EHT says no requirement to disclose sponsor's links to its largest investor

Singapore

THE man who became Eagle Hospitality Trust's (EHT) single largest shareholder during its lukewarm initial public offering (IPO) was also the man who sold EHT's sponsor six of the 18 hotels that eventually formed its IPO portfolio, EHT confirmed on Thursday.

But as the seller, ASAP Holdings, had sold the six hotels to the sponsor's founders, who subsequently injected them into EHT soon after, there is no legal requirement to disclose their relationship, EHT also said.

Frank Yuan is EHT's largest shareholder and the chief executive of ASAP, a California-based acquisition advisory and asset management firm specialising in hotel assets.

Apart from the six hotels it sold, ASAP has also advised EHT sponsor Urban Commons on at least five other hotel acquisitions, said its website.

Mr Yuan took a 16.2 per cent stake in EHT by way of a placement during the IPO in May - greater than any of EHT's cornerstone investors or even its founders. But he pared his stake to 13.7 per cent as of last Friday.

Another ASAP executive, Norbert Yuan, owns 12.4 per cent of EHT after having reduced his stake on Oct 8. The sales were mostly executed through married trades.

When approached by The Business Times, Salvatore Takoushian, chief executive of the manager of EHT, said: "Urban Commons and ASAP have a business relationship but are otherwise unrelated... The only EHT assets that came from ASAP were acquired by our sponsor ahead of the IPO. It was six assets that we actually refer to as the 'ASAP6 portfolio'."

However, the Yuans' links to ASAP were never mentioned in EHT's offer document, since they emerged as investors only after the placement was completed.

Mr Takoushian described the sale of shares through married deals by the Yuans as acting responsibly.

"They find a counterparty for the stock, as opposed to creating selling pressure in the market... I think that's a responsible approach to selling a block of stock."

He said he did not know the identity of the counter parties to those deals.

Separately, EHT clarified that despite the recent furore over the state of disrepair of its Queen Mary floating hotel in Long Beach, the newly-announced bill of US$7 million over two years to repair the property was not inconsistent with the capital expenditure projections it made during the IPO.

This is because EHT is responsible only for the capex of 17 hotels, excluding the Queen Mary.

The Queen Mary is EHT's only hotel that is on a triple net master lease structure, in which all operating expenses - including insurance, maintenance and repairs - are borne by Urban Commons, the master lessee.

So EHT's capex spend for this year and next remains at US$16.5 million, as referenced in the prospectus.

Mr Takoushian said: "At the time of the IPO, the sponsor put US$9.2 million of capital on the balance sheet associated with this identified capex. The balance will come from the (individual) Capital Improvement Fund reserves that each of the 17 assets generates."

He also addressed concerns about the Queen Mary's carrying value.

During the IPO, EHT paid Urban Commons US$139.7 million for the retired ocean liner, which was built in 1937 and considered to be way past the useful life of a ship.

The last known transaction price for Queen Mary was in 2007 - over a decade ago - when a company called Save the Queen paid US$43 million to buy the lease through a bankruptcy court.

When Save the Queen defaulted on its loan, its lender Garrison Investment took over the lease. After failing to find a new buyer, Garrison hired a management firm to run the ship.

Then Urban Commons came along in 2016 and took the lease off Garrison for an undisclosed sum.

Mr Takoushian stressed that more than three years had lapsed since Urban Commons originally acquired the lease, and that the City of Long Beach had spent US$23.5 million between 2016 and 2018 restoring and renovating the ship. "I believe Urban Commons has improved the lease," he said, since the sponsor also negotiated with the City to set up a reserve mechanism for maintenance and to extend the lease term.

What EHT has now is a ground lease with 63 years left on it, on which sits a "very significant revenue producing ship" (owing to the triple net lease structure backed by Urban Commons) and around 45 acres of adjacent land as well as water rights, he added.

Urban Commons has also committed to developing that land into a US$250 million attraction called Queen Mary Island, though local media reports say that plan is being pushed back by at least two years.

Mr Takoushian said: "The Reit is not responsible for that development. At the time of the IPO, our projections did not contemplate incremental income from the development of Queen Mary Island. And it's not necessarily a capital requirement for the sponsor either, as the sponsor can potentially sublease parcels of the land, enter into partnerships and/or joint ventures to further the development."

The Queen Mary has since been revalued to US$159.4 million, and accounts for 12.57 per cent of EHT's total portfolio value of US$1.27 billion. The property is forecast to contribute 15.9 per cent to EHT's net property income in 2020.

EHT units closed flat at US$0.56 on Thursday, down 28 per cent from the IPO price of US$0.78.