First REIT's Sponsor Plan to Default on Original Rental Support Agreements- Price Collapsed By 30% Within A Day

What a shocking announcement being made by First REIT this afternoon. Lippo Karawaci plans to default on the rental income support for Siloam hospitals stipulated in the rental agreements. The sponsor has cleverly crafted it as a "rental restructuring" instead of a planned default. First REIT share price dropped from S$0.885 to an all day low of S$0.635 this afternoon- a whopping 28% crash in valuation. Even before the announcement, I was puzzled to see the price suddenly corrected by over 12% in the morning. Looks like some insiders managed to get the news first and escaped by dumping their stocks. SGX regulatory team immediately raised query on the abnormality. First REIT management team had no choice but to call for a trading halt immediately. Then a few hours later, news came out that the sponsor is unable to provide the huge rental income support. According to First REIT, its sponsor, Lippo Karawaci, had not approached it with regard to the "lease restructuring".

First REIT Response To The Surprised Announcement By Sponsor Without Prior Notification

Announcement Extracted From Lippo Karawaci and Posted by First REIT

Income support of up to 80% by Lippo Karawaci and Internal Organisation Politics?

Please see here on my previous posting of: "First REIT Review PART 2- Super High Yield of Over 8% And Possibility of 80% Drop in Rental Income For Upcoming Renewal Of Expiring Hospitals" on 18th October 2019.

Lippo Karawaci had just thrown a spanner into the works on upcoming lease renewals of the 5 hospital leases at the end of 2021. This time round, Lippo Karawaci decided to activate the nuclear option as it disclosed this material announcement without touching base with the current First REIT team. Is this due to internal politics and major disagreements on the current discussion? I reckon that this may have risen due to local First REIT management or OUE team putting up a fierce fight for a fair renewal of contractual terms that are not prejudicial to the interest of the current unit-holders.

The sponsor now declares that it is not just the 5 properties expiring in 2021 up for new terms and conditions, but for all the properties of Siloam hospitals under rental support by the sponsor as it is under intense financial pressure from the COVID-19 recession. In short, Lippo Karawaci is not going to honour the rental income support commitment. Worst case scenario will be that Lippo Karawaci just walk away from the previous signed contractual obligations. This is like holding a knife to the throat of the management of First REIT.    

Personal thoughts on the current soap opera

I do not like the current development. Lippo Karawaci had just completed a USD 1 billion rights issue last year and also raised funds by selling away a shopping mall to Lippo Mall Trust. It had even set aside hundred of millions (USD 315Mil) from the rights issue exercise for REITs rental payment for FY2020. However, upon being hit by COVID-19 pandemic recently, Lippo Karawaci decided to activate the nuclear option of potential default of rental payment to First Reit.

I am currently still vested in First REIT. But luckily since the March 2020 crash, have pared down 60% of my significant holdings and concentration risk in First REIT and diversified more of my holdings into Mapletree Commercial Trust, Suntec REIT and AIMS AMP in view of the possible devastating COVID-19 impact in Indonesia. Saying that, I am still vested in 40,000 units. Will probably sell off another 25% of my current First REIT units this week based on the worrisome historical track records of the owners. Personally, I think there is enormous destruction of shareholders' value in Lippo Mall Trust and OUE Commercial Trust. So I guess it is now First REIT's turn at the slaughter house to butcher if off. 

Summary- To buy more units, hold or panic sell all your units?

The price of First REIT had dropped from its heyday of S$1.30 per unit to the current S$0.680 per unit due to the uncertainty of the upcoming lease renewal on a triple net charging basis. The key to answer whether to buy more, hold or panic sell rest on:

(i) whether this is just a strategic move by the Sponsor to force the First REIT management and OUE folks to agree on more favourable terms and conditions for Lippo Karawaci or 

(ii) is it really due to threat of bankruptcy facing Lippo Karawaci?

By decreasing the dividend income, the yield of First REIT will go down. This may make it easier for OUE Healthcare to sell off some of its assets into First REIT as yield accretive to unit-holders in future to reduce reliance on only 1 main healthcare client concentrated in Indonesia.  One thing is for certain, that is, retail investors are always the ones getting the shorter end of the stick either way. 

