By Mak Yuen Teen

On August 31, 2020, Eagle Hospitality Trust (EHT) will be holding its inaugural AGM following its listing in May last year. It is just as well that it is virtual and non-interactive as, otherwise, I could imagine a very tough grilling from unitholders.

There are only three ordinary resolutions for the AGM. Since EHT is externally managed, unitholders do not get to vote on the re-election of directors. Some trusts allow unitholders to endorse the appointment of directors, and some require directors to resign if they do not receive endorsement. But not EHT.

Ordinary Resolution 1 is for unitholders to receive and adopt the reports of the Trustee-Manager of EH-BT (which is dormant), the REIT Trustee (DBS Trustee Limited) for EH-REIT, the REIT Manager, and the audited financial statements of EH-BT, EH-REIT and EHT for the financial year ended December 31, 2019 together with the Independent Auditors’ Report.

Ordinary Resolution 2 is to re-appoint KPMG LLP as auditors for EHT, EH-REIT and EH-BT until the next AGM of EHT and to authorise the REIT Manager and the Trustee-Manager to fix their remuneration.

Ordinary Resolution 3 is to authorise the REIT Manager and Trustee-Manager to issue up to 100% of new stapled securities on a pro-rata basis and up to 20% on a non-pro rata basis.

I am not a unitholder but have received requests to suggest questions that unitholders can ask. I have focused on questions relating to the listing of EHT and the corporate governance section in EHT’s annual report. Some of the questions are best answered by the issue manager, trustee or auditors. Hopefully, the board will seek answers from those who are in the best position to answer particular questions.

