When approached for comment, an Urban Commons spokesman says: “A public assessor will not provide the true value of a property, the figure you have stated is not correct. We started negotiating the acquisition of the underperforming Holiday Inn Orlando Suites soon after the last recession. Over five years, Urban Commons invested more than US$30 million converting the property into what it is today. It took us three years to renovate, rebrand and relaunch the property, unlocking and adding significant value.”
Holiday Inn Resorts Orlando Suites-Waterpark is one of 17 properties that were sold into Eagle Hospitality Trust during its IPO in May last year. The 18th asset was Queen Mary Long Beach, a stationary ship.
Undoubtedly, one of the reasons for selling Holiday Inn Resorts Orlando Suites -Waterpark into Eagle Hospitality Trust in May last year for US$142.7 million was for Urban Commons to turn around a profit from its purchase of the property in 2014, for a reported US$80 million. The valuation that was adopted by EHT was US$162.8 million.
The valuation for Holiday Inn Resorts Orlando Suites, according to the prospectus, is based on a master lease of 20 years + 20 years, a base rent of US$7.5 million, and a variable rent of 19% of gross operating revenue, plus 22% of gross operating profit. For FY2020, this would have been US$12.52 million. In addition, Urban Commons was required to provide a rental guarantee of nine months of the base rent as part of the IPO valuation.
EHT’s most well-known asset is Queen Mary Long Beach whose capital expenditure and operating expenditure needs, and ground lease terms - and hence valuation mismatch paid for by unitholders - were brought to light by The Edge Singapore last year. Since then, issues such as failure to provide security deposits as stipulated by the prospectus, and failure to pay master lease rents have come to light, culminating in a default by EHT of a US$341 million loan.
Properties in REITs are generally valued by their cash flow and hence the discounted cash flow (DCF) is the most common. Generally, valuers adopt two types of valuations. In addition to DCF this could be a comparable property value. For some of EHT’s properties, this was included, but not for Holiday Inn Resorts Orlando Suites, and Queen Mary.
If valuations are not what they seem, there could be very little incentive for a third party white knight to swoop in on Eagle. Its total debt as at Dec 31, 2019 was U$506 million. Based on the valuation of Holiday Inn Resorts Orlando Suites, unitholders and white knights would have to be prepared to take a valuation haircut of around 50%. EHT’s portfolio was valued at US$1.27 billion at IPO.
Since SGX and MAS are looking into possible breaches of relevant laws and regulations as well as listing rules and will take regulatory and enforcement actions where appropriate, they have said, a good place to start would be the prospectus and the basis of the valuation for the properties.
EHT has been suspended since Mar 24.