Hong Kong Still Better Than Singapore Even With Protests, Recession and COVID-19?

According to the post by Peter G.de Krassel (he is a so called strategic analyst and contemporary social commentator) on South China Morning Post on 24 May 2020, the singular advantage Singapore has over Hong Kong is its affordable public housing. On the political and economic fronts, Singapore is no better than Hong Kong. Even in the fight against coronavirus, Singapore is left far far behind Hong Kong.

Well, I find it strange that Peter is dragging in Singapore again for his social commentary post of Hongkongers and Hong Kong Corporation contemplating whether to stay in Hong Kong  or move to Singapore due to the lingering protest and passing of new security law by China. He also went on to make the remark that "Singapore like China is effectively a one-party state". This is a typical western "Ang Mo" view that either you are a democracy like the USA or you are deemed an autocratic nation. So if you are an autocratic nation, then something is very wrong with your political system and the associated democratic attributes of such system. 

In my personal opinion, Peter Krassel got it all wrong. Such Ang Mo don't seemed to understand that there is a Mao-era China and a Deng Xiaoping era China albeit being seemed to be a one-party state but in actual fact, there is a world of difference. Deng Xiaoping revamped the politics at the bureaucracy level which bears qualities of democratic society system such as introduction of competition and accountability. This paved the way for the rise of modern China to its current greatness which is continuing its evolution under the Xi Jinping era. In addition, I do not know why Peter Krassel insisted on his assertion that Singapore is similar to China due to its opaque political system that leads to the perpetual election of the People's Action Party (PAP).

It is an absolute fallacy to think that there is no democracy in Singapore and that the PAP is not accountable to Singaporeans. The 2011 General Election whereby public housing prices and shortages were hot button issues is a perfectly good example. If the PAP had not listened, it would surely have gone out of power in the future. A U-turn was made with the step down of Mah Bow Tan from cabinet and the appointment of Khaw Boon Wah as the new Minister of National Development. From there on, Khaw did a fantastic job of resolving the BTO shortages housing issue by building first instead of Mah's wait first then build. HDB  and EC eligibility wage ceiling were also raised to help the sandwiched class and more generous housing grants were also given out.

Anyway, comparing Hong Kong and Singapore are like comparing chalk and cheese. Hong Kong has a great hither-land, China, to rely on even if things turned chaotic for a while. Singapore unfortunately does not have such overwhelming luxury. I cannot imagine freedom of speech and human rights such as staging violent protests and beating up people with different viewpoints can happen in Singapore without permanent damage to our reputation and the eventual demise of our economy and the loss of jobs of many Singaporeans due to the exodus of investors from riots. 

Magical Extra 20% Discount For Polar Puffs And Cakes By Using Food Panda Hack.

While ordering dinner on Food Panda last weekend evening, I noticed that if you choose the "Pick-up" yourself option, there are a number of food and beverages shops in shopping malls offering a 20% discount. Generally, the 20% discount is just a marketing gimmick as the food and drinks pricing will still be higher or at most similar to the direct retail pricing at the shops. This is due to the cost of using Food Panda's technological platform and thus the F&B outlets have to contribute part of their earnings from sales of food and drinks as service fees.

Now, for the really super duper weird part: An abnormality (at least from my personal perspective) occurred for Polar Puffs and Cakes such that when one utilized the "Pickup" yourself option, the 20% discount is truly off the current outlet retail price of each snacks and cakes. For example, sugar roll of S$1.30 became S$1.04 after the 20% discount.  Why would anyone then buy direct at any outlet of Polar Puffs and Cakes? Everyone would simply just start punching into their mobile phone to order using the Pickup option in the Food Panda App which is way cheaper. 

I decided to do an experiment the very next day which led to another mind-boggling situation. This was what I did: I went down directly to the Polar Puffs and Cakes Outlet at the shopping mall nearest to my home to see for myself. 

