More shocking bad news came out from Eagle Hospitality Trust ("EHT"). On 15 May 2020, EHT did not just released their Q1 2020 financial results but also took the opportunity to announce that the key Sponsor directors, Howard Wu and Taylor Woods have imposed contractual terms on EHT that are prejudicial to the interest of the security-holders of EHT. Apparently, both Howard and Taylor signed up terms that are not in accordance with commercial market terms for the Non-Disturbance Agreements between Lessor and Lessee. EHT will now need to assume all liabilities from the bankrupted lessee even before the termination date of the agreement. This adds a whopping USD44.6 Million of additional liabilities to EHT and its security-holders.
1. Management of EHT claimed kept in the dark by Sponsor's Directors while Sponsor's Directors claim that they are not aware that they did not inform due to "miscommunication".
Most surprising aspect was that according to the other management and audit committee of EHT, they were not aware of this. Howard Wu and Taylor Woods also mentioned that this was due to miscommunications and they sort of missed out highlighting this to the other management of EHT. The matter only came to light when the US legal counsels hired by EHT went through all the agreements entered into by the hotel managers on 16th December 2019 and 14th February 2020 under the instruction of Howard Wu and Taylor Woods. Personally, I think that these directors of the Sponsor have serious integrity issue. The Audit Committee of EHT had announced that they are of the view that the terms and conditions entered into are not on usual commercial terms and is therefore prejudicial to the interests of EHT and its minority stapled security-holders.
2. Revised financial projection of salvageable net asset value from fire-sales
- Added in new item L7 for additional liabilities of USD44.6Mil due to Sponsor Directors imposing terms that are prejudicial to the interest of EHT and security-holders.
- I have updated Ops expenses using Q1 2020 and extrapolated it for full year on assumption that it will take 12mths, that is until 31 March 2021, to complete the fire-sales-item L6.
- Also item L6, assume zero rental income during the restructuring exercise.
- For item L1, trade and other payables, I have removed USD 30Mil dividends payable to security-holders for the period 24 May 2019 to 31 Dec 2019 and assume that they cannot be paid out until completion of the whole exercise to simplify the projection of realizable value.
- For the USD30Mil dividends payable, you will need to add this back to derive the realizable value if you bought in after the ex-dividend date.
- Entry price assumed to be at average of USD0.60 per unit by investors.
As we can see above, it is game over for all security-holders if the REIT manager sell off EHT hotels at fire-sales discount of 53%. Not a single cent will be left for the security-holders after paying off bankers and vendors. Hopefully, the hotels can be sold off by offering one-third discount off last valuation done at end of December 2019 as security holders will still be able to get back USD$0.282 per unit or almost close to 50% of their original investments.
3. EHT got shot by SGX
On 15th May 2020, SGX immediately asked EHT to justify why they are not considering removing Howard Wu and Taylor Wood as directors as they have breached Interested Party Disclosure requirement and also made operational decisions that are detrimental to the interest of the security-holders of EHT.
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| SGX Query |
Final thoughts:
I actually hope that the restructuring manager just liquidate all the hotels under management instead of only doing partial sales of hotels and then trying to continue operations. Personally, I have serious doubts on the abilities and integrity of the management team of EHT for the non-stop surprise after surprises that keep getting revealed. I have a sinking feeling that more dirt maybe unveiled later on and that this will not be the last time we need to revise downwards the realizable value projection of the net assets.
Please see my previous post on EHT below:
Can I check if the “bankrupted lessee” scenario of USD 44.6m has already occurred or is this a contingent liability? Tks
ReplyDeleteHi John, the group of hotels under the said Non-Disturbance Agreements being signed have defaulted on rental payment to EHT. Hence I have to assume that they are facing bankruptcy due to no business/tourists but have to pay off mountain of debts.
DeleteThanks for your reply.
DeleteWhat the F! Like that also can!
ReplyDeleteHi Kyith, unfortunately it is so in the circumstances as it is. COVID-19 is scary. But directors with conflict of interest in making decisions by themselves and asserting "miscommunication" is even scarier.
DeleteAny legal case against the directors?
ReplyDeleteHi Nick,
DeleteNot at the moment as EHT management are pending US Counsel's legal advice on various options. Too early to say right now.
1.In addition, from regulatory perspective, a breach of fiduciary duty of director (if convicted) is a breach of the Companies Act. This is thus a criminal act. Section 157 of the Companies Act obliges a director to act honestly at all times and to use reasonable diligence in the discharge of the duties of his office. Have to wait for SGX's assessment.
2. From breach of fiduciary duty, parties can also file a civil suit to claim for compensation. In this case, USD44.6Mil to be shared by Howard and Taylor makes it USD22 Mil each. But I doubt Howard and Taylor got that kind of money right now given the COVID-19 economic crisis. Not sure whether worth it to pursue in view of the current situation. Will be throwing good money after the bad.
Any chance that the banks will allow further discretion of the default payment even with all these bad news? Also, what would be your advice to those still holding on to the shares. Assuming that one enters at USD0.60, and the price after suspension would probably be close to 0, does it mean that holding on to it would be the same as selling them off. Holding on to the shares might lead some sort of loss alleviation 5 years down the road per se.
