Wednesday 30 December 2020

Results of EGM Of Eagle Hospitality Trust- Disastrous EGM and Back To Square One

Well, this is a complete waste of time and efforts for all stakeholders of Eagle Hospitality Trust ("EHT"). All resolutions were defeated by the stapled security holders as Resolution 1 to Resolution 4 are inter-dependent. Stapled security holders neither wanted a new REIT Manager & their rescue plan nor wanted to liquidate the Trust which is already running out of working capital. 88.39% do not want to liquidate the Trust even thought they rejected the rescue plan. However, this brought the Trust closer to creditors' winding up due to funding issue.

On closer examination, resolution 2 on proposed REIT Manager base fee, which required an extraordinary support of 75%, caused the downfall of the entire EGM to appoint the new manager. My thoughts are that unit-holders are not being rational here. EHT is a trust in distress and there is no painless business solution to get out of this mess.  Results of the EGM as below:

Resolution 1 (Ordinary): To approve the proposed appointment of SCCPRE Hospitality REIT Management Pte. Ltd. as the new manager of EH-REIT (Conditional upon Resolution 2, Resolution 3 and Resolution 4)
For-56.64%; Against-43.36%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 2 (Extraordinary-need 75% to pass): To approve the Proposed Base Fee Supplement (EH-REIT) to reflect the proposed base fee structure of the New REIT Manager as an Interested Person Transaction (Conditional upon Resolution 1, Resolution 3 and Resolution 4).
For-56.25%; Against- 43.75%
Results: Defeated as unable to get 75% support. Proposed new REIT Manager will not be appointed

Resolution 3 (Ordinary): To approve the proposed appointment of SCCPRE Hospitality Business Trust Management Pte. Ltd. as the new trustee manager of EH-BT and waiver of the 14-days’ notice period required under Regulation 14(3)(b) of the BTR (Conditional upon Resolution 1, Resolution 2 and Resolution 4).
For-56.63%; Against- 43.37%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 4 (Ordinary):  To approve the proposed authority for the issuance of up to 140,000,000 new Stapled Securities at the Issue Price per Stapled Security for payment of the New Managers’ Base Fees for the financial years ending 31 December 2021 and 2022 (Conditional upon Resolution 1, Resolution 2 and Resolution 3).
For-56.21%; Against- 43.79%
Results: Carried but since resolution 2 failed, proposed new REIT Manager will not be appointed.

Resolution 5 (Extraordinary-need 75% to pass): To approve the proposed (a) voluntary delisting of EHT, (b) voluntary termination and winding-up of EH-REIT, and (c) voluntary winding-up of EH-BT, in the event that any of Resolution 1, Resolution 2, Resolution 3 and Resolution 4 is not passed and/or carried.
For-11.61%; Against-88.39%
Results: Defeated

Parting Thoughts:
Stapled security owners are just digging their own grave by delaying the appointment of a new REIT manager to open up the hotels for business. A forced liquidation by the bankers may well be on the table soon despite a massive 88.39% of stapled security holders who want EHT to continue operations instead of choosing a voluntary winding up. The saga continues for now.....

Monday 28 December 2020

First REIT Twisted The Knife Further Into The Heart Of All Unitholders- Nightmare of Nightmares Right Issues Announced At More Than 50% Discount Off Last Market Price.

Unitholders still holding on to First REIT got hit with a double whammy shock today (28 Dec 2020) when the REIT Manager announced a rights issue on top of the previous released of rental restructuring of all hospital contracts news the previous month (29 Nov 2020). The sponsors of First REIT wasted no time to twist the knife further into the hearts of all retail unitholders by announcing a rights issue at more than 50% discount off the last traded price of S$ 0.405 per unit on 24 Dec 2020. The price of S$0.20 per unit is also 60% off the projected NAV of S$0.51 per unit after the rental restructuring. Investors who do not subscribe to the rights issue will be severely diluted by this latest move, which to me personally, is a massive destruction of value for all unit-holders. Right after this latest announcement (even before the EGM approval), the price of First REIT went down by a whopping 33% to trade between S$0.26 to S$0.27 per unit.

