An investor in Hospitality Investors Trust, a publicly registered non-traded REIT formerly known as American Realty Capital Hospitality Trust, has filed a lawsuit claiming gross abuse of trust by certain company executives and directors, the former property managers and advisor, former sponsor AR Global, and AR Global’s senior executives.
The plaintiff is claiming that the defendants breached their fiduciary duties, wasted company assets, aided and abetted the breaches of fiduciary duties, breached certain contracts, and unjustly enriched themselves.
The defendants include AR Global founder Nicholas Schorsch; AR Global partners Peter Budko, Edward Weil, and Brian Block; former Hospitality Investors Trust CEO William Kahane; former CIO Jonathan Mehlman; CFO Edward Hoganson; and independent directors Stanley Perla, Abby Wenzel, and Robert Burns.
Hospitality Investors Trust terminated its initial public offering in November 2015 following a series of scandals involving various AR Capital-sponsored entities. The lawsuit claims that immediately before the REIT discontinued its IPO, which was its primary source of operating capital, the defendants materially altered the advisory agreement to pay unconditional asset management fees to the advisor, an alleged violation of the company’s charter.
The cash asset management fee payment totaled more than $26 million and contributed significantly to the company’s financial problems, the lawsuit claims. Additionally, the company forfeited $41.1 million in earnest money deposits from terminated property acquisitions between December 2015 and February 2016.
The REIT was forced to seek a recapitalization as a result of its liquidity problems, and in January 2017, announced that an affiliate of Brookfield Asset Management would make a $300 million preferred equity investment in the company’s operating partnership, which in turn provided the Brookfield affiliate with 12.5 percent annual distributions and “substantial control” over the company.
The lawsuit claims that the terms of the Brookfield investment were detrimental to the company and its stockholders. The company suspended payments of stockholder distributions indefinitely and reported an estimated value of $13.20 per share, a decline from the $25.00 per share initial offering price.
“The capital infusion from the Brookfield investor created an opportunity for Schorsch and his affiliates to implement a lucrative exit strategy for the advisor and property managers at [the company’s] expense,” the lawsuit claims.
With Brookfield at the helm, the “grossly uncompetitive” property management fees (4 percent of gross revenue) were restructured, bringing them in line with the competitive market.
As consideration for the restructuring, the property manager and the advisor received approximately $37 million in compensation that was financed in part through capital received from the Brookfield.
Additionally, the company released the advisor, property managers, AR Global and its partners, company officers and certain directors from all claims, losses, and legal proceedings. The plaintiff seeks declaratory judgment from the court that the agreement is unenforceable.
“The release agreement is unenforceable because it is unconscionable,” the lawsuit claims. “The [parties] caused the company to enter into the agreement in an attempt to evade liability for their own wrongdoing and unjust enrichment.”
The plaintiff argues that independent directors Wenzel, Perla, and Burns were incapable of making objective decisions due to their “affiliations with numerous AR Global sponsored non-traded REITs and their receipt of massive amounts of compensation from these entities.”
Between 2012 and 2016, Wenzel received more than $1.8 million as a director of Hospitality Investors Trust and three other AR Global-sponsored REITs. During the same period, Perla received compensation in excess of $1.3 million as a director of the company and three other AR Global-sponsored REITs. Between 2008 and 2016, Burns served as a director of seven AR Global REITs and received more than $2.5 million in compensation.
“The compensation paid to the independent directors exceeded that of almost every other non-traded REIT not affiliated with AR Capital,” the lawsuit claims.
The plaintiff demands a trial by jury and is seeking compensatory damages paid to the company and/or its stockholders, disgorgement, and attorney’s fees.