EHT’s largest creditor speaks of disappointment as hospitality trust winds up
Uma Devi
THE winding-up process of Eagle Hospitality Trust (EHT) has shed light on certain details of the lead-up to the group’s bankruptcy, particularly the role of Urban Commons as master lessee in the downfall of the trust. And at least 1 creditor is disappointed with how the affair has been handled from start to finish.
EHT is a stapled trust comprising Eagle Hospitality Real Estate Investment Trust (EH-Reit) and the dormant Eagle Hospitality Business Trust. It was listed on the Singapore Exchange (SGX) in May 2019, tanked upon its debut, and was suspended in March 2020.
A number of the trust’s units had filed for Chapter 11 Bankruptcy protection in the United States in January last year. They later filed a plan for liquidation, with bank lenders mopping up the bulk of the proceeds.
In the course of the liquidation, investigations revealed numerous lapses in governance and difficulties that were not disclosed to investors.
Alan Tantleff, Eagle Hospitality Reit’s chief restructuring officer, noted in a declaration filed on Jan 19, 2021 that the master lessees of the hotels in the Reit’s portfolio had failed to pay rent as early as January 2020.
And even before January 2020, the master lessees had begun to default on payment obligations under their hotel management agreements (HMAs). These defaults eventually resulted in the closure of 15 out of 18 hotels by the end-May 2020, said Tantleff.
There was also some US$52.9 million worth of unmet obligations to various parties, including vendors, contractors and taxing authorities – which led to the commencement of litigation and the imposition of statutory liens against some of the hotels. Some of these failures to pay dues occurred early on, before, or around the time of EHT’s listing.
Contrary to claims made by EHT in various communications, the Reit’s failure was not due to the negative impact of Covid-19. According to findings disclosed in Tantleff’s declaration, certain managers of EHT-owned hotel properties decided to close their hotels because Urban Commons-linked entities had failed to fully fund operating expenses, and not because business volumes necessitated a closing.
These disclosures have left creditor and former unitholder Frank Yuan disappointed in the listing process for EHT and the subsequent management of its liquidation.
Yuan is chief executive of ASAP Holdings – a California-based acquisition advisory and asset management firm specialising in hotel assets – and had sold 6 hotels to EH-Reit’s sponsor Urban Commons ahead of EHT’s initial public offering (IPO).
His family members, Norbert Yuan and Jerome Yuan, are listed as ASAP Holdings’ chief operating officer and chief investment officer on the company’s website.
As a long-time investor in hospitality properties in the US, Yuan noted that the pandemic did create problems for hotel owners. But, he added, not many of these hotel owners were bankrupted.
In an interview with The Business Times (BT), Yuan said he was “pushed into a corner” in the lead-up to EHT’s IPO.
The cost of the ASAP6 portfolio was in the range of US$225 million to US$250 million, said Yuan. The agreement between the Yuans and Urban Commons’ owners Taylor Woods and Howard Wu was that ASAP Holdings would be paid upon EHT’s successful IPO.
Two days before the listing, however, Yuan said Wu approached him in his Singapore hotel room to take over a US$89 million syndicated loan that was initially promised by the Bank of China to EHT. If Yuan did not take on the loan, the IPO would have failed.
“As a seller, we already prepared how (we were going) to use our proceeds as well,” said Yuan, who agreed to give EHT the loan. “So I’m pushed into a corner; either I take it or the IPO fails.”
Yuan also said Wu and Woods did not have enough money to pay ASAP Holdings for the 6 hotels, so Urban Commons offered the Yuans EHT’s stapled securities as payment. But on May 25, 2019, EHT began trading on the SGX, but had a dismal debut with shares ending 6.4 per cent lower that day. “I wish I could have said no at that time; I would still have my 6 hotels,” said Yuan.
He disagrees with the decision to sell the hotels in the thick of the pandemic, suggesting it would have been wiser for EH-Reit to “sell a few hotels” and reduce its debt.
“If you sell a couple of large hotels and pay (the banks) US$200 million ... then you don’t have a debt, and you can hang in there,” he said.
