Shareholder Files Against REIT Over $41M Puerto Rico Hotel Loan Write-Down

A shareholder of Resource Capital Corp. is suing the real estate investment trust (REIT) because of the way it dealt with a Puerto Rico hotel loan portfolio and a $41 million write-down that resulted last year. Plaintiff Josh Reaves says that the REIT’s directors knew there was bleak information about the deteriorating financial state of the U.S. territory way before a press release went out in August revealing there had been a $41 million write-down on a hotel mezzanine loan. The announcement caused the REIT’s stock to drop over 12% ,while erasing $55 million in market capitalization.

Reaves says that Resource Capital should have known as early as February 2014, when Puerto Rico debt was downgraded to “junk” status, that investments on the island were at risk. Instead, he contends, the REIT did not disclose the degree to which its loan portfolio was exposed to the Puerto Rican economy, misrepresented the degree of risk the portfolio could handle, did not abide by disclosure practices as they pertain to loan impairment, did not accurately represent the portfolio’s value, and failed to have the internal controls needed to stop the risks from becoming too precarious.

In August 2015, when submitting its filing to the SEC, Resource Capital wrote that the loan’s outstanding balance was $38.1 million and moved $3 million of accrued interest to the negative column from the positive column. Because of the $41 million write-down, $31 million was lost over that quarter.

Reaves’ case is a derivatives lawsuit. He is filing it on the company’s behalf. This means that Resource is a nominal defendant. The defendants named included the REIT’s CFO David Bryant, CEO Jonathan Cohen, Chairperson Steven Kessler, and a number of its board members.

Puerto Rico has been contending with a financial crisis over the past few years and owes investors more than $70 billion in debt that the Commonwealth’s government has now admitted it cannot repay. The island recently announced that it would pay $300 million on the general obligation bonds that it owes. It defaulted on about $37 million of other bonds, which it mostly owes to the Public Financing Corp. and Puerto Rico Infrastructure Financing Authority, also known as PRIFA.

Insurers Financial Guaranty Insurance Co. (FGIC) and Ambac, which insure more than $860 million in PRIFA bonds, have said that they will cover some of these payments owed. Ambac is paying the interest due on the PRIFA debt while FGIC will pay the allowed policy claim of approximately $6.4 million As a result, Standard & Poor’s reduced PRIFA’s rating to a D because of the bond payment default. (Five months ago, the Commonwealth also defaulted on a debt payment.)

Meantime, Puerto Rico is getting ready for lawsuits from creditors over the default. Some are speculating this may finally spur the U.S. Congress to come up with legislation that would let the territory restructure its debt in an easier way. The Commonwealth’s next bond debt deadline is February 1, when approximately $400 million is due primarily to the Puerto Rico Sales Tax Financing Corporation, commonly called COFINA. Governor Alejandro García Padilla said that the funds for that have already been put aside. However, he warned that more defaults are likely unless U.S. lawmakers make a move or the island arrives at a settlement with creditors.

In Puerto Rico and the US, our municipal bond fraud and REIT lawyers are working with investors who sustained losses from investing in Puerto Rico closed-end bonds, Puerto Rico Bonds, or REITs with exposure to Puerto Rico. Many investors purchased these investments from UBS (UBS), Banco Santander (SAN), and Banco Popular even though these were investments that were not suitable for their portfolio or for their investment goals. Contact Shepherd Smith Edwards and Kantas, LTD LLP today.

REIT Sued Over $41M Write-Down On Puerto Rico Hotel Loans, Law360, January 5, 2015