Image source: The DI Wire
Hospitality Investors Trust Inc., formerly known as American Realty Capital Hospitality Trust, has taken a bold step toward restructuring its financial obligations. The publicly registered non-traded REIT recently filed for Chapter 11 bankruptcy in Delaware, aiming to tackle its $1.3 billion unsecured debt head-on.
A Strategic Move with a Vision
The road to recovery for Hospitality Investors Trust has begun. Through the bankruptcy court, the REIT seeks a confirmation order by June 23, 2021. This move demonstrates the company's commitment to restructure its finances and emerge stronger than ever.
The REIT has also secured the support of its largest investor, Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. Both entities have entered into a restructuring support agreement, showcasing their confidence in the plan moving forward.
A Helping Hand in Tough Times
To ensure a smooth transition during the restructuring process, Brookfield has committed to providing a $65 million debtor-in-possession term loan. This loan will finance Hospitality Investors Trust's ongoing obligations, including interest payments and approved expenses for property-level mortgage loans.
Once the bankruptcy plan receives approval, Brookfield will further extend support by offering a $25 million exit facility. These financial aids come with an interest rate of 15 percent per year.
New Faces, New Expertise
Hospitality Investors Trust looks forward to welcoming fresh perspectives on its board of directors. After the bankruptcy plan becomes effective, Brookfield will select four directors, ensuring at least one independent director under the listing rules of the New York Stock Exchange.
This injection of new talent and expertise will play a crucial role in steering the REIT towards success in the post-bankruptcy era.
Embracing Change: Shareholders and the Contingent Cash Payments
As part of the restructuring process, Hospitality Investors Trust's common stock will undergo cancellation. In exchange, shareholders will receive a right to receive contingent cash payments (CVR). Each share of the "old common stock" will entitle the shareholder to one CVR.
While the maximum payment per CVR stands at $6.00, it's important to note that these payments are non-transferable, except in specific instances such as the death of the holder. This new approach aims to bring stability and value to shareholders in the long run.
A Rewarding Future: Executive Compensation and Changes
Recognizing the dedication and commitment of its executive team and employees, Hospitality Investors Trust's compensation committee paid approximately $2.5 million in retention bonuses on May 13, 2021.
Jonathan Mehlman, the CEO and president, received $1 million, while Paul Hughes, HIT's general counsel and secretary, received $303,900. Additionally, Bruce Riggins, the CFO and treasurer, received $390,000.
To ensure accountability, these bonuses are subject to a "clawback" provision if the recipients resign or are terminated before February 18, 2022. In the case of Mehlman, the provision extends to the bankruptcy effective date.
A Shifting Landscape: Leadership and Employment Changes
In light of the bankruptcy proceedings, certain leadership and employment changes are expected within Hospitality Investors Trust. Mehlman will continue to serve as the CEO until termination without cause, which will occur on the tenth business day after the bankruptcy effective date.
Following this transition, Mehlman will receive life, disability, dental, and health insurance coverage for 24 months, along with a cash severance package worth $3.5 million. The severance amount will increase if termination doesn't occur before June 30, 2021. Mehlman will also serve as a consultant and be compensated at a rate of $100,000 per month for three months following his termination.
Riggins, on the other hand, will be appointed as the president in addition to serving as the CFO once the bankruptcy is effective. His annual base salary will increase to $450,000. Similarly, Hughes' annual base salary will rise to $425,000. These changes reflect the management's commitment to navigate the REIT through this challenging phase.
A Journey of Resilience: The Path Forward
Hospitality Investors Trust's recent financial struggles precede the global pandemic. Share values experienced significant declines, with a one-year drop of 39 percent from March 2016 to March 2017. Despite the challenges, the REIT severed ties with its former sponsor AR Global and its founder Nicholas Schorsch to become self-managed in 2017.
During this period, a Hospitality Investors Trust investor filed a lawsuit against the REIT's executives and directors, AR Global, and AR Global's senior executives. Although allegations were made regarding the abuse of trust and detrimental terms of the Brookfield investment, the defendants maintained their innocence and denied all claims.
In February 2020, a preliminary settlement was reached, resulting in a monetary payment of $15.2 million to the REIT. This settlement involved contributions from the defendants' insurers, with Mehlman himself making a payment of $250,000. Additionally, the REIT received common stock shares from AR Capital, AR Global Investments, and Mehlman.
Through the bankruptcy proceedings, Hospitality Investors Trust aims to make a fresh start, restructure its finances, and instill confidence in its shareholders and investors.
Stay tuned for updates on this remarkable journey as Hospitality Investors Trust works towards a brighter future.
Click here to visit The DI Wire directory page.