Potential Consequences of a Sponsor Default

S$140Mil from the 20cents Rights Issue To Repay Loan Facilities 

Financial Effects Of Proposed Corporate Actions

There are 3 main questions that both the Sponsors (Lippo Karawaci and OUE Healthcare) and their REIT manager need to answer:

1. Why is the potential breach of bank covenants not previously highlighted prominently in the rental restructuring agreement with Lippo Karawaci on 29 Nov 2020?
My own thoughts on this is that the management is taking way too long to announce this. They should have analyzed and released such pertinent financial information on 29 Nov 2020 during the rental restructuring agreement and organized a townhall with all unitholders to brainstorm instead of adopting such high handed manner in the short time frame to the upcoming EGM. 

In addition, using proceeds of rights issue to repay part of expiring bank loans means that the REIT is unable to leverage on the lower cost of borrowings to finance itself. This is detrimental to the entire business and investors and I am surprised that this vital information is not released earlier in the announced rental restructuring proposal as well as the potential rights issue which would have reduced the NAV further from S$0.51 per unit to S$0.36 per unit.

2. Why is the rights issue not priced at 25% or 30% discount instead to last 45 days trading average and the sponsors & REIT manager took such a drastic haircut of 50% for additional rights issue?
The projected NAV is S$0.51 per unit after the rental restructuring agreement. The rights issue represents a 60% discount to projected NAV and a 50% discount to last traded market price. This seems like hitting retail investors below the belt to buy-over unsubscribed rights issuance units  at a massive discount and is extremely prejudicial to retail investors who either do not have cash on hand to subscribe for it or who do not want to undertake additional risk in their investments into First REIT.

3. Why not sell some of the hospital properties back to Lippo Karawaci or other potential buyers to raise proceed for loan repayment instead of proposing such dilutive rights issue corporate action? 
My personal thought is that Lippo Karawaci should be the one to do a rights issue to fund their own operations instead of downloading all cashflow problems to the investors of First REIT. If they refused to buy their own hospitals based on the latest fair valuation report, then First REIT should sell it off to rival competitors by launching a public tender or asking Siloam hospitals to get ready to exit their operations. As alluded to point 2 above, the heavily discounted rights issue is a heavy handed way to deal with retail investors.

Parting thoughts
Personally, I think that this is an exploitation of retail investors. This seems like a deal that is more beneficial to Lippo Karawaci. The sponsors are holding on to retail investors by their neck. I would rather choose to liquidate the entire First REIT to scare off the sponsors into offering something better value for money instead of trying to milk the existing retail investors dry. 

Ultimately, Lippo Karawaci will the one that gets the most damage if there is a default in paying of rent to First REIT, across all their businesses. Based on the valuation report of the investment properties netting off liabilities after the proposed restructuring agreements, the NAV is S$0.51 per unit. It thus makes sense to just go for liquidation unless Lippo Karawaci offers a better deal rather than letting the share price drop to S$0.26-S$0.27 with the detrimental rights issue proposal. Lippo Karawaci should come back with a better deal for retail investors instead of taking the easy way out.

Last but not least, my other personal thought is that breaking lease agreements once means that the senior management of Lippo Karawaci group will simply repeat the same act of default and another rights issue again if there is another economic crisis. Toss a coin Head or Tail but Lippo Karawaci wins either way....strange isn't it? 

(P.S: Please also see my last posting on First REIT below

Saturday 26 December 2020

Starlink By Elon Musk For Satellite Internet Broadband Services Operational Soon- Possible Threat to Singtel, Starhub and Netlink Trust?

Elon Musk is planning to launch its SpaceX's Starlink services soon. Starlink is actually a satellite internet constellation being constructed by SpaceX providing satellite Internet access. The constellation will consist of thousands of mass-produced small satellites in low Earth orbit, working in combination with ground transceivers. An estimated investment of more than US$10 billion has been pumped into this decade old project from Elon Musk. This space internet broadband project actually went on track as per forecasted with various beta testing being done already. It is scheduled to launch soon in USA and Canada this year and to rapidly expand to attain global coverage of the entire world by 2021. I was rather surprised that Elon Musk managed to pull this off and they are in the midst of going live soon. 

