The Edge Singapore  Published on Fri, Jun 04, 2021

ARA US Hospitality Trust (ARA H-Trust) has so far survived the pandemic despite losing more than 15% of its portfolio value (see Table 2), as its investors forfeited distributions in FY2020 and possibly this year as well. On the other hand, the status of Eagle Hospitality Trust (EHT) as a listed stapled security comprising a REIT and a business trust is approaching its endgame. Its portfolio has been protected under Chapter 11 since January this year. Both ARA H-Trust and EHT listed within weeks of each other. ARA H-Trust, however, listed without the financial engineering that was a characteristic of EHT’s portfolio.

At any rate, according to the latest announcement by DBS Trustee, the US Bankruptcy Court at the sale hearing has approved the sale of EHT’s 14 Chapter 11 properties (see Table 1). DBS Trustee is overseeing the sale of EHT’s assets under Chapter 11 protection in accordance with local regulations, where it acts in the interests of the stapled security and its unitholders.

Of the properties protected by Chapter 11, nine properties fetched US$326.5 million ($432.2 million) in accordance with the terms of the Stalking Horse Agreement. Five properties fetched US$115.4 million, which is US$24.8 million more than the floor price set by the Stalking Horse Agreement. The Stalking Horse is Madison Phoenix, an affiliate of Monarch Alternative Capital which also provided financing to some of the properties. Altogether the sale is likely to fetch US$481.9 million.

Crowne Plaza Dallas near Galleria-Addison (CPDG), which was not part of Chapter 11 properties, was almost divested in April this year. The lender of the mortgage to CPDG issued a notice of acceleration in August last year when the property defaulted on its loan. However, the buyer did not pay the deposit in a timely manner.

Two more properties — Delta Woodbridge and Hilton Houston Galleria — were also not part of the portfolio protected under Chapter 11. DBS Trustee says the sale of the 14 Chapter 11 properties is likely to be completed this month.

“Subject to the claims resolution process, it is unlikely that claims of all creditors of the Chapter 11 Entities will be satisfied in full from the sale proceeds, and accordingly, the sale proceeds are not expected to result in a recovery for Stapled Securityholders,” its statement says.

Objections to sale overruled by US court

Constellation Hospitality Group, on behalf of EHT’s former sponsors Taylor Woods and Howard Wu, filed an objection to the sale motion and requested that the sale hearing be postponed. An ad-hoc committee comprising seven EHT unitholders also filed an objection requesting that the sale motion be postponed to June 1 “in order to realise the benefits of a potential future bid by Constellation”. The US Bankruptcy Court judge ruled that neither Constellation nor the ad-hoc committee had shown that the Constellation bid represented a better deal, compared to the results of the auction.

In fact, the judge observed that there were features of the Constellation bid which made it inferior to the bids received, and the eleventh-hour submission of the Constellation bid in its current state was inadequate and did not warrant a disruption to the sale hearing.

On Dec 30, 2020, EHT held an EGM for four interdependent resolutions pertaining to the restructuring and recapitalisation of EHT. One of the four interdependent resolutions was an extraordinary resolution requiring 75% of unitholders present or by proxy to vote in favour. Only 56.25% voted in favour.

On Dec 30, 2020, EHT held an EGM for four interdependent resolutions pertaining to the restructuring and recapitalisation of EHT. One of the four interdependent resolutions was an extraordinary resolution requiring 75% of unitholders present or by proxy to vote in favour. Only 56.25% voted in favour.

More due diligence required

During a post-mortem of this saga, there will be time for regulators, investment bankers and the investment community at large to study how EHT was allowed to list, with properties valued based on 20-year master leases; and where the financial standing of the master lessees was not thoroughly researched. The structure of the individual companies holding the assets was designed to confuse.

The total security deposits for these master leases were never received. As part of the master lease agreements, the sponsors Woods and Wu were required to provide security deposits of US$43.7 million following the IPO, according to the prospectus. They never did. Their initial security deposit was US$28.7 million.

Neither did Woods and Wu honour the master lease agreements, causing EHT to default on its loans. As a result, EHT halted trading and has been suspended since March 19, 2020.

