Eagle Hospitality Trust says sponsor won't lose its key Queen Mary lease

Singapore

EAGLE Hospitality Trust (EHT) said that its sponsor, Urban Commons (UC), is in no danger of losing its lease on the Queen Mary floating hotel which forms part of the trust's assets.

EHT was responding to recent media reports that the city of Long Beach in California, where the former luxury cruise liner is docked, had sent a letter on Oct 1 claiming UC had not met its lease obligations to maintain the historic ship, which had fallen into disrepair.

The letter asked UC to respond within 30 days with a plan to fix the Queen Mary's most urgent repairs and to release its FY2018 financial statements - or the city may find the property developer in default. This suggests that UC has only a week left to respond before the Oct 31 deadline.

In a Thursday filing after trading hours, EHT said UC has confirmed it is not in default on the lease and that the Queen Mary is "safe and structurally sound". UC is also preparing a response to be "imminently" sent to the city, addressing the items referenced in the letter. This response will include specific maintenance items that have been completed as well as those that are in progress or planned.

The city has also issued a statement on Oct 16 saying UC is expected to present a plan in November.

The city-owned Queen Mary is a retired British liner converted into an upscale 347-room hotel, with 63 years left on its lease. It is one of 18 assets in EHT's portfolio. Queen Mary together with Holiday Inn Resort Orlando Suites Waterpark contribute 31 per cent of EHT's fixed rental income, Motley Fool Singapore noted in May.

Critical ship repairs and ongoing maintenance are UC's responsibility.

The city's letter said UC had not made several repairs, including the removal of 22 lifeboats suspended from the ship. Considered the most urgent project, the lifeboats pose "a serious threat to the ship's structural integrity and the safety of guests and employees", the letter stated.

In a Sept 23 city memo seen by The Business Times, the removal of the decaying lifeboats was deemed "critical" and will cost about US$2.3 million. Another "critical" area is the ship's side shell and bridge wings, which are also corroded. This repair will cost US$4.7 million.

The memo said a funding source had not been identified for these two projects. UC has to prepare a plan for completing both projects within the recommended two years.

In May, Salvatore Takoushian, CEO of EHT's manager, told BT that US$50-60 million in capital expenditure would be needed for Queen Mary's repair and UC had put in US$25 million. There were also reserves that could be used to re-invest in the ship in the next few years, he said.

Under the 2016 lease agreement, the city committed US$23 million to fix top-priority repairs, while UC will finance the remaining works. A 2015 marine survey identified critical repairs costing US$235-289 million, although UC has disputed that figure. The survey forecast that the works could take up to five years.

Since then, monthly inspection reports commissioned by the city have noted that some areas are still suffering from deterioration. But Long Beach economic director John Keisler told local media last week that the ship has become "far safer than it was three years ago". He also said UC intends to meet the deadlines and has exceeded the requirements of the contract.

Since signing the 66-year lease in 2016, UC has completed major life safety and structural projects, including the repair of the ship's fire and life safety system, and the replacement of expansion joints.

UC has worked with the city to set up a perpetual funding mechanism to ensure the ship's viability, said Taylor Woods, UC principal and deputy chairman of EHT's manager, on Thursday. He added that UC is also committed to funding a capital improvement fund, equal to 2 per cent of 2019 revenues and 3 per cent of revenues thereafter, for repairs and maintenance.

News of EHT possibly losing a prime asset has come five months after its tepid mainboard debut. Since the first day of trading on May 24, EHT stapled securities have shed 17 per cent from the IPO price of US$0.78, closing at US$0.645 on Wednesday.

EHT called for a trading halt on Thursday. Trading will resume on Friday.