Eagle Hospitality Trust's sale of 14 properties protected under Chapter 11 has been approved by the US Bankruptcy Court.
Eagle Hospitality Trust’s status as a listed stapled security comprising a REIT and business trust is approaching its endgame. Its portfolio has been protected under Chapter 11 since January this year.
Now, according to the latest announcement by DBS Trustee, the US Bankruptcy Court at the sale hearing has approved of the sale of 14 Chapter 11 properties (see table). DBS Trustee is overseeing the sale of Eagle Hospitality Trust’s assets under Chapter 11 protection in accordance with local regulations where it acts in the interests of the stapled security and its unitholders.
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Of these properties protected by Chapter 11, nine properties fetched US$326.5 million in accordance with the terms of the Stalking Horse Agreement. Five properties fetched US$155.4 million, 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.
Crown Plaza Dallas near Galleria-Adison (CPDG) was meant to be 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 transaction was terminated as the buyer did not furnish the required deposit.
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 complete this month (June 2021). “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.
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. Following the failure to pass the resolutions to restructure and recapitalise the REIT, its assets were protected under Chapter 11 as the trustee and financial adviser Moelis started the sale process.
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 were not thoroughy researched. 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 provided security deposits 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 the table, 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 isn’t included in the table. That’s altogether a separate study on financial engineering.