Eagle Hospitality Trust- Phillip on the Ground December 14, 2020 527

  • A new REIT manager has been proposed, subject to Stapled Securityholders’ agreement in an upcoming EGM vote.
  • 3 possible outcomes from the EGM: 1) The new REIT manager is appointed and restructuring commences, 2) the new REIT manager is not appointed and winding-up of EHT commences, or 3) no resolutions are approved and EH-REIT is wound down.
  • Accept the new managers or undergo a winding-down or sale of existing assets. With the approval, additional funding of US$125mn will be provided to allow the assets to re-open and maybe revalued upwards.

 

We recently attended Eagle Hospitality Trust (EHT) presentation on its Proposed New REIT Manager held on 10 December 2020, below are some highlights:

 

Current status of EHT:

  • On 24 Mar 2020, trading of EHT’s shares were suspended following various master lessee delinquencies, and defaults and/or terminations of Hotel Management Agreements and Franchise Agreements. Significant hotel liabilities unpaid by master lessees and lack of income also led to acceleration and notices of default for EHT’s loans. Furthermore, EHT has potential liability for interested person transactions and unauthorised Paycheck Protection Program (PPP) loan application made on behalf of the Queen Mary master lessor. As of this update, 15 of EHT’s 18 hotels remain closed and under caretaker arrangements.
  • MAS has issued a direction to remove EHT’s REIT manager by 30 Dec 2020. A new REIT manager has been proposed, subject to Stapled Securityholders’ agreement in an upcoming EGM vote.

 

Details of the EGM:

To be held by live webcast on Wednesday, 30 December 2020 at 2.00 p.m. (Singapore time).

Timeline:

  • Fri, 18 Dec, 2pm: Deadline for CPF/SRS investors who wish to appoint the Chairman of the EGM as proxy to approach their respective CPF Agent Banks / SRS Operators to submit their votes
  • Wed, 23 Dec, 2pm: Deadline to submit questions about the EGM to QNA@eagleht.com
  • Sun, 27 Dec, 2pm: Deadline to register for EGM and deadline for vote submission via post to registered office of the Managers or electronically via email at REG@eagleht.com
  • Wed, 30 Dec, 2pm: EGM via webcast link

 

Possible EGM Outcomes:

  • Scenario 1: Resolutions 1 to 4 are all approved. New REIT Manager is appointed, restructuring commences
  • Scenario 2: 1 or more of Resolutions 1 to 4 are disapproved, and Resolution 5 is approved. New REIT Manager is not appointed, winding-up of EHT commences.
  • Scenario 3: No Resolutions are approved. New REIT Manager is not appointed, seek insolvency protection under Chapter 11 of the United States Bankruptcy Code to facilitate a reorganisation of EH-REIT or an orderly winding down of EH-REIT.

 

Scenario 1: New REIT Manager is appointed, restructuring commences

Appointment of New REIT Manager: SCCPRE Hospitality REIT Management Pte Ltd is the proposed new REIT Manager. Is it part of the SC Group, which has a 16-year track record of investing and asset management across Asia-Pacific, manages two (2) listed real estate investment trusts in Asia, namely JHR and Thailand Prime Property Freehold and Leasehold REIT (TPrime REIT), and has assets under management of more than USD7.3bn. The new REIT manager appointment is subject to Stapled Securityholders’ approval by ordinary resolution in an upcoming EGM. (Details of the EGM below) Upon appointment, the name of EH-REIT will be changed from “Eagle Hospitality Real Estate Investment Trust” to “SCCP Hospitality Real Estate Investment Trust”.

Reopening of Hotels: To facilitate reopening of EHT’s hotels, delinquent master lessees will be taken over by EH-BT through wholly owned OpCos as the new master lessee. The new REIT manager will also work with hotel managers and franchisors on the reopening of their hotels.

New Financing: A new US$125mn proposed bridge facility will help to fund capital expenditure and working capital of EHT’s properties. The loan, by Bank of America and a consortium of lender banks, matures on 30 Jun 2022, and is conditional and may be extended by 18 months if the following are met:

  • The appointment of the new REIT manager
  • Sale of certain properties in 2021
  • Minimum equity raising of US$20mn by 31 Dec 2021, and USD30mn by 31 Dec 2022
  • Resumption of trading of EHT’s stapled securities before 31 Sep 2021

New Shares Issuances as Management Fee: 140mn of new stapled securities, or 16% of total existing shares will be issued as management fee to the new REIT manager for FY2021 and FY2022 (equivalent to USD4.5mn per annum). This will be dilutive for existing stapled securityholders. The issue price will be based on (i) the quarterly NAV of EHT per stapled security when trading remains suspended and (ii) the 10-day VWAP per share when trading has resumed when the fee payment is made.

Further equity raising expected: To reduce aggregate leverage, EHT may seek further equity raising. As at 30 Sep 2020, EH-REIT’s aggregate leverage was 65.5%, above the MAS maximum of 50%. EH-REIT is in the process of obtaining a waiver from MAS.

 

Scenario 2: Winding-up of EHT

If the new REIT Manager is not appointed, there is no reasonable prospect for EHT to continue to operate on a going concern basis. EHT will seek to realise any remaining value of their Stapled Securities through the voluntary delisting, termination and winding-up of EHT and/or a reorganisation of EH-REIT, including potential Chapter 11 filing and potential sale of assets under Section 363 of United States Bankruptcy Code Chapter 11 Plan.

EHT’s total liabilities are US$630.0mn (of which loans and borrowings amounting to US$485.1mn) and total assets are US$778.9mn as at 30 Sep 2020. Net sale proceeds less debt repayment and expenses will be distributed.

Given weak market conditions that could cause assets to be sold at lower prices, and recurring losses due to continued property closures and possible solvency concerns, there may be minimal to no distributions to Stapled Securityholders.

 

Scenario 3: Winding-down of EHT

In the event that Resolution 5 is also not passed, the EH-REIT Trustee will likely be compelled to consider seeking insolvency protection under Chapter 11 of the United States Bankruptcy Code to facilitate a reorganisation of EH-REIT or an orderly winding down of EH-REIT.

 

Comments

There appears to be limited options for unit holders. Accept the new managers or undergo a winding-down or sale of existing assets. With the approval, additional funding of US$125mn will be provided to allow the assets to re-open and maybe revalued upwards.

Downsides are dilution of the share price through issuance of new share as for management fee payment should the stock resume trading again. There is also risk of the restructuring failing or the proposed bridging loan conditions not being met. Post relisting there is also the need for another round of equity financing.

 

Company Background:

EHT is a hospitality stapled group comprising EH-REIT and EH-BT (Business Trust). EHT was listed on the Main Board of the SGX-ST on 24 May 2019. EH-REIT is a Singapore-based hospitality and/or hospitality-related REIT with initial focus on the United States.

 

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About the author

Profile photo of Timothy Ang

Timothy Ang
Research Analyst
Phillip Securities Research

Timothy covers credit analysis of local and foreign bonds. Previously an equity dealer, he handled equity trade execution and portfolio management. He has presented seminars for organisations such as SIAS, SPH and IRAS, commentated live market updates for 93.8FM, and authored investment articles for the Business Times newspaper. He graduated with a Bachelor of Commerce in Accounting & Finance from the University of Western Australia.

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