How a Singaporean REIT’s mighty US hotel investment sunk
Eagle Hospitality Trust offered investors a bet on the booming hotel market, including a converted cruise liner. The timing couldn’t have been worse
A retired British ocean liner. A decommissioned Soviet submarine. And now, a bankrupt Singaporean real estate investment trust. All three defunct vehicles from around the world have one thing in common: They made their last stop at the Port of Long Beach.
Over the past month, Singapore-listed Eagle Hospitality Trust — whose finances were clobbered by the pandemic less than a year after its initial public offering — has sold off most of its U.S. hotel holdings as part of Chapter 11 proceedings. But the REIT gave up its prized possession for free: the 80,000-ton, 87-year-old RMS Queen Mary.
“For the first time in decades, Long Beach has full control of the Queen Mary,” Long Beach Mayor Robert Garcia said in a statement last month, after EHT surrendered the converted hotel to the city. “We will be fully engaged in the preservation of this historic landmark and are incredibly grateful for this opportunity.”
The city of Long Beach has its work cut out for it, as the landmarked 347-key property requires millions of dollars in urgent repairs and is at risk of capsizing. The integrity of the vessel is also threatened by a deteriorating Soviet submarine anchored next to it and whose ownership is unclear.
But the Queen Mary is just part of the liquidation of EHT’s 18-hotel portfolio — originally assembled by Los Angeles-based investment firm Urban Commons, which served as the REIT’s sponsor. That unwinding is the culmination of more than a year of wrangling with regulators, courts and various stakeholders, a saga that has led to arrests in Singapore and allegations of fraud involving federal stimulus funds in the U.S.
Since Singapore’s first REIT listing in 2002, the Southeast Asian city-state has emerged as a regional hub for publicly listed real estate vehicles, attracting capital from across Asia and investing it in properties around the world.
In 2019, with the world economy still humming, there was plenty of appetite in Singapore for exposure to the U.S. hotel market. In fact, another U.S. hotel REIT — ARA US Hospitality Trust — went public just a few weeks before EHT.
In addition to the track record of Urban Commons co-founders Howard Wu and Taylor Woods, EHT’s offering prospectus touted “strong U.S. macroeconomic fundamentals” and the portfolio’s “large, high-growth markets” as factors that would make it a solid investment.
The hotel portfolio — eight in California, three in Colorado, two in Texas and one each in Utah, Georgia, Florida, New Jersey and Connecticut — was diversified, including corporate-, leisure- and airport-driven properties.
“We believe in the long-term investment merits of EHT’s portfolio and remain committed to increasing our presence in Singapore,” said Salvatore Takoushian, CEO of the REIT manager, in a statement following EHT’s public listing in May.
In response to a request for comment, an EHT spokesperson referred to the company’s public filings on the Singapore Stock Exchange.
Long-term vision notwithstanding, short-term realities soon began to cause problems for Eagle Hospitality. And the coronavirus wasn’t even the first sign of trouble.
The largest hotel in the portfolio, the 777-room Holiday Inn Resorts Orlando Suites in Orlando, saw “significant disruptions” as a result of Hurricane Dorian in the summer of 2019. Five other hotels experienced construction delays, although the portfolio’s revenue per room still outperformed the competition by 3.7 percent, according to a disclosure from EHT in early March 2020.
Just a few weeks later, with lockdowns sweeping across the U.S., EHT defaulted on a $341 million loan facility provided by Bank of America. This led the REIT to miss a dividend payment to unitholders, and to suspend trading on March 24.
As the first and second Covid waves battered the country, EHT found itself in ever more dire straits. Tax liens and mechanics’ liens began to pile up, and auditor KPMG declined to certify the REIT’s 2019 financial statements.
In September, EHT terminated its master lease agreements with Urban Commons. And in October, six of the REIT’s directors, including Takoushian, were arrested in Singapore as part of an investigation into deficiencies in its financial disclosures. The directors were released on bail, and no charges were filed.
Following the arrests, the Monetary Authority of Singapore demanded that Eagle Hospitality remove its manager and appoint a new one. But not enough unitholders voted in favor of a proposed replacement, leaving the REIT manager-less at a critical moment.
With no manager in charge, the REIT’s trustee — supported by an army of professional advisers — had to step in to keep things afloat. At that point, with EHT’s assets at risk of being seized by creditors, the only realistic option was to file for bankruptcy.