At the counter, I asked the shop assistant serving the counter at Polar Puffs: "Auntie, I want buy 5 sugar rolls without sugar coating. Got promotion a not and how much in total ar?"

The Auntie shop assistant replied: "We here no promotion lah. Don't have discount. Total is S$6.50 for 5 sugar rolls.....each is S$1.30"

I then politely told the Auntie that I decided not to buy the sugar roll and bid my farewell. Next, I took out my mobile phone and dived into the Food Panda App and started to place order for 5 sugar rolls for picking up at the Polar Puffs and Cakes outlet that I just visited. The electronic checkout total pricing shows S$5.20 to be deducted with a huge 20% discount. 

After paying via my e-wallet, the Food Panda App told me to go pick up from the outlet in 10mins time. As I could not contain my excitement, I hurriedly walked to the end of the shopping mall and then U-turn back to the Polar Puffs and Cakes outlet within just 1 minute and saw the Auntie busy taking my new electronic order sent via Food Panda and packing 5 sugar rolls into a box. The Auntie was very surprised to see me so soon again and asked me: "You back liao ar? What do you want to order?"

I replied: "Auntie, I don't want to order. I came to collect my order placed via Food Panda wor. Got 20% discount leh....only S$5.20." The Auntie was shell-shocked and asked me to show her my mobile screen on the details of the order being placed and asked me why like that. 😀

So it seems that the Food Panda App special pricing off retail outlet price is not a glitch. It appears to be a strange loophole for one to buy directly at the outlet at a 20% discount albeit the shop is not running any promotion for its famous sugar rolls. Why would anyone then want to pay S$1.30 to buy a sugar roll when one can just use the Food Panda App? This is a strange product pricing paradox. 

Maybe someone in the marketing industry can help enlighten me on the apparent Food Panda hack for Polar Puffs and Cakes. Anyway, I am a loyal supporter of Polar Puffs and Cakes for many years....more than happy to buy my favourite sugar rolls at a discount....hopefully, they maintain this working partnership with Food Panda forever. Yeah!

COVID-19 Vaccine-The Good and Bad

A mixture of good and bad news came out recently from the COVID-19 vaccine development. US Moderna Inc came up with positive news that its vaccine during the phase 1 trial is producing neutralizing antibodies to the virus and appears safe with the exception of a few volunteers displaying side effect of flu symptoms after vaccination. Phase 2 trial will also try to find the best dosage for administration and will start soon in May'20 and Phase 3 trial on efficacy and safety using larger sample population will commence in July'20. This is good news for all, in particularly, the battered travel and hospitality sector. 

However, the Oxford vaccine in development in UK seems to have hit a wall. From the animal testing, all the monkeys vaccinated were eventually infected despite developing some antibodies to the virus. The slightly positive news is that it appears that vaccinated monkeys do not develop severe pneumonia as compared to the other control group without vaccination. So we have a partially effective (half-baked) vaccine that does help to reduce the severity of the virus but may not stop infection in human beings. Despite this, the UK human trial is still proceeding with 1,100 people with double the dosage compared to the vaccination given to the monkeys.  Hopefully, the higher dosage will work out to stop the virus from replicating.

Summarising, the US Moderna Inc vaccine seems to show great promise. Saying that, the human trials for Moderna may turned the other way in terms of whether it really works well. Phase 2 and Phase 3 clinical trials will be the real deciding point on whether the pandemic can be ended. This will the key determinant on real economic recovery else we will have to go through more devastating circuit breakers akin lock-downs imposed by governments to prevent the healthcare system from being overwhelmed by COVID-19. 

Eagle Hospitality Trust- Updates On Projected Salvageable Hotel Properties Value from Fire-sales

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

Note: Last projection done here using financial statements as at 31 December 2019.

• 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.

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:

1. Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)

2. Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)

Since the resignation of the CFO of Eagle Hospitality Trust ("EHT"), I have mentioned that investors holding on to EHT better be prepared to do a 100% write off of their investments similar to what happened to Hyflux. However, the lightning speed of the collapse did catch me off-guard in March 2020- I was planning to re-evaluate on what to do with my existing holdings of EHT after the payout of dividends (which unfortunately never materialise).

