The Queen Mary saga continues.

SGX-ST had queries for Eagle Hospitality Trust which has responded accordingly this afternoon. Query 1 had to do with "what happens" in a worst-case scenario, ie what is the fallout if Urban Commons, LLC (“UC”), the sponsor of Eagle Hospitality Trust, fails to meet its obligations under the Queen Mary ground lease.

Below are SGX-ST's Query 2 and the REIT manager's response, which deals with the source of the current controversy. In essence, the REIT manager's response reflects a pushback against the Marine Survey as it appears to be "grossly inaccurate" in its assessment of The Queen Mary.

SGX query: We refer to the article dated 23 October 2019 entitled “Eagle Hospitality Trust could get wings clipped as key asset The Queen Mary sinks into disrepair” by The Edge Singapore.

It was stated in the article that “Three years ago, Urban Commons is reported to have taken on the lease despite a marine survey that unveiled that the ship’s deteriorating condition was “approaching the point of no return”.

According to that report, the total cost of ship repairs could range from US$235 million ($320 million) to US$289 million.

In addition, it estimated that the work would take approximately five years to complete, with some 75% of repairs deemed “urgent”.”

Please quantify the total cost of ship repairs, provide further details on how this will affect the operations of the Trust, the implication on the impact of the valuation of The Queen Mary and how the Trust intends to finance such costs of repairs.

REIT Manager’s Response: The REIT Manager believes that the Marine Survey’s estimate of scope of work and costs was grossly inaccurate and does not reflect UC’s actual obligations at the property.

Salvatore Takoushian EagleREITREIT manager: President & CEO Salvatore Takoushian. NextInsight file photoUC has been working with the City since 2016 to address any needed repairs.

Presently, the City only requires repairs with respect to the noted items, which have a total estimated cost of up to US$7 million, such items will be paid for by UC utilizing the multiple capital reserve mechanisms built into the leases.

UC is working together with the City to address the noted items of work that the City expects to be done.

UC expects these noted repair items to be completed within the next two years.

Discussion As stated in the response to Query 1, JAMA has confirmed that the “Queen Mary remains in excellent structural condition,” and the City has acknowledged receipt of UC’s 22 October 2019 response to their request and confirmed that it has not given a notice of default to the Eagle Queen Mary Subsidiary.

“For example, the Marine Survey estimated the total cost for “urgent hull repairs” to be between US$175,354,000 and US$212,678,000. UC was in fact able to address substantially all of such urgent hull repairs at a cost of less than US$1.1 million.”

-- Eagle Hospitality Trust

The City and UC are presently working cooperatively together to address the estimated up to US$7 million of repairs set forth in UC’s 22 October 2019 letter to the City.

UC has multiple capital reserve mechanisms built into the leases to address the relatively minor list of repairs that are the current focus of the City and UC.

The REIT Manager believes that UC should be able to utilize these capital reserve mechanisms to discharge its obligations to maintain the ship. Further, the current repair work is not expected to have any material adverse impact on the operations of the Queen Mary, and the ship remains operational and open to guests.

Accordingly, the REIT Manager does not believe that these repair costs have any negative impact on its valuation of the Queen Mary.

In light of the JAMA Report, the naval architect’s letter regarding the JAMA Report, recent correspondence with the City, and UC’s own experience completing certain of the repairs noted in the Marine Survey at fractions of the costs estimated therein, the REIT Manager believes that the Marine Survey significantly misrepresents the nature, scope and amount of repairs required at the Queen Mary.

For example, the Marine Survey estimated the total cost for “urgent hull repairs” to be between US$175,354,000 and US$212,678,000. UC was in fact able to address substantially all of such urgent hull repairs at a cost of less than US$1.1 million.

The cost differential was attributable to a completely different scope of work and a more thorough and scientific analysis than the estimate for work purported to be required by the Marine Survey.

The work required by the Marine Survey was determined not to be necessary and the repairs that were ultimately undertaken by UC were substantiated as appropriate from a structural and safety standpoint by JAMA and confirmed by R. Maddison CEng. MPhil, the naval architect.

Regarding the JAMA Report prepared for UC before the IPO and which has been provided to the City, Shane Fitzgerald, SE, DBIA, partner at JAMA, informed UC as follows: “JAMA used a 3D finite element model (FEM) to accurately evaluate critical structural components of the ship which led to a nominal amount of steel plate reinforcements in the hull and tank tops, but overall and as a result of these structural upgrades, The Queen Mary remains in excellent structural condition.”

The Marine Survey additionally included enormous amounts devoted to the soft costs of repairs: US$88,019,000 to US$119,069,000 of the total US$235-289 million was attributable to soft costs, and an estimated contractor “dislocation” premium of up US$21,315,000 to US$24,715,000 was included in the Marine Survey’s estimate of hard construction costs.

Based on the repairs done to date and the bids for future work that have been received there is no evidence that these extraordinary costs cited in the Marine Survey are required or representative.

Full announcement here

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