By Mak Yuen Teen

On July 1, 2020, I posted an article titled “Eagle Hospitality Trust: The One That Flew Too Far”,  mostly about the disclosures in the prospectus for Eagle Hospitality Trust (EHT).

Source: Mak Yuen Teen, CG Renegades: Boardgame, 2020

One issue I raised was about the absence of historical financial information for the six hotels in the ASAP6 portfolio. This is what I wrote:

“It is interesting that the prospectus disclosed that the managers do not have the historical financial information for the six hotels under the ASAP6 Portfolio for the last three years – that is, years ended 31 December 2016, 2017 and 2018. In other words, the managers bought the six hotels under the ASAP6 portfolio without information about the income and cash flows for these hotels. The unaudited pro forma statements of comprehensive income and cash flows for the past three years in the prospectus did not include these six properties.

Without such historical financial information, how are the valuers to apply the Income Approach reliably for these six hotels?”

I added:

“KPMG LLP in Singapore were the reporting auditors for the profit forecast and profit projection, and for the unaudited pro forma consolidated financial information. With regard to the unaudited pro forma consolidated financial information, KPMG offer what could be described as a 67% opinion – a bit like Star-Lord in Guardians of the Galaxy having a 12% plan.

The reason why I say this is because there was historical information for only 12 out of the 18 hotels, and KPMG’s opinion on the pro forma income and cash flow information was therefore based on just 67% of the hotels.

However, it seems that none of those responsible for the listing of EHT had any concerns that six out of the 18 hotels that were injected into EHT were bought with no historical information about income or cash flows for the last three years. I could find no reasons given as to why the managers agreed to the acquisitions of the six hotels without such information – it was merely stated that the managers did not have the historical financial information.”

And there’s more:

“SGX had “no comments” on the exclusion of the ASAP6 portfolio from the unaudited pro forma income and cash flow statements submitted for the purpose of the application for listing and “no further comments” that the unaudited pro forma income and cash flow information included in the prospectus excluded the ASAP6 portfolio.

However, in November 2019, SGX was suddenly concerned about the way the sale of these six hotels was conducted prior to the IPO. Frankly, that was about six months too late. These six properties were sold by ASAP Holdings to Wu and Woods prior to the IPO. ASAP6 is run by several Yuan family members, and its CEO Frank Yuan became EHT’s largest unitholder at its IPO with a 16.2 percent stake and started selling down his stake about five months after the listing. EHT said there was no legal requirement to disclose this relationship.

There was clearly something unusual about buying six hotels without information on income and cash flows for the last three years. Did anyone pause and consider the risks of EHT absorbing the six hotels without recent information about their performance?

After SGX said “no comments” on the lack of historical information for these hotels, everybody else just went along. The problems that have now emerged are not just with the six hotels. But the willingness to accept this, together with some of the other matters I have raised, show an over-enthusiasm for the listing which arguably led to blind spots.”

On August 23, I posted another article on the questions I would ask at the AGM if I were a unitholder (which thankfully, I am not). One of the questions was this:

“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?”

A unitholder took some of my questions, including the above, and sent to EHT.

At the AGM on August 31, Mr Tarun Kataria, the independent director, said this: “As for the ASAP6 portfolio, the independent valuers were provided with at least two years of historical financials (FY2017 and FY2018).” This is in the first para on page 4 of the Q&A published by EHT on September 25 and can be found here:

https://links.sgx.com/FileOpen/EHT%20-%20AGM%20QA%2031%20Aug%202020_R.ashx?App=Announcement&FileID=632875

There is clearly a contradiction between what was disclosed in the prospectus and what was said at the AGM. So was historical information (be it for two or three years) available for the ASAP6 portfolio hotels or not? If they were, then why did the prospectus say otherwise? Why did the auditors and SGX acknowledge that there was no historical financial information for these six hotels? Was this information withheld from them but provided to the valuers? Or was Mr Kataria incorrect when he told unitholders at the AGM that such information was provided to the valuers? As the independent directors are supposed to review the prospectus too, how does Mr Kataria explain the difference between what is in the prospectus and what he said at the AGM?

It will be a long road ahead for any possible revival of EHT. The appointment of a new manager, if successful, is going to be just a baby step. Significant litigation is likely to continue to plague EHT especially with its properties being based on U.S.

Unitholders deserve answers and accountability from all those responsible for this debacle.