No one can predict with 100% certainty what will happen next. But there are basically 3 scenarios that can happen, and we can then rationalise using probability to figure out it goes which way:

Scenario 1: EHT goes into immediate liquidation and firesales of its hotels to 3^rd parties as bankers refuses to grant any further forbearance of the breach of bank covenant.

I think that the chances of this happening is possible but on the low side. If this happens, then it will be an immediate fire-sales to raise cash to pay off the bankers. If the investment properties is valued at 50% haircut discount to the last valuation done by independent parties as at 31 December 2019, then investors will only get back 18% of their invested sum assuming the average entry price is at USD 0.60 per unit. Any fire sales of discount more than 57.5% to the last valuation will mean investors will not get a single cent back- pls refer to "Financial Projection of Realisable Cash from Sales of Investment Properties" section below.

I tada

Scenario 2: EHT do an equity fund raising exercise and also a partial asset sales to repay bulk of the bank loan as well as restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

This is the scenario that is most unlikely. The reason being that most investors have already lost faith in the sponsor Urban Commons and the senior management team of EHT. Even the last market trading price of USD 0.137 per unit before suspension already represented a substantial discount of close to 50% off the property fair valuation as at 31 December 2019. In addition, taking into account the current high COVID-19 fatality rates in the USA which is still going up, the market sentiment will not be favorable at all. 

Scenario 3: EHT sell off a significant stake to raise cash, restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

I would think that the probability of this scenario seems ostensibly higher given that EHT has already appointed FTI Consulting as their Financial Advisor for the restructuring exercise and to present a sellable storyline to the bankers. Also, the COVID-19 situation to me is not going to last many years as my thoughts are that by end of next year of 2021, more effective treatment drugs and vaccines will end this pandemic. Air travel and tourism will then start picking up again and the hospitality industry will see a gradual recovery from 2022 thereafter. The investment properties thus cannot be worthless and valued at more than 50% hair cut. 

The realizable value from this scenario of a going concern restructured business will be higher than the firesales of all hotels under scenario 1. This will represent a win-win scenario for all stakeholders.

Financial Projection of Realisable Cash from Sales of Investment Properties

Some simple assumptions to the financial model for estimating the realizable fair value:

• Basically, the most significant pieces of asset of value are the hotels (investment properties) worth US$1.27 billion on the statement of financial position last valued by independent assessor as at 31 December 2019. The yellow highlights are the playing around with the haircut/discount upon sales of the hotels of 25%, 33.3%, 50% and 57.5% as depicted above. Any discount at 57.5% haircut or above will mean that shareholders are not getting not a single cent back after the bankers are repaid.

• I have also included operating expenses run rate up till Dec'20 (assume zero rental income and include REIT manager fees, property expenses, financing cost in item L6) for the whole restructuring exercise as mentioned in the above 3 scenarios for conservative estimate of the financial model and business intrinsic valuation at fair value.

Summary and Parting Thoughts

In the event that EHT managed to sell off the assets at one third discount of 33.3%, we can see that the realizable value should still be worth US$0.349 per unit which means that investors can still get back around 52% of their invested amount (assuming entry price average was US$0.60 per unit). However, in the event that the hotel properties can only be sold off if more than 57.5% discount off their last valuation in 31 Dec 2019 is required, then investors will not get a single cent back. However, I am slightly more optimistic that offering a 50% discount should be able to get a rich buyer to takeover some of the hotels to raise cash for repayment to the bankers. In such case, investor will still get back around 18% of their invested amount. So for existing investors that could not exit in time, do keep your fingers crossed.   

Fina

Please also see my previous post on EHT:

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)

On 20 March 2020, the Managers of Eagle Hospitality Trust (“EHT”) received a notice of default and acceleration to the Facilities Agreement issued on behalf of Bank of America which is acting as the overall administrative agent for the syndicate of lenders that provided USD341Mil to EHT. EHT then quickly went on to ask SGX for a voluntary trading suspension in order to prevent a total share price collapse of EHT while it engages lawyers to re-work out operational, financial and loan negotiation with all the different stakeholders.

