid. The managers said they have been consulting lawyers on their legal rights and remedies regarding these "rental deliquencies".

The managers said they engaged UC and the master lessees "actively" in demands for these outstanding amounts in January and February and were "consistently reassured" that the rents would be paid.

Security deposits

For the payment of outstanding SDs, the master lessees were required to obtain letters of credit (LoCs) and counter-standby LoCs from UBS' Singapore branch, as stated in EHT's prospectus. As the master lessees failed to get these, however, the managers had to consider LoCs issued by a different bank.

After approaching another bank, the master lessees submitted an LoC for review by the managers' lawyers, but this draft did not satisfy the required criteria. The managers of EH-Reit thus notified them in a June 24 letter of their failure to comply with the SDs requirement, and the master lessees had 180 days to cure this failure by paying the SD balance.

During the cure period, the master lessees tried to secure an LoC from BNP Paribas' wholly-owned unit Bank of the West (BOTW) in California. BOTW is also a lender to EHT.

BOTW provided a term sheet for an LoC on July 22, 2019, subject to the approval of its internal committee, but this was delayed by administrative issues. There were also further delays when BOTW had to conduct additional due diligence, after EHT was featured in adverse media reports.

Throughout the cure period, the master lessees gave consistent assurances that the LoC would be forthcoming, EHT's managers said.

Before the cure period expired in December 2019, the master lessees requested to extend it, saying they fully expected to get the LoC approval by mid-February 2020. The audit and risk committee (AC) and the EH-Reit manager's board thus agreed to a 60-day extension, seeing as the master lessees had already paid a substantial portion of the SDs in cash and had been paying their rents at the time.

But the master lessees asked for another extension on Feb 6, as the LoC documentation and finalisation were still ongoing. A second extension was then granted to June 8.

One of the reasons the AC and the EH-Reit manager gave this extension was that the master lessees agreed to provide a further US$5 million in cash towards the SD. This increased the aggregate SDs received and undrawn to US$28.7 million, representing 5.9 months of fixed rent.

The first and second extensions of the LoC due date were also approved by BofA and the lenders.

DBS Trustee, meanwhile, said it consented to both extensions partly because EH-Reit was new and needed time to work out "operational kinks", as it held 18 hotels in multiple US states. And while there were delays in the monthly fixed rents for 2019, these rents were eventually paid.

The trustee said it did not consider the financial resources of UC or the master lessees before consenting because it was concerned first with preserving the MLAs, which were an essential feature of EHT's structure.

SGX RegCo is reviewing the responses by EHT and DBS Trustee, and will follow up with the stapled group on any areas of concern.

Amendment note: Due to an error introduced in the editing process, an earlier version of this story stated that EHT units have been suspended since March 19. Trading in EHT stapled securities were actually halted on March 19, before the managers requested a voluntary suspension on March 24.