Will it pose a threat to 5G technology and fibre optic network of Singtel, Starhub and Netlink Trust?

Firstly, the original market segment for Starlink seems to be more for rural areas. In big countries such as USA, the vast geographical area makes it almost impossible to lay fibre optic cable to connect every home. I do not think that there will be many take up  in Singapore even if it is given regulatory approval by the Singapore Government due to the fact that Singapore is a tiny country that is already very well connected by fibre optic and also upcoming planned 5G base stations setup from the telecommunication/internet cabling companies.

Secondly, the technology of satellite connection based on beta testing has speed of only 150Mbps and latency rate of 20ms to 40ms. With 5G network deployment using high frequency bandwidth, we can get up to 1Gbps and latency rate of 1ms. Hence competitive services such as direct fibre optic cable and upcoming 5G network services are superior relative to the connectivity services offered by Starlink.

Thirdly, the reported cost seems to be US$99 per month and a one time USD500 setup kit. SpaceX expects to generate US30 billion per annum from selling this internet services globally. In Singapore, the US$99 is a lot more expensive than what the main telecommunication companies, Singtel, Starhub and M1 are offering. Hence I think there is a lack of competitive advantages for such services in certain countries which are small and already built up extensive fibre optic cabling infrastructure.

Parting Thoughts
Satellite internet connection seems to be an upcoming technology ready for deployment. There are also other players like Amazon and OneWeb (went into bankruptcy but subsequently rescued by UK government and India Bharti Group). Elon Musk's Starlink seems to be leading ahead in the global deployment of thousands of satellites to beam high speed internet from anywhere in the world. My personal thoughts are that it should not pose a threat to Singtel. Starhub and Netlink Trust in our Singapore market due to the aforesaid mentioned 3 points. 

What are your thoughts?

Wednesday 23 December 2020

SPH REIT Still Undervalued by 30% from Peak- Fear of new COVID-19 Outbreaks on Retail Landscape

SPH REIT and other retail REITs are still reeling from the mall closures and rental waivers during the worst season of the pandemic in Singapore from April'20 to May'20. Since 2017, the market valuation of SPH REIT on SGX has always been hovering between S$1.00 to S$1.10 per unit. The current unit price of S$0.840 per unit represents a 30% potential capital upside that still has not priced in much optimism on recovery but still sinking in extreme pessissim by the market. Fear is driving many investors away from SPH REIT citing potential future severe outbreak of COVID like the European countries, Korea & Japan and the end of retail at shopping mall as e-commerce (driven by e-marketplaces such as Amazon, Shopee, Qoo10 etc) continues to grow rapidly. This actually represents the best opportunity to continue scoping up units in SPH REIT while most folks are still fearful in order to reap the reward by waiting for the eventual retail recovery over the next 3-5 years. 

1. COVID Vaccines will be rolled out in early January 2021 in Singapore- First batch of vaccines received this week already. 
Singapore is the first country in Asia to receive the COVID Vaccine. As more and more vaccines became available to the general population, this allows for herd immunity (70% to 80% of population target) to be achieved without substantial fatality and thus reduces the probability of another "circuit breaker". 

The current "mutant" and more infectious UK COVID strain should not be a grave concern as the vaccines will be able to offer protection for it as per the leading CEOs of the respective vaccine developers.

2. E-commerce will end retail malls and their relevancy in Singapore?
I disagree with such belief. The retail scene is very different in Singapore compared to other countries such as European countries or the United States. Unlike in Europe and the US where cities were built around outdoor commercial streets and plazas, shopping malls in Singapore form an integral part of the urban landscape and consistently achieve high footfall especially at suburban neighborhood areas. 

Singapore is a land-scarce nation where the government controls the supply of commercial space through long-term planning policies and government land sales. This thus limit the supply of shopping mall relative to the residents living in a certain district.

