Hospitality Investors Trust Inc., a publicly registered non-traded real estate investment trust formerly known as American Realty Capital Hospitality Trust, announced that a New York district court has preliminarily approved a proposed settlement and dismissal of 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 lawsuit was originally filed by shareholder Tom Milliken in February 2018.
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 deny every claim in the lawsuit and “affirm that they have acted properly, lawfully, and in full accord with their fiduciary duties.”
Defendants include the Hospitality Investors Trust, its former sponsor AR Global, and certain current and former directors and executives, including AR Global founder Nicholas Schorsch; AR Global partners William Kahane, Peter Budko, Edward Weil and Brian Block; former chief investment officer Jonathan Mehlman; chief financial officer Edward Hoganson; and independent directors Stanley Perla, Abby Wenzel, and Robert Burns.
The proposed settlement includes a monetary payment to the Hospitality Investors Trust of $15.2 million, of which $14.9 will be paid by the defendants’ insurers and $250,000 will be paid by Mehlman. In addition, AR Capital and AR Global Investments must tender 66,555 shares of common stock to the REIT, while Mehlman must tender 16,949 shares.
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 offering, 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.
According to the lawsuit, 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.
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 Brookfield.
The company suspended stockholder distributions in January 2017 and its share repurchase program in March 2019, and reported an estimated value of $9.21 per share, as of December 31, 2018, a substantial decline from the $25.00 per share initial offering price.
On June 9, 2020, the United States District Court for the Southern District of New York will hold a settlement hearing to determine whether the proposed settlement and plaintiff’s counsel’s application for an award of attorneys’ fees, reimbursement of expenses, and payment of a case contribution award of $2.25 million should be granted final approval as fair, reasonable and adequate.
Any current stockholder may object to the proposed settlement and/or proposed fee award and appear at the settlement hearing, at their own expense and by following the procedures outlined in the notice. If the court approves the proposed settlement, stockholders will be barred from contesting the approval of the proposed settlement and from pursuing the released claims.
Hospitality Investors Trust invests in select-service lodging properties in North America branded by premium national hotel brands. The REIT’s offering was declared effective in January 2014 and suspended sales activities in November 2015 after raising $903 million in investor equity. As of the fourth quarter of 2018, the company’s $2.3 billion portfolio was comprised of 144 properties. The company severed ties with its external advisor, an affiliate of AR Global, and became self-managed on March 31, 2017.