The recently listed, Eagle Hospitality Trust (EHT) has fallen into structural disrepair and is in default of its ground lease agreement on one of its asset, the Queen Mary.
Background of the asset
The Queen Mary is a decommissioned ocean liner that was converted into a 347-room upscale hotel moored in Long Beach, California. It was owned by the City of Long Beach, who had leased the asset to EHT's sponsor, Urban Commons (UC) for 64 years. UC then signed a 20+14 year master lease agreement with EHT for it to operate the asset.
The Sequences of the Event
In early Oct, the City of Long Beach hired an independent investigator to examine the Queen Mary. The report highlighted that there are specific structural issues due to the poor maintenance.
The City of Long Beach sent a letter to UC to warn of a potential default should UC fail to meet obligations under the ground lease to repair and to maintain the vessel properly.
UC then confirmed that The Queen Mary is safe and structurally sound. It also reassured that maintenance has already been completed, and on-going enhancement is planned to preserve the ship. There is no breach on the ground lease agreement. Besides, UC also established a perpetual funding mechanism to contribute 2% to 3% of the revenues for on-going maintenance.
The City of Long Beach clarified that its initial letter to UC was just a "request for information" and not a notification of default.
UC proposed a plan to address five issues raised by the City of Long Beach and the plan is under review.
What is the impact on EHT
Best case scenario
The total cost of the repairs is estimated to be US$7m which is will be completed within the next two years.
UC has confirmed that capital expenditures associated with Queen Mary are not the responsibility of EHT. And the REIT noted that Queen Mary benefits from the capital reserve to support the on-going investment in the ship.
There will be very minimal impact on EHT assuming the plan is approved and executed, and maintenance is adequately done.
Worst case scenario
UC went into default on the ground lease agreement with The City of Long Beach, which then triggers a legal default between UC and EHT.
In terms of financials, The Queen Mary consists of 12.6% of EHT's total portfolio, with 16.4% of net property income contributed by the ship. Assuming 100% write-off, NAV per unit and DPS could fall 20% and 16% to US$0.71 and US5.49¢ respectively.
The case has not been concluded yet. In the short team, the market is likely to take this negatively, and the price is expected to be impacted.