In addition, shopping malls in Singapore have been adapting to shifting trends well by including more F&B outlets & educational centers into their tenant mix. Many malls are also experimenting with new retail stall concept. For example at Capitaland Funan shopping mall, the tenant Courts opened its first IoT-themed store, which retails the latest smart home, AI and voice-control technology from leading brands, incorporates interactive in-store experiential concepts and robotics. Swiss sewing machine brand Bernina’s flagship store at Funan offers a new lifestyle concept that includes themed sewing workshops, machine rental service as well as gift personalisation service.

3. SPH REIT maintained a strong balance sheet and operating financial metrics

  • One off non-recurring (touch wood-unless there is another lockdown) rental waiver of S$39.9Mil given to tenants in Singapore and Australia thus leaving FY2020 Net Property Income ("NPI") of S$182Mil. Non-recurring rental waiver thus comprises 21.9% of NPI.
  • As at year end 31 August 2020, occupancy rate remains high at 97.7%
  • As at 31 August 2020, SPH REIT’s gearing was stable at 30.5% while its debt maturities were well-staggered with no refinancing due till June 2021.
  • Net asset value per unit as at 31 August 2020 was S$0.91 per unit a decline of only 4.2%.

4. Most of the shopping malls under SPH REIT (with the exception of Paragon) has recovered to near pre-covid levels and Phase 3 launch on 28 Dec 2020 to further boost traffic.

4.1 Suburban local shopping mall (Clementi Mall etc) and Australian Shopping Malls
On 19 June 2020, the Singapore Government relaxed the COVID control measures and most businesses were allowed to resume trading. Progressively, businesses have started to show signs of recovery. With Phase 3 to commence soon on 28 December 2020, it is anticipated that dining capacity and overall shopper traffic will increase, which will in turn will benefit SPH REIT tenants’ businesses.

In the initial months when COVID-19 hit Australia, tenant sales declined in SPH REIT Australian malls in the continent. Unlike Singapore, in the cities where SPH REIT assets are located, there were no lockdowns, but there was some form of restricted trading, in particular, those with “touch points” such as cinemas and massage services. Since May 2020, both of SPH REIT’s assets in Australia started to show signs of recovery and from July 2020 onwards, tenant sales are almost back at pre-COVID-19 levels.

4.2 Paragon shopping mall in Orchard Road
Paragon’s location on Orchard Road appeals to locals as well as tourists. Its well-established premier upscale positioning continues to attract the target market from the local community. However, with the border restrictions imposed since February 2020, international tourist arrivals declined 97%. 

Without the tourists’ consumption along Orchard Road, which is the most visited free access attraction in Singapore, Paragon’s tenant sales were inevitably impacted. Paragon’s tourist visitation closely mirrors the Singapore Tourism Board’s report that about 30% of Orchard Road consumption is from tourists. 

The Medical tower of 90 specialist were also affected by the border restriction on the Medical Tourism industry and also circuit breaker which only allows essential medical procedures. However, Singapore is expected to open up gradually in 2021 to international visitors once vaccination rate improves for the general population. Personally, I expect Paragon businesses to recover close to pre-COVID levels in the 2nd half of 2022.   

5. High forward dividend yield based on $0.840 per unit price
Using 2019 quarterly dividend average of S$0.014 per unit as future operations norm, annual dividend expected is S$0.056. At current price of S$0.84, this represented a dividend yield of 6.7%-7.0% from good quality assets such as Paragon and future M&A pipeline of Seletar Mall and upcoming Woodleigh shopping mall for inorganic growth. Investors who went in now will have another capital upside potential of at least 30%. The world will not be defeated by COVID and medical advances with vaccines and better treatment will definitely lead to an eventual economic recovery. 
The Seletar Mall

The COVID-induced recession is one of the worst that the world has ever seen with economies coming to a virtual standstill. However, it also presented an opportunity to purchase retail assets at such a huge discount to their potential valuation. Buying into SPH REIT now is like buying into an Orchard Road prime property at 30% discount off. Investors who stay the course of their investment and who dare to make additional purchases this year and even early next year will see substantial returns on their retail REIT investments over the next 3-5 years. 