Questions

  1. What were the considerations in assessing that EHT was suitable for listing on SGX, given its complex corporate structure with multiple layers of entities in Cayman Islands, U.S. and Singapore; its foreign-based properties; and with two individuals controlling the managers and companies owned by them being master lessees for all the properties?
  2. What was the due diligence done for the co-founders, directors and management?
  3. How was the appropriate composition of the board determined prior to the IPO, including the appointment of the chairman, deputy chairman, lead independent director and committee chairmen? Who were involved in this?
  4. Who were involved in assessing the independence of the independent directors for the IPO?
  5. Mr Carl Stubbe, an independent director and Chairman of the Nominating and Remuneration Committee (NRC), was disclosed in the prospectus as being appointed in April 2019 but his LinkedIn profile said that he was appointed in August 2018. He is currently the Senior Vice President, Investment Sales, Asia Hotels & Hospitality Group of Jones Lang LaSalle Property Consultants Pte Ltd (JLLPC). His LinkedIn profile showed that he joined Jones Lang LaSalle Property Consultants in May 2019, the same month that EHT was listed. JLLPC is part of the Jones Lang LaSalle Inc. (JLL) group listed on NYSE and one of its subsidiaries, Jones Lang LaSalle Americas, Inc (JLLA) was the independent market research consultant for the IPO. What is the correct appointment date? Was his employment relationship with JLLPC considered in assessing his independence in accordance with the letter and spirit of the regulations applicable to REITs and business trusts and the Code? Can the board disclose the fees paid to JLLA as independent market research consultant so that unitholders can assess whether the payments to JLLA were significant?
  6. What was the board’s involvement in reviewing and approving the acquisition of the properties?
  7. EHT bought six hotel properties in the ASAP6 Portfolio without historical financial information for the past three years. Did the issue manager, trustee and the board question why there was no such information and consider whether this may impose significant risks for unitholders? What due diligence was done with respect to the properties, and was there any additional due diligence for the ASAP6 Portfolio and on the vendors?
  8. There were two valuers appointed, Colliers International Consultancy & Valuation (Singapore) Pte Ltd (Colliers) and SG&R Singapore Pte Ltd (HVS). Colliers said that it used the Income (DCF) Approach, while HVS said it used the Income (DCF) Approach and Direct Sales Comparison Approach. Who were involved in reviewing the valuations to ensure they are reliable? For  the six properties for which there was no historical information for the past three years, how were the estimates for the DCF approach derived?
  9. HVS said that it inspected all the 18 properties in undertaking the valuations. Is this correct?
  10. Did the issuer manager, trustee and board question the consistently higher valuations from HVS and can the board explain why their valuations were adopted for all  the properties?
  11. On page 36 of the prospectus, there is a footnote which says: “Prior to the listing or shortly after Listing, the USHI Portfolio Vendor or the Master Lessee of the Hotel, as the case may be, may replace this Hotel Manager. A new Hotel Manager will be appointed, which is expected to be an existing Hotel Manager of one or more properties in the Initial Portfolio and a larger and more established hotel management company.” This applies to seven properties managed by Brighton Management, LLC. No reason was given for the intended change in hotel manager for these properties. Did the issue manager, trustee and board question the proposed change to ensure that there were no underlying problems that need to be disclosed?
  12. Many issues have emerged since EHT’s listing. Do any of these issues date back to prior to the IPO?
  13. Are there any restrictions in the ability of unitholders to replace the managers, such as triggering breaches of certain agreements or covenants?
  14. Mr Cheah Zhou Yue, Joel, the Senior Vice-President (SVP) of Finance, was the most senior finance person in management at the IPO. He resigned on June 30, 2019, just over a month after the IPO. Was the board, and especially the Audit Committee, aware of his resignation at that time? Why was his resignation only announced in December 2019?
  15. EHT appointed a CFO, Fred Chee Kin Yuen, on June 29, 2019 but he lasted only about eight months, as he resigned in early March 2020. EHT does not have a full-time senior finance person since. Why did Mr Chee stay for only eight months? Who is overseeing the finance function at the moment and has EHT identified any person to take on the CFO role?
  16. Can the board provide an update on the status of the forensic investigation, restructuring process, strategic review and engagement with the lenders? Can the board provide an estimate of the total costs to be incurred by EHT, including payments to investigators, consultants and advisers?
  17. If wrongdoing is established, would the board consider legal action against those responsible to recover any losses suffered and costs?
  18. Under the remuneration policy for the executive director and key management personnel (KMP), it is said that there is a variable component or annual award that is linked to corporate and individual performance or corporate guarantees. Can the board explain what are the corporate and individual performance KPIs or corporate guarantees?
  19. Can the board disclose the actual fee structure for non-executive directors, including base fee, additional fees for additional responsibilities, and any meeting fees?
  20. EHT discloses the remuneration of the CEO, individual directors and KMP in bands of $250,000. In the case of the CEO and individual directors, this is not in compliance with the 2018 Code. EHT said that it believes that “full disclosure of the specific remuneration is not in the best interests of the Group, taking into account, amongst other things, the sensitive nature of the subject, the competitive business environment, and the potential negative impact of such disclosure”. Can the board explain why disclosing the exact amount compared to a band of $250,000, especially for the CEO who is in the band of $3.25 million – $3.5 million, and the highest paid KMP, who is in the band of $1 million – $1.25 million, is any more sensitive, or is more harmful to its competitiveness, or has a greater potential negative impact? Can the board be more specific about the harmful effects of greater transparency in remuneration?
  21. In the case of the non-executive directors, can the board explain why disclosure of the exact amounts can be harmful to the best interests of the Group?
  22. Why are the non-executive directors paid a “directors’ appreciation bonus”? Who decided on payment of such a bonus? What is the basis for determining this bonus and is it provided for in their terms of appointment?
  23. KPMG LLP were paid US$1.65 million for non-audit services for services rendered in relation to the IPO, and US$1.093 million for audit and audit related services, with US$0.9 million of that for services rendered in relation to the IPO. Can KPMG explain how its audit-related work was conducted for the pre-IPO and why the fees for the audit-related services pre-IPO are so much higher than the fees for the full audit for FY2019?
  24. Can KPMG explain the nature of the non-audit services provided pre-IPO, and what safeguards they have in place to ensure that the nature of the services and the large amount of non-audit fees do not compromise their independence?

Voting

Given what has happened over the past year and some of the issues raised above, I would vote against all three resolutions if I am a unitholder.

Ordinary Resolution 1 is procedural and have no real consequences either way, but voting against will send a strong message to the board and others who are putting up the reports for adoption.

For Ordinary Resolution 2, I am concerned about the large amounts paid for non-audit services and pre-IPO audit related services, with little information provided about the nature of the non-audit services and whether they may compromise the auditor’s independence. Having new auditors not connected to the IPO is also preferable.

For Ordinary Resolution 3, I do not think that unitholders should give the manager a general mandate to issue additional units unless they are convinced that there is a future for EHT. At the moment, I am not convinced that there is a future and would be hesitant to throw in good money after bad. The strategic review, restructuring, investigations and engagement with creditors are still ongoing, and I think it is premature to give a general mandate.