EHT commences forensic accounting probe on sponsor

Master lessors issue two notices of default to relevant master lessees.

Eagle Hospitality Trust (EHT) managers have directed FTI consulting to commence a forensic accounting investigation of EHT’s sponsor Urban Commons and its master lessees, according to a filing.

The investigation would include reviewing and analysing the fluctuations of the financial statements, comparing the sources and uses of the funds to the payment of fixed and variable rent as well as the various reserves, capital expenditure and other payment obligations provided for in the master lease agreements (MLA).

This will also include 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 in the US.

Further, the master lessors have issued two notices of default to the master lessees of EHT’s properties in respect of delinquencies in provision of security deposits under certain MLAs

Except for the Crowne Plaza Dallas Near Galleria-Addison, the Hilton Houston Galleria Area, and the Delta Woodbridge, 15 master lessors have granted a further extension of the deadline for the provision of outstanding security deposits.

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Following this, the master lessees were required to provide approximately $20.9m (US$15m) of security deposits by 8 June through cash contribution and/or letters of credit, bringing the total security deposits to $60.89m (US$43.7m) as stipulated in EHT’s prospectus.

However, the master lessees have not provided the outstanding security deposits and are said to have constituted an event of default under the relevant MLAs and the extension agreement. Accordingly, the relevant master lessors have issued a notice of default on 10 June.

Further, the fixed rent for the months of January to May and the variable rent and additional rent for the months of January to March remain substantially unpaid by the master lessees. As a result, certain master lessors have applied the security deposits to the payment of certain outstanding rent in respect of certain properties in EHT’s portfolio as permitted pursuant to the applicable MLAs.

Furthermore, additional defaults rose from the respective Hotel Management Agreements (HMA) as a result of the master lessees’ failure to maintain sufficient working capital for the hotels’ operations, and pay management fees.

In addition, the master lessees have also defaulted on other obligations, such as failure to 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, as well as replenish the security deposits for three properties within the stipulated time period .

Further, the master lessees failed to provide the City of Long Beach access to the financial records of The Queen Mary Long Beach, causing defaults under the ground lease by failing to comply with covenants and obligations.

The master lessees also failed to prevent the termination of the relevant HMAs due to the relevant uncured defaults by not replacing the hotel manager and failing to secure the relevant properties in EHT’s portfolio.

With this, the master lessors have issued a separate notice of default on 19 June.

EHT’s managers note that they are in the process of undertaking strategic review in consultation with financial adviser Moelis and the REIT Trustee to take into account defaults under the MLAs and the extension agreement pursuant to the MLAs.

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