(P.S: On the subject of valuation, there are many variables and factors. For skeptical folks whose narrow mindset "understanding" of valuation concept is based on current known conditions only and not forward looking into the future and treat the REIT as a non-going concern and undergoing immediate liquidation, then the valuation will approximate to the last known NAV of S$0.91 per unit based on fair value of its investment properties on again known prevailing market conditions as at financial year end. A more logical valuation method would be to view the present value of net future inflow of economic benefits isn't it?)

Sunday 20 December 2020

A Game Of Thrones in Condominium Disputes And Filing of Case With The Singapore Strata Title Board

This is a follow-up posting from the last one on "Problems With Living In Singapore Condominiums- Not As Glamorous As One Think It Is". When communication breaks down between residents and the Management Committee of the MCST, all hell breaks loose, in particularly, with many egos being at stake, some estate issues will definitely escalate out of control. This is where a group of very pissed off resident group will get together to campaign to overthrow the incumbent Management Council team by mudslinging on social media and tit for tat went on between the 2 parties This is also whereby some residents will file a case with the Strata Title Board ("STB") to take on their own MCST.

1. Procedure of Filing to STB and whereby all residents gets punished from depletion of management funds in the legal dispute.
From my last posting, one typical problem will be whether 2nd and 3rd car can park for free issue in most condominiums  or whether the MCST can enforce stringent wheel clamping rules against fellow residents.

The proceedings at Strata Titles Boards consist of 4 main stages:

(1.1)  Application: The Applicant will file an application against the Respondent.

(1.2) Mediation: All parties (Applicant and Respondent) are required to attend mediation session(s) fixed by the Board. The matter may stop at mediation if parties resolve the dispute at that stage.

(1.3) Hearing: If the matter cannot be resolved at the mediation stage, the Board will give directions to the parties to prepare for a hearing and fix the hearing date.

(1.4) Post-hearing: The Board’s orders is binding on parties and may be enforced at the Singapore State Courts.

1.1 Cost of Application Stage- Money commences burning
An application fee of S$500 is required to submit the application along with the "prayers" being sought. Prayers here is not referring to the religious prayers but rather a specific request for judgment, relief and/or damages at the conclusion of a complaint or petition. The applicant/applicants will typically hire a lawyer at this stage to help prepare the filing and incur additional cost of between S$3K to S$5K.

At this point, the MCST is known as the respondent. The Management Council Members may also be named by the applicant/applicants individually as additional respondents along with the MCST. To get ready a respond, the MCST will typically incurr legal fees for crafting the respond. This can cost anywhere from S$3K to S$5K depending on the number of issues, its complexity and hours spent by the legal counsel.

 1.2  Mediation- Extra money burnt for legal counsel to attend Mediation session on behalf of Applicants/Respondent
The lawyers representing the applicants and the MCST at this stage will be very happy as they can bill around S$3K to attend the mediation session. 

So applicant wasted S$3K out of their own pocket if they hired legal counsel at this stage and the respondent will also waste S$3K. 

Normally, there will be at least 2 mediation sessions before all stakeholders either resolve the issues or decided that mediation is useless and to move on to full hearing. If there is another mediation session, another S$3K will be wasted at each side.

Therefore, at least S$6K will thus be burnt by applicants and respondent respectively at the mediation sessions.

1.3 to 1.4 Hearing and Post Hearing
There will be an STB hearing cost here as well as individual legal counsel cost. This stage typically cost around S$10K to S$20k for each respective party depending on the number of hours spent by the legal counsel on hearing preparation and submission.

One import thing to note here is that many people have the wrong notion that if they win the STB case, they can get back all legal consultation and mediation costs from the losing party. This is totally wrong concept. Only party to party cost and panel hearing cost can be recovered. To give an example, I have known of MCST who spent S$50K in legal fees overall to defend against the prayers sought by the applicants and won the case but in the end only got back S$10K in cost recovery. 

A typical STB case may thus cost up to S$20K to S$30K for applicants and respondent respectively depending on the number of prayers and the complexity of the issues. This is a lose lose situation as this means that S$40K to S$60K would have been wasted by both parties. The only winners out of this will be the legal counsels. Unfortunately, such incidents are not isolated. There are many people with different personalities and principles living in any estate. Residents should thus participate actively in the Annual General Meeting and ensure that they elect their council members wisely. 

