SINGAPORE (THE BUSINESS TIMES) - FTI Consulting, as chief restructuring officers of Eagle Hospitality Trust's (EHT) managers, has commenced a forensic accounting investigation into EHT sponsor Urban Commons and its master lessees.
EHT is a mainboard-listed stapled trust comprising Eagle Hospitality Reit (EH-Reit) and Eagle Hospitality Business Trust. Trading of EHT units was voluntarily suspended in March, after EH-Reit defaulted on a loan of $341 million. The loan default followed the failure of Urban Commons, the master lessee of EHT's properties, to place with EHT the full sum of security deposits due under the master lease agreements (MLA), and make timely rental payments since December 2019.
FTI was directed on June 25 to launch the probe by EHT's managers, acting through a special committee, and EH-Reit trustee, DBS Trustee, the managers said in an exchamge filing on Monday (June 29).
The scope of the work agreed with FTI for the forensic accounting investigation includes, among other things, reviewing and analysing the fluctuations of the financial statements of the master lessees, which are wholly-owned by Urban Commons.
Under the probe, FTI will also compare the sources and uses of the master lessees' funds to the payment of fixed and variable rents by the master lessees to the master lessors as well as the various reserves, capital expenditure and other payment obligations in the MLAs. This includes whether there was any failure by master lessees to apply funds received from the hotel operations towards the rents for the months of January and February 2020, before the Covid-19 pandemic's onset in the US, due under the MLAs.
"Depending on the initial outcome and findings of the investigation, the scope of the investigation may be extended," the EHT managers said in a bourse filing on Monday (June 29).
Meanwhile, the master lessors, which are EH-Reit subsidiaries, have also issued two notices of default to the master lessees of EHT's properties.
One notice is in respect of delinquencies in the provision of security deposits under certain MLAs.
Among the 18 master lessors, 15 had further extended the deadline on Feb 14 for their master lessees to provide the outstanding security deposits owed. The master lessees were required to provide about US$15 million in security deposits by June 8 through cash contribution and/or letters of credit, which would have brought the total security deposits to US$43.7 million as stipulated in EHT's prospectus.
However, the 15 master lessees had not provided the outstanding security deposits as at Monday. This constitutes an event of default under their relevant MLAs and the Feb 14 extension agreement. Accordingly, the master lessors on June 10 issued a notice of default for the security deposits.
The other notice was issued by the master lessors on June 19 to all of the master lessees, relating to numerous defaults as follows.
For one thing, the fixed rent for January to May 2020 as well as the variable rent and additional rent for January to March 2020 for all EHT properties "remain substantially unpaid" by the master lessees as at Monday, the EHT managers said. Certain master lessors have thus used the security deposits provided by the relevant master lessees to pay certain outstanding rents.
Furthermore, there were additional defaults under the MLAs, arising from the master lessees' defaults under the hotel management agreements (HMAs) when they failed to provide and/or maintain sufficient working capital for the hotels' operations, did not pay management fees and/or failed to make funds available to pay hotel operating expenses.
The master lessees also defaulted on other obligations under the MLAs, as they failed to do the following: make timely payment of outgoings; make reserve contributions for the repair, alteration, improvement and replacement of the plant, services infrastructure, furniture, fixtures, furnishings and equipment of EHT's properties; and replenish the security deposits for three properties within the stipulated time period, after having used part of these security deposits to pay outstanding rent.
As for The Queen Mary floating hotel, the master lessee did not provide the City of Long Beach access to its financial records, and caused defaults under the ground lease by failing to comply with covenants and obligations therein.
The master lessees also failed to prevent the termination of the HMAs due to their uncured defaults, did not replace the hotel managers and failed to keep and maintain EHT's properties in good condition.
In addition, the master lessees allowed liens to be filed against certain EHT properties in connection with services furnished, the EHT managers said on Monday. Last week, the managers disclosed that tax authorities and third-party service providers had filed liens against more than 10 hotels, claiming about US$8.26 million in total.
The EHT managers are in the process of undertaking the strategic review in consultation with financial adviser Moelis and DBS Trustee.
The strategic review will take into account the aforementioned defaults and events of default, in evaluating the appropriateness and viability of the MLA structure and any actions to be taken in respect of and pursuant to the MLAs, EHT's managers said on Monday.