Investigations have been launched into trust managers or executives involved in the management of two Singapore-listed real estate investment trusts, or S-REITs, since the beginning of June, but investors appear unperturbed by the government intervention or by the possibility of wrongdoing.
The probes by the Monetary Authority of Singapore and the Commercial Affairs Department into Eagle Hospitality Trust and EC World REIT seem to be isolated cases, said David Gerald, president and CEO of the Securities Investors Association of Singapore.
Last month, the MAS and the Commercial Affairs Department launched a joint investigation of Eagle Hospitality and the company’s directors for suspected breaches of disclosure requirements under section 203 of the Securities and Futures Act. The probe stems from a complaint filed by SGX in April seeking to safeguard the interest of investors in the financially troubled REIT.
Hotel REIT Defaults on Loan Obligations
The investigation came after the Los Angeles-based owner of US hospitality properties in March shelved a dividend payout and defaulted on a $341 million loan facility as the rapid spread of Covid-19 and related travel restrictions emptied hotels across the country.
As the joint probe into EHT deepened, the MAS and CAD launched another inquiry into a separate REIT. Earlier this month, the government agencies initiated an investigation of Li Jinbo, the chief investment officer of EC World, for potential breaches of the Securities and Futures Act.
EC World, which owns a portfolio of logistics properties across China, has said it’s not the subject of the investigation and that Li has taken a leave of absence pending results of the probe. The company’s operations are not affected by the investigations, the REIT’s manager said.
Bullish Stance on Singapore REITs
Despite the increasing scrutiny of S-REITs, Gabriel Yap, executive chairman of investment firm GCP Global, said he remains bullish on the bigger REIT names listed on the Singapore bourse. “The level of corporate governance in these REITs are very high,” he said.
Agreeing, Gerald of SIAS said investor confidence in Singapore REITs remains strong because these assets offer attractive yields and have solid fundamentals..
“There are always going to be bad actors,” Gerald said in a statement to Mingtiandi. “What is important is that they are identified and taken to task swiftly. One should not be disheartened or prejudge the entire sector strength with one case such as EHT, which is specific to the REIT.”
Call for Tighter Regulations
Still, some analysts are calling for tighter regulations on S-REITs, particularly those with overseas assets.
“Such investigations have placed greater scrutiny on other overseas S-REITs and their sponsor track record and financial capabilities,” said Vijay Natarajan, real estate and REIT analyst at RHB Securities in Singapore. “We believe it may also set the ball rolling in terms of further tightening of investment regulations by MAS/SGX, due diligence and IPO bankers’ role which we believe is good for the sector.”
Despite concerns over some REITs, Natarajan said he recommends that investors accumulate players with strong sponsor backing, quality assets and good track records. His top picks include ARA Logos Logistics Trust, Ascendas REIT, IREIT Global, Manulife US REIT and Suntec REIT.
Forensic Accounting Investigation
EHT said on 29 June that it has appointed a special committee to launch a forensic accounting investigation into its sponsor Urban Commons, adding to the long saga of the REIT’s financial troubles. The Los Angeles-based sponsor bought six of the 18 hotels in EHT’s portfolio prior to the REIT’s initial public offering in May 2019.
The committee — composed of FTI Consulting together with other professional advisers — has been charged with evaluating the income, expenses, cash and profitability, and unpaid rent owed by the REIT’s master lessors, which hold each underlying hotel asset, to EHT.
The investigations will examine whether the master lessors failed to remit rents to EHT before COVID-19 spread across the US in January and February.
The COVID-19 pandemic has exacerbated troubles EHT has been suffering since its IPO. Last month, the California cities of Pasadena and Long Beach took separate legal actions against the companies holding properties in EHT’s trust portfolio, while a number of creditors placed liens against the REIT’s assets.
In addition to these legal actions, the troubled hospitality trust scrambled to maintain a set of shuttered properties as its hotel management partners reduced their services due to non-payment of fees.
EHT’s Sheraton Pasadena and nine other hotels in the trust’s portfolio face a variety of tax liens from local authorities as well as from third-party service providers which were not paid for services to the hotels, the trust’s manager revealed.
Early Signs of Trouble
Signs of trouble at EHT emerged even before COVID-19 ravaged the hotel industry. About 60 percent of the 44.9 million shares allocated to retail investors in Singapore were not taken up at the close of the IPO in May 2019.
Since that time, EHT’s shares have fallen from its IPO price of $0.78 to $0.137 when trading was suspended in March this year after EHT defaulted on loans owed to Bank of America.
The REIT’s managers are planning to divest some assets to boost the company’s liquidity. EHT owns a 5,420-bed portfolio of upper midscale to luxury hotels spread across 11 metropolitan areas in the US operated under Hilton, Sheraton, Holiday Inn and Westin hotel chains.
In consultation with DBS Trustee and the financial adviser Moelis, the EHT managers are still in the process of undertaking strategic review concerning the recent defaults.
Alexandra Casey provided research and reporting for this story.