Most importantly, more residents should step forward to take up the thankless job of being a management council member lest the council is left in the control of an extremist group of residents who can then make numerous house rules to turn the entire estate into an army camp or prison which will have negative repercussions such as the estate getting into multiple lawsuits with vendors at Small Claims Tribunal/State Courts or cases lodged by fellow residents at STB. 

Friday 11 December 2020

COVID Vaccine Will Only Be Successfully Developed in 10 Years Time According to Colleague Who Worked As A Nurse Before.

Yesterday, I was working from home and had a very interesting tele-conversation with one of my colleagues in Sales and Marketing team. We were talking about the current work from home situation and how I find it not that effective but have to adhere to Business Continuity Planning.

"I wonder when will the COVID vaccine be imported by our Ministry of Health for use by Singaporeans," I said.

"Aiyo, not so fast one. I tell you this. I worked as a nurse in a hospital before and know about such thing. Successful vaccines take as long as 10 years to develop. So we will need to wait at least 2-3 more years fastest before a successful tested vaccine is rolled out for mass inoculations. Also viruses keep mutating, so a successful vaccine may never be developed," exclaimed my colleague confidently.

When I heard the above, I was stunned for a moment and bewildered. Is my colleague, Sarah, working from home or more of "sleeping from home" for a few months to be so out of touch with the biggest global news this month?

"Sarah, Moderna and Pfizer vaccine have concluded their phase 3 trial and both are more than 90% effective and safe for use. As a matter of fact, UK had already started their mass vaccination programme for covid. The US is not far behind and they expect an emergency authorization as soon as this week or early next week by their FDA for Pfizer followed by Moderna," I remarked.

"Oh, I didn't know that....haha...I was very busy with business development work hence did not see the news," Sarah replied hastily.
Apparently, some folks maybe too relaxed with working from home and lost touch with reality. Luckily I updated her on the latest news else it will look bad on the image of our organisation if she meets clients and tells them the weirdo theory and misconceptions of hers.

Thursday 10 December 2020

7 Things Eagle Hospitality Trust Unit-holders Need to Know About The Upcoming EGM (30 Dec 20) and Restructuring Plan

Eagle Hospitality Trust ("EHT") finally released the details on the restructuring plan on Dec 9, 2020, along with a 194 pages circular. The proposed new REIT manager is SCCPRE Hospitality REIT Management Pte Ltd ("SCCPRE"), a member of SC Group

7 key highlights EHT unitholders need to know:

1. SCCPRE rescue plan is straight forward and does not involve equity raising at the kick off stage. They will negotiate for an 18mth bridging loan of US$125Mil @ around 10.25% interest rate per annum from a group of lenders led by the Bank of America to re-start hotel operations in the stabilization phase before moving on to the growth phase. This represented the best proposals received so far as it preserves value within EHT with minimal dilution impact due to current weak market sentiment.  

2. If Resolutions 1, 2, 3 and 4 associated with the appointment of SCCPRE fails, then unitholders will need to move on to Plan B (final resolution number 5) which is the voluntary winding up of EHT and an immediate liquidation.

3. The name of EHT will no longer exist and amended to SCCP Hospitality Real Estate Investment Trust if the change of new REIT Manager is approved by unit-holders (pls refer Pg 39/194 of Circular). This actually bodes well for all stakeholders as EHT branding is now negatively associated with breach of numerous listing regulations and also famous for the 2 USA based directors who make decisions such as signing non-disturbance agreements that has conflict of interest by transferring liabilities from lessee to the lessor as well as unauthorized loan application on behalf of EHT for US COVID Loan programme- pls see pt 5 below also. 

4. By opting for a new REIT manager, the key risk here is a potential litigation risk from the creditors of outstanding hotel liabilities, the lenders of EHT under the Bank of America Facilities Agreement as well as Sponsor (Urban Commons) and the Master Lessees. Litigation are expensive and may burn up existing working capital and lead right back to square one.