1. Weak Sponsor Urban Commons Does Not Have Adequate Financial Resources For Emergency

This should be nothing new. From the Queen Mary incident, most folks already know that Urban Commons live by the hand to mouth. It has been unable to produce timely audited financial statements to the City of Long Beach. Unfortunately, the COVID-19 outbreak totally disrupted its hotel businesses. Even though there is a high fixed rental component guaranteed by the Master Leasee Agreement, this is of no use at all in the face of substantial decline in business due to the worsening COVID-19 situation.

The sudden departure of its CFO also seems to be more for the reason of financial issues. Please see my previous post "Eagle Hospitality Trust CFO Suddenly Quit Less Than One Year On The Job For Personal Reasons". In a striking contrast, ARA US Hospitality Trust is still operating normally without such blatant default by its lessee.

Another shocking announcement was made later on that Urban Commons actually did not placed the required full rental deposit as per the Master Lessee Agreement- please see below point.

2. Management of EHT did not disclose to Unitholders that required deposits by Sponsor was not fully handed over.

EHT management did not highlight or disclose to Unitholders that Urban Commons actually already missed placing crucial rental deposits down. The excuse-oophs, I mean reason- here is that the management of EHT was waiting for a letter of credit promised by the sponsor. But this just does not make sense. Even if it is a letter of credit still within the “cure period”, the fact is that the sponsor will most likely breach the lease agreement by not providing this timely. Such information would have been crucial to many retail investors to watch out for potential financial default. 

3. Insufficient clarity on “defaulting events” in Bank Covenants disclosed to Unitholders.

Imagine a scenario for say Suntec REIT and one of its tenant default on rental. Does this mean that all the bank borrowings of Suntec REIT will be due immediately by just 1 tenant defaulting in rental payment? In addition, the bank covenant also strangely ties the bank borrowings to 3 key personnel such that departure of any personnel will lead to a defaulting event also. On hindsight, this just does not make sense for EHT to enter into such a one-sided draconian loan agreement. This either reflects on the lack of common sense or that the financial position of its sponsor are so weak that the bankers forced it down their throat.

I was rather surprised by these stringent bank covenants which were never emphasized to unitholders as well as the lack of clarity on the prospectus (page 120 did not give sufficient clarity on defaulting events). As a matter of fact, the entire EHT management team themselves was caught off guard by the immediate calling back of loan from the syndicated lenders- they were still thinking of paying out dividends under the assumption that the loan covenants have not been breached yet until the Bank of America, the bank administrator of the syndicated loan, served notice on them.

4. What happens next for those still holding on to EHT?

Since the resignation of the CFO of EHT, I have mentioned that investors holding on to EHT better be prepared to do a 100% write off of their investments similar to what happened to Hyflux. However, the lightning speed of the collapse did catch me off-guard in March 2020- I was planning to re-evaluate on what to do with my existing holdings of EHT after the payout of dividends (which unfortunately never materialise).

No one can predict with 100% certainty what will happen next. But there are basically 3 scenarios that can happen, and we can then rationalise using probability to figure out it goes which way:

Scenario 1: EHT goes into immediate liquidation and firesales of its hotels to 3^rd parties as bankers refuses to grant any further forbearance of the breach of bank covenant.

Scenario 2: EHT do an equity fund raising exercise and also a partial asset sales to repay bulk of the bank loan as well as restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

Scenario 3: EHT sell off a significant stake to raise cash, restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

I think I will do a separate elaboration and quick financial projection in my next post on the above scenarios to illustrate as this post seems getting too long winded. But basically, the longer the whole negotiation and restructuring drags on, the better it is for existing shareholders still holding on to EHT. Things are getting slightly more positive with new drugs (remdesivir) and vaccines being developed against COVID-19 and the re-opening of US economy. But if the bankers decided that the future storyline presented by the management of EHT are utter rubbish, then this will lead to immediate firesales of the hotels at current depressed price and unitholders will not get back a single cent.    

Please also see my part 2 posting on EHT:

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)