In January, EHT and entities owning 15 of the 18 hotels filed for Chapter 11 protection, offering breathing room to wind down operations. (The company’s Texas and New Jersey hotels were excluded from the bankruptcy due to separate mortgages.)
Once in bankruptcy, the REIT lined up a $100 million debtor-in-possession financing facility from Monarch Alternative Capital to fund ongoing expenses. Monarch also provided a $470 million “stalking horse” bid for the 15 hotels — a minimum valuation that was “unlikely to generate any residual value” for unitholders, EHT acknowledged to investors.
At the same time, EHT still has a bone to pick with its former partners.
“No two individuals bear more responsibility for the events leading to the debtors’ Chapter 11 cases than [Urban Commons’] Woods and Wu,” the REIT trustee’s lawyers wrote in a court filing. The trustees sought to investigate several “troubling actions” Urban Commons allegedly undertook during and before the pandemic.
“Woods and Wu appear to have repeatedly abused their position as insiders of both Urban Commons and the [REIT] for their own personal gain,” the filing alleges. EHT’s concerns center around several “onerous non-disturbance agreements,” an $89 million unsecured loan from an anonymous LLC and a $2.4 million federal Paycheck Protection Program loan for the Queen Mary.
A representative for Urban Commons did not respond to requests for comment, but Woods and Wu have rejected these claims, calling them a “smear campaign” with no basis in fact. In their telling, Urban Commons has contributed substantially to the REIT’s business while “receiving little in return,” and “was there to work constructively” with the REIT trustee when the pandemic struck.
The REIT trustee “embarked on an expensive, litigious and nonsensical path of self-destruction” in the months leading up to the bankruptcy, during which it “engaged countless professionals” and “began burning through millions of dollars” of cash reserves, Urban Commons’ lawyers allege in a court filing.
“Neither Urban Commons, Wu nor Woods have the time or money to waste on the debtors’ unfounded witch-hunt,” the filing continues.
Founded in 2008, Urban Commons had bought and sold dozens of properties and amassed total assets under management of about $1 billion by 2019, according to the REIT prospectus.
While the firm’s business is focused on hotels, its development projects also include multifamily, retail and assisted living. In contrast to the problems facing the REIT portfolio, Urban Commons notes in court filings that its non-REIT hotels are “appropriately positioned” to weather the impact of the pandemic.
While the dispute between EHT and its former partners remains unresolved, the liquidation of the REIT’s holdings has gone forward. As part of the sales process, Eagle Hospitality reached out to more than 180 potential buyers, according to disclosures in Singapore.
In June, EHT announced it had closed on the sales of 14 of the 15 bankrupt hotels, with total net proceeds of $478.6 million. The one exception was the Queen Mary, the ocean liner-turned-hotel docked in Long Beach. Commissioned by Cunard Line, the ship was built by John Brown & Company in Clydebank, Scotland. The 12-deck cruise liner launched on Sept. 26, 1934, with a passenger capacity of over 2,000, along with 1,100 officers and crew.
Although the ship had originally been included in Monarch Alternative Capital’s stalking horse bid, the investment firm ultimately decided not to purchase it. A bid from a group of investors including Woods and Wu was rejected, and no other qualified bids were received.
“A significant part of the challenge in finding a buyer for the Queen Mary [is the] substantial capital improvements required,” the REIT explained in a disclosure. After surrendering the ship to the city, Eagle Hospitality filed a motion to reject the various leases at the property, including a 66-year ground lease.
According to a marine survey from 2017, the Queen Mary is in need of urgent repairs that could cost as much as $29 million by the city’s estimates. It noted that leaks could cause the whole vessel to capsize.
Further complicating matters is the Scorpion, a rusted Soviet submarine that has been moored near the Queen Mary for over 20 years. During an inspection in May, the city found that the submarine was “taking on some water, was not safe to be aboard, and could sink and/or roll and damage the hull of the Queen Mary.” Removing it could cost millions.
According to the city, because the 50-year-old Scorpion is not owned by Long Beach or mentioned in the leases, it is “personal property” belonging to EHT.
EHT “should clarify its intent with respect to the Scorpion,” the city said in a recent court filing. “If the debtor’s intent is to abandon the submarine, such a request should be denied.”