5. The unauthorized loan of USD 2Mil taken out by ex-Directors Taylor Woods and Howard Wu using the name of EHT Master Lessor for the United States Paycheck Protection Program, has not been transferred to the correct party which is the lessee. There seems to be a hidden agenda by Taylor Woods and Howard Wu to transfer the liability to EHT unit-holders, that is, making EHT investors pay for their own Urban Common hotel lessee operations. There is a risk that EHT unit holders may have to bear the liability for this fraudulent loan application.

6. In order for EHT to eventually lift its trading suspension, sufficient progress would need to be made towards stabilising EHT's operations and EHT would have to ensure that it can operate as a going concern. This would mean the fastest turnaround for trading suspension to be lifted will be as at end of June 2021 if (i) SCCPRE managed to divest at least 1 hotel properties to raise cash on hand and to pay down the bridging loan and (ii) the hospitality sector starts to recover with the COVID vaccines for sufficient cashflow generation to at least breakeven point.

7.  In the event of a liquidation under Chapter 11 if unitholders choose not to vote in a new REIT manager, there is a probability that a further 14% to 43% discount off the last valuation report of US$727Mil maybe required to liquidate them immediately (Pls refer to Pg 69/194 of Circular) due to COVID.

Parting Thoughts:
Based on the aforesaid mentioned points, if the unit-holders choose to liquidate immediately, they will most likely get back nothing due to the current weak market. Hence the better option is obviously to vote for resolution 1, 2, 3 and 4 to appoint the new REIT Manager. In addition, the Trustee DBS is of the view that the proposed change of managers and related matters is the most credible proposal put forth to stapled security holders in the best interest of EHT.

(P.S: Please also "Follow" me on Facebook-Investment Income For Life.)

Wednesday 9 December 2020

Eagle Hospitality Trust New White Knight- SC Capital and EOGM Showdown Coming

The recent announcement of SC Global coming into the picture as White Knight is good news for Eagle Hospitality Trust ("EHT"). SC currently controls the managers of two listed real estate investment trusts in the region, Japan Hotel REIT Investment Corporation and Thailand Prime Property Freehold and Leasehold REIT. It is very strong financially and has the networking and experiences to restructure EHT.

The bad news now is how much will be the placement units issued to SC Global for them to re-capitalise EHT and at what price. Current unit holders will suffer from massive dilution in their original holdings if the new unit issuance is based on recent valuation report of the hotels. But no choice, given that SC Global need to have a significant stakes in order to water down the current units controlled by Howard Wu and Taylor Woods.

More details should be released soon on the re-capitalization plan and the Extraordinary General Meeting to be convened to formally approve the change in REIT Manager and acceptance of the rescue package. Perhaps the other interesting question is whether current unit holders need to also cough up additional funds in order to raise working capital. 

(P.S: Please also "Follow" me on Facebook-Investment Income For Life.)

LATEST updates on 10 Dec 2020: Please refer here for the key highlights on the detailed rescue plan and EGM.

Sunday 6 December 2020

First REIT Nightmarish Rental Restructuring- Good Buy Now With Huge Drop in Price and High Potential Dividend Yield of 12.2%?

First REIT has to be one of the most disastrous performing REITs over the past 3 years (the only worse one is Eagle Hospitality). From a record high S$1.40 per unit in 2018, it has now dropped to just a mere former shadow of itself of S$0.40 per unit as at 3rd December 2020. When the detailed rental restructuring plan was released on 29 November 2020, it crashed the previous week ending market valuation of S$0.475 per unit. What was released in the announcement on that fateful day was apparently worse than the basic expectation of most investors.

1. Sponsor and main lessees Lippo Karawaci & Siloam in trouble
Lippo Karawaci is having cashflow challenges due to COVID-19. It is having problems selling its properties in development amidst the current pandemic and also having problems divesting off assets such as retail shopping mall to raise cash. On 2nd December 2020, unitholders of Lippo Malls Indonesia Retail Trust (“LMIRT”) grilled the Trust’s manager over the pricing and timing of purchase of strata title units of Lippo Mall Puri in West Jakarta from Lippo Karawaci for S$336.5Mil. There are doubts by LMIRT unit holders on whether or not the valuation done at the end of 2018 is reasonable enough given the current adverse impact of COVID-19 in Indonesia. Hence there is a probability that Lippo Karawaci is unable to download the asset into LMIRT to raise fund.

