What do EHT securityholders have to look forward to after expected delisting?

IT has been clear for some time that stapled securityholders of Eagle Hospitality Trust (EHT) would have to write their investment off. But for any still holding on to some hope, a recent announcement has put their plight in no uncertain terms.

On July 30, it was announced that an agreement has been made to sell the Crowne Plaza Dallas Near Galleria-Addison to the original owner Lockwood Development Partners for US$15.5 million.

With this sale, EHT will have offloaded 15 of its 18 hotel properties. The 14 hotels already sold have raked in net proceeds of US$478.6 million.

But the cash is not going to be sufficient to repay all the claims on EHT. In a recent update to investors, EHT's trustee said: "The sale proceeds are therefore not expected to result in a recovery for stapled securityholders."

The trustee, DBS Trustee, further clarified that it would most likely have to work with its professional advisers and the regulators to facilitate a delisting and winding-up of EHT.

A delisting would bring to a close one chapter of the sad tale for EHT investors. But it should not be the end of the story.

Even if investors are unable to recoup their money - and two are already trying to do that in a lawsuit against six of EHT's former and current directors - they will want some justice. As evidenced in questions submitted by the Securities Investors Association (Singapore) to DBS Trustee, investors are baying for blood.

They have already begun to point fingers at DBS and the Singapore Exchange (SGX). One of the questions asked was about the "level of due diligence" - on both market reputation and financial resources - done by DBS and SGX on the sponsor at the time of the IPO.

Investors also asked: "Even prior to the Covid-19 effect on the US hospitality market, it would appear that the sponsor has insufficient financial resources to support the master lease rental payments, which is the key supporting point for the asset valuations injected into the Reit (real estate investment trust) at IPO. Many feel that insufficient due diligence was conducted. Could the situation have been avoided?"

EHT is a stapled trust comprising Eagle Hospitality Real Estate Investment Trust (EH-Reit) and the dormant Eagle Hospitality Business Trust. Trading of EHT units has been suspended since March 24, 2020, after EH-Reit defaulted on a loan of US$341 million.

From the get-go, EHT received a lukewarm reception from the Singapore market. Its IPO saw less than half of its stapled securities subscribed under the public offer, resulting in the joint bookrunners and underwriters having to take up the bulk of the allotment of unsubscribed stapled securities. The counter fell 6.4 per cent on its mainboard debut on May 24 to close at US$0.73.

As the debacle unfolded, the stock tumbled as investors took flight. EHT shares last traded at 13.7 US cents before the suspension, down by a whopping 82.4 per cent from its IPO price of US$0.78 - all in less than a year.

Questions of valuations

DBS was the sole financial adviser and issue manager for the initial public offering of EHT in May 2019. It was also a joint global coordinator, as well as a joint bookrunner and underwriter, alongside a number of other banks.

The adopted valuation of the 15 properties that have been sold or are in the process of being sold totalled US$983.6 million, according to EHT's IPO prospectus. This valuation was done by HVS, a consultancy that specialises in the hospitality industry.

EHT has not been able to fetch anywhere near that price in its sale. This is undoubtedly in part attributable to the Covid-19 pandemic, which has roiled the hospitality and tourism segment. The conditions under which EHT is selling the assets now also make it a price taker rather than a price setter.

Investors will wonder, however, how much of the fall in value is attributable to non-pandemic reasons.

One of EHT's assets has been dogged by controversy almost since its listing. The Queen Mary in Long Beach, a former ocean vessel-turned-floating hotel, was valued in EHT's prospectus at US$159.4 million. That made it the second most valuable property after the Holiday Inn Resort Orlando Suites - Waterpark, which was valued at US$162.8 million.

The property's deteriorating condition due to neglect was first highlighted in August 2019 by an inspector employed under a contract with the City of Long Beach in California. It was also revealed, around that time, that EHT's sponsor Urban Commons had submitted a proposal to the city for critical repairs, including the removal of corroded lifeboats and the repair of peeling areas of the ship's exterior.

None of these issues were disclosed in EHT's prospectus. A reference to the Queen Mary in the prospectus merely highlighted that it is "subject to damage associated with ships such as the ordinary wear and tear of the ship". In commentary on the performance of each asset in EHT, there was a reference to a "large-scale capital improvement plan" in conjunction with the City of Long Beach. But the property was portrayed as having been recently renovated, and likely to enjoy higher revenue as a result.

When DBS Trustee put EHT assets up for sale, the Queen Mary did not receive any bids from the stalking horse bidder Madison Phoenix or other bidders in the auction. On June 4, the ship was surrendered to the City of Long Beach.

Waiting for action

After EHT began to unravel, the Monetary Authority of Singapore (MAS) stepped in to order the removal of the incumbent manager of EH-Reit.

It is currently conducting an investigation alongside the Commercial Affairs Department (CAD) into the current and former directors as well as officers responsible for managing EHT.

The six current and former Singapore-based directors of the previous Reit manager were arrested and released on bail on October 1, 2020.

There may be little that MAS can do, however, about Howard Wu and Taylor Woods, the founders of EHT's sponsor Urban Commons and former directors of EH-Reit's manager.

Mr Wu and Mr Woods were allegedly involved in several non-disturbance agreements and prejudicial interested-person transactions that were prejudicial to the interests of EHT and its minority unitholders, according to findings by EHT's audit and risk committee during a review.

In response to queries from The Business Times, an MAS spokesperson reiterated that investigations are still ongoing, and updates will be provided to the public "when appropriate".