“A prudent operator should have saved the assets, because that’s your value. Your value is not these legal documents, it’s your properties.”
Yuan said EHT’s properties are all in “good locations and cities”. For ASAP Holdings’ properties, he said the company worked with the lender to either defer interest payments, for instance.
CBRE’s Asia-Pacific head of hotels and hospitality, capital markets, Steve Carroll said it took the US market around 18-24 months to recover from the brunt of the pandemic.
Revenue per available room (RevPar) fell about 50 per cent over the peak of the pandemic. Much of this was due to a fall in demand for both the luxury segment, as well as the upper end of the upscale segment — both of which are heavily reliant on international arrivals in the US market.
Overall revenues for US lodgings reached pre-pandemic levels by mid-2021, and returned to the pre-pandemic growth trend by mid-2022, he said.
“Despite a slowdown in new hotel construction and the current high-inflation economy, CBRE forecasts a full recovery in average daily rate this year, and in demand and RevPar next year for the US market,” Caroll said.
Yuan also wonders what went wrong at the point of the IPO, adding that it is “unheard of” for a listed company to fail in 6 months.
Indeed, many other investors were left reeling from the sudden crash of EHT. Another investor who spoke to BT on the condition of anonymity said a number of things were “not disclosed at all” in the lead-up to the listing – including many interested party transactions, or transactions that had a conflict of interest.
“If all these transactions had been made known, I don’t think EHT would have been allowed to list in Singapore,” he said.
The transactions between the Yuans and Urban Commons were, in fact, among the list of things not disclosed in full during the prospectus.
Later, when queried by Singapore Exchange Regulation, EH-Reit’s manager said the Yuans were introduced by Urban Commons to the placement agents during the bookbuilding process for the IPO.
The Yuans had also subscribed for stapled securities in the placement tranche at the IPO price of US$0.78 per stapled security as part of a bookbuilding process by the placement agents, EH-Reit’s manager said then.
According to bourse filings, Frank Yuan received 141.44 million stapled securities, or a stake of 16.3 per cent, through his wholly-owned company Claydon Hill Investments. Norbert Yuan, meanwhile, took a stake of 13.83 per cent or some 120 million stapled securities through his wholly-owned company Compass Cove Assets.
Filings showed that Claydon Hill sold 10 million EHT stapled securities on Aug 19, 2019, at US$0.70 apiece. Compass Cove sold 5 million stapled securities at US$0.675 apiece on Oct 8, 2019.
Compass Cove eventually ceased to be a substantial shareholder of EHT in December 2019, while Claydon Hill ceased to be a substantial shareholder in March 2020.
According to SGX rules, investors who are connected to the IPO sponsor have a 6-month moratorium on their shareholdings. Rules also state that the shares of a promoter for the IPO also have a moratorium of at least 6 months after listing, and no less than half of the original shareholding can be sold during the next 6 months.
Another fact that only became known later was that various contracts between the master lessees and the hotel managers were worded in a way that left the owners of the hotels at risk of liability.
And some other agreements that were supposed to be reassigned from the property owners to the master lessees for the purpose of the IPO were not, “despite representations and obligations to do so”.
Various other incidents arising from the investigations showed a pattern of behaviour in which Woods and Wu used EHT units to benefit Urban Commons master lessees, said Tantleff.
In an e-mail to BT, Wu declined to comment on matters relating to the Yuans and directed BT to DBS and other banks who provided EHT with syndicated loans instead.
In response to a query from BT, an SGX spokesperson said the exchange is unable to comment on “alleged rule breaches in relation to EHT” given the ongoing investigations for possible offences under the Securities and Futures Act.
DBS Trustee, meanwhile, told BT that it is “not privy to the private commercial discussions between Urban Commons and ASAP Holdings”.
When questioned about the due diligence conducted by DBS Trustee and DBS Bank – which was one of the bookrunners and underwriters – in the lead-up to the IPO, a spokesperson said the due diligence carried out by DBS Bank was “guided and supported with advice provided by an experienced team of external professional parties”.
Such parties included reporting accountants, independent valuers, an independent market research consultant and legal advisers, the spokesperson said.