ReplyDeleteHi Two Sense Investment,
ReplyDeleteGood question. It it really up to your own individual risk assessment and investment decision hence I am unable to advise you. Personally for myself, there are a few possibilities:
1.If the market price after suspension is trading at close to zero dollar, say 1 cents or 2 cents, then might as well just wait for the restructuring to complete and take the risk of holding on since no material valuation differences.
2. If there are still some value left like USD0.05 cents or USD0.10 cents for instance, then the question is whether one should just take whatever residual value left to cash it out and re-invest to reduce the opportunity cost of holding on. Also consideration of more hidden bad news not yet announced by the current Management team is vital due to their poor track record. The Queen Mary side I reckon will also have more surprises coming out from the City of Long Beach.
3. Yes, the latest incident of additional liabilities assumed by EHT and signed off by Howard and Taylor and which are contrary to normal commercial terms will definitely have an adverse effect in the current ongoing loan forbearance extension negotiation.
4. In the event of fire-sales commencing immediately within this 2 months of May'20 and June'20, I do not think there will be any buyers even if 50% discount is being offered. This will be disastrous to existing security holders.
5. The key to getting a good price on liquidation lies in the vaccine development news which I reckon clinical 1 and clinical 2 trial results by Pfizer and Moderna in USA to be released by July'20 or Aug'20 on the safety and efficacy of the vaccine. There must be absolute certainty that the COVID-19 pandemic will come to an end eventually. Only then, will there be enough rich buyers willing to make a bid for the hotels at a reasonable pricing. So the longer this whole restructuring drags on, the better it is for Security Holders from my perspective. Else most probably it will be a scenario of zero residual value.
Those 2 fella should be brought here to be charge.
ReplyDeleteIs this outright fraud???
ReplyDeleteHi Henry,
DeleteGood point.
In addition, Howard Wu is a Non-Executive Chairman while Taylor Woods is the Deputy Chairman. Based on their designation in EHT, these are clearly non-executive roles from my perspective. So not sure why would they went in to execute the agreements when they clearly do not have executive powers. Some-more, they did it not just on 16th December 2019 but also for the agreements on 14 Feb 2020. So, both Howard and Taylor failed to inform the CEO and Audit Committee on 2 separate occasions.
Their defense as per the announcement was that they thought that the CEO and Audit Committee of EHT were informed. Only recently did they discovered that it was a case of miscommunication. Hence it seems that they had either forgotten or they had assumed someone else will inform the CEO and Audit Committee over the additional liabilities to be borne under EHT for the lessee.
One thing is clear, SGX regulatory team are not amused by the "miscommunication" defense in the announcement and have asked the EHT nominating committee to justify why Howard and Taylor should still remain in the BOD of EHT.
I do habour some hope that the signed agreements can be eventually repudiated by the legal counsels of EHT by arguing that Howard and Taylor played a non-executive role in EHT. In that way, security holders can save on USD44.6Mil.
We have to wait for further clarification from EHT to see whether the miscommunication on 2 separate occasions from Howard and Taylor are genuinely due to having poor memory or intentional act of deceit.
I worked for Urban Commons the Sponsor for Howard and Taylor that place was always a mess.
ReplyDeleteThey would use REIT hotel revenue to pay back old investors
The only financial analysis they would do when purchasing a hotel was the projected 2 year cash flow without debt service or any investor return analysis or cap ex
If this was in the US Howard and Taylor would be in jail
The company was poorly managed and there there were actually some smart employees but howard and taylor would act unilaterally and take action that were detrimental to the company
They tried development but could not raise enough capital so their projects just lingered for years and they would take out 20+ percent loans
One day after telling Howard he should sell a development property to minimize losses he said "your job is not to analyze my business plan, if I want to lose money thats my business."
I assume all the reit money is locked into the wagner hotel in manhattan. UC owns that hotel and it loses $26 million per year. They bought it when it was loosing money no bank would lend but the seller smartly agreed to cary the not so now they are paying the owner for a property that the owner used to lose money on
the plan was a lot of cap ex for the wagner I am assuming with money from the IPO but as the share price fell they could not afford it.
I assume now the property will just revert back to the seller because they cannot pay they not but im not sure if the seller want to repo a loosing asset
That place is a mess
They owe everyone in los angeles money. No one will do business with them because their reputation is so bad.
DeleteThey find foreign investors to find them but some of them have filed law suits against the company.
Most vendors have suits against them also
Thanks Christopher for sharing all these background info on Howard and Taylor as well as Urban Commons. These are shocking revelations from your side.
DeleteLooks like retail investors who put money into this hospitality trust boarded a Pirate ship instead.
If what Jones reveal is true, did MAS, SGX and DBS do their due diligence on background check of the persons applying for listing ? There should be some traces if they had been sued (as claimed by Jones) and no once wants to lend them money. Attributing to miscommunication is the most weird excuse I have heard from senior executives.
DeleteSeems like never ending. S chips, penny stocks.:( Hope investors can see the daylight for this Eagle.