As can be seen from Table 1, the proceeds from the sale process are a fraction of the IPO purchase price. And the Queen Mary Long Beach — sold into the REIT at US$139.7 million — is not included in the table. That is altogether a separate study on financial engineering.

Surviving Covid

ARA H-Trust — a stapled security comprising ARA H-REIT and ARA H-BT — raised some US$331.56 million in an IPO on May 2, a few weeks before EHT’s IPO. The valuation of its IPO properties, which were valued at US$719.5 million, with a discount rate of 10% at IPO, has fallen by around 15.7% to US$605.4 million. This excludes the three Marriott-managed hotels acquired in January 2020. Including the three acquisition properties, ARA US Hospitality Trust’s valuation stood at US$696.9 million.

As at end-1QFY2021, ARA H-Trust’s gearing had risen to 49%, and its interest coverage ratio was below one time. Replying to questions ahead of the AGM on April 27, the trust’s manager said: “As the operating environments continue to improve and normalise in the US, we believe that the portfolio value, which is derived based on projected cash flows, will improve and consequently improve the trust’s gearing ratio. For FY2020, ARA H-Trust reported interest coverage ratio (ICR) of 0.1 times, which is lower than the minimum interest cover financial covenant under the loan facilities.”

The manager said that there is “currently no immediate plan for ARA H-Trust to conduct any equity fund-raising as there is sufficient working capital”, adding that it hoped to achieve a gearing of 40% to 45% once the US economy has stabilised.

Operations to stabilise by 2024, says valuer

In a summary of a valuation report, valuer HVS said the operations of the properties are anticipated to stabilise around 2024. “Operations are stabilised when abnormalities in supply and demand or any additional transitory conditions cease to exist; and (ii) the Properties will be maintained in good competitive condition and that no major changes will have occurred in the local market or the US economy that would have affected the performance of the Properties by 2024,” HVS stated in a report dated Feb 24 this year.

DBS Research is a lot more positive than US-based HVS. It reckons that domestic travel is likely to rebound strongly in 2H2020. DBS has a price target of US$0.69, representing a 32.7% upside. “A swing towards pre-Covid-19 RevPARs (revenues per available room) in the medium term implies ARA H-Trust can offer dividend yields at close to 15%,” DBS says.

Even then, ARA H-Trust did not pay distributions per stapled security (DPS) in FY2020 as it had to conserve cash. And it is unlikely to be paying DPS in the near term as its ICR remains low.

In fact, on April 16, ARA H-Trust announced that John Lim, the founder and major shareholder of ARA Asset Management, had divested 40 million units of ARA H-Trust to its sponsor, ARA Real Estate Investor 23. This raised ARA Real Estate’s stake in ARA H-Trust from 9% to more than 16%. An ARA spokeswoman says this is to align Lim’s interests with those of ARA H-Trust’s unitholders.

Based on US regulations, unitholders of REITs and trusts should not hold more than 9.8% of a REIT or trust to qualify for exemption from 30% withholding tax on dividends. “The sponsor has obtained a waiver from the trustee of ARA H-REIT and the trustee manager of ARA H-BT from the ownership limit of 9.8% … for the sponsor to hold up to 23% of the stapled securities in ARA H-Trust,” an April 16 announcement said. Exceeding the 9.8% ownership by ARA Real Estate (the sponsor) will not impact future the tax treatment for other unitholders, a spokeswoman says. 

As for capital management, ARA H-Trust’s manager obtained an unconditional waiver on the financial covenants for all loan facilities up to March 2021 and this has been extended to June 2021. Under the second waiver, the next testing period will be based on results for 3Q2021 (ended September 2021) and will be performed by November 2021.

Interestingly, when ARA H-Trust’s manager was asked if it looked at EHT’s assets, the manager said: “Managers had reviewed the mentioned hospitality assets and considered many factors including incremental capital requirements, the prolonged closure of these hotels affecting the dislocation of demand, and the stalking horse bid, in concluding not to pursue the opportunity for ARA H-Trust.”