First REIT Trust Manager’s rational for the new Master Lease Agreement (“MLA”) is to avoid the adverse consequences of a default by Lippo Karawaci if it maintains the existing MLAs. Personally, I thought that this move is as good as admitting that First REIT is undergoing a potential default by its tenants as it had already given 4 months of rental waiver to its tenants. 

2. Nightmarish terms of new MLAs for First REIT owners

(i) What are the main changes to the MLAs? 
The aggregate commencement base rent for the bulk of the portfolio, LPKR hospitals, will be reduced from S$80.9 Mil to approximately S$50.9Mil (or around IDR550.7 billion) per annum. This is a whopping cut of <58.9%> in base rent. The restructured MLAs will also feature a new performance-based rent mechanism where the actual rent paid will be the higher of either the base rent

The main changes is that instead of receiving the rental in Singapore dollars, the new MLAs changed this to Indonesian Rupiah. The commencement base rent will enjoy a fixed escalation rate of 4.5% per annum, compared to the previous base rent escalation capped at 2.0% per annum under existing LPKR MLAs.

(ii) Is the higher annual escalation rate of 4.5% relative to the current 2.0% per annum a much better deal?

The answer to this seems to be no better. Investors are generally worst off albeit the seemingly higher escalation rate of 4.5%. This is because the risk of foreign currency risk is now being passed on to First REIT investors as the rental denomination currency has been changed to IDR instead of SGD. The IDR lost around 32% of its value over the past 10 years. If there is hyper-inflation or changes in monetary policy such as printing lots of money by the Central Bank, then the IDR may face a substantial drop that is double digit and definitely more than 4.5%. 

(iii) What is the point of signing a new lease agreement if the tenant does not intend to honour it?
The important question here is what if there is another pandemic or major recession in another few years’ time? Will Lippo Karawaci come back to ask for another restructuring of MLAs? If one can dishonor an agreement one time, then one can surely do it again to the unit-holders a second or third time. They should have only changed the terms for the upcoming first batch of hospitals that have leases expiring and do for the rest later on upon expiry. Personally, I think this has seriously damaged their reputation and branding. They should have gone for a rights issue to raise cash at the holding company level back in Indonesia to meet future obligations instead of blatantly breaching signed lease agreements. 

3. Dividend trap with high yield or really good buy now?

Dividend yield look good with 4.44 cents after the restructuring. At the last traded unit price of S$0.40 per unit, this is an attractive dividend yield of 11.1%.. If we exclude the one off non-recurring restructuring costs of S$3.4Mil, then one will get an even higher dividend yield of 12.2%.

As at 30 June 2020, net asset value dropped from S$0.969 per unit to S$0.494 per unit after the restructuring exercise. Compare to the market price of S$0.40 per unit last traded on 4 December 2020, there is  thus a current discount of around 19% to NAV.

However leverage ratio jumped to 48.6% which is almost near the new ceiling of 50% by MAS. 

4. Parting Thoughts
I am not sure how First REIT will be able to get any yield accretive new properties acquisition at the current super high yield expected by investors and also the fact that it is near to bursting the debt limit of 50% hence unable to take advantage of the current low interest rate environment.

Hence despite the seemingly very attractive potential dividend yield of up to 12.2% per annum, I will give First REIT a miss due to the change in rental base (forex fluctuation risk) from SGD to IDR and an over-leveraged financial position. Perhaps most importantly, I looked at the sorry state of another Lippo Karawaci sponsored Reit, LMIRT, and can't help but worried that any investment in First REIT will go the same way in the near future. Last but not least, my personal thoughts are that breaking lease agreements means that the senior management of Lippo Karawaci group will simply repeat the same act once there is another economic crisis.    

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