Independent audit shows $6 million net loss for Queen Mary operator in 2018
Queen Mary operator Urban Commons found itself in a sea of red ink last year, despite generating income of nearly $60 million on the historic ship’s attractions, events, rooms and other revenue, according to a newly obtained independent audit.
The audit by the accounting firm of Grant Thornton LLP for 2018 showed that Urban Commons Queensway, which operates the Queen Mary under a lease agreement with the city of Long Beach, suffered net losses of more than $6 million on operating costs and interest payments.
The Chicago-based auditor warned that those losses, along with other shortcomings, raised “substantial doubts about the Company’s ability to continue as a going concern.”
Urban Commons, a Los Angeles-based real estate investment and development firm, only recently provided the audit to the city as part of its lease agreement to operate the ship. In October, Long Beach officials had warned Urban Commons that it could be in danger of defaulting on its lease if it failed to divulge its finances and make critical repairs to the ship.
The Post this week obtained the audit, dated Nov. 12, through a public records request with the city.
The financial standing of Urban Commons has come under increasing scrutiny in recent months. On Tuesday, City Auditor Laura Doud announced her own investigation into Urban Commons’ financials to ensure that the city has “received all revenues owed.”
Urban Commons signed a lease to run the city-owned Queen Mary in 2016. Its efforts came after a string of companies had failed to make the ship financially viable over the decades.
The new audit shows that Urban Commons, under the name Urban Commons Queensway, LLC, generated $59 million in revenue, including $16 million from attractions and events, $19 million in food and beverages and $13 million in room fees in 2018. But the revenue didn’t outweigh expenses, including $33 million in departmental expenses and $25 million in total operating costs.
In all, Urban Commons reported a net operating loss of $2.3 million and interest expenses on debt of $4 million. The company’s financial situation for 2019 is unclear.
Urban Commons co-founder and principal Howard Wu in a statement Wednesday said the company’s financial standing has significantly improved since the 2018 audit. He said the company has invested nearly $29 million in improvements for the ship, which had a significant impact on income in that time period.
Wu said the company has made enhancements to the financial structure since 2018 and that all of the items mentioned in the audit were remedied this year.
“We expect our 2019 financial report will be significantly stronger and remain confident in our ability to protect the legacy and future of the Queen Mary,” he said.
Wu and the auditors noted that the company’s debt balance was paid in full in May when Urban Commons, under the name Eagle Hospitality Trust, went public on the Singapore Stock Exchange in an effort to generate up to $566 million for its portfolio of 13 hotel properties it owns or manages, including the 1930s-era ship.
But the financial information Eagle Hospitality provided to investors prior to the offering has raised new questions with city officials, who are concerned about discrepancies with the latest audit.
In a report to potential investors, the Queen Mary is listed as the most lucrative property in Urban Commons’ hotel portfolio, with a total profit of $11.2 million in 2018, up from $6.5 million in 2017. Key drivers included the reopening of newly-renovated restaurants, increased concert revenue and more visitors. It made no mention of the 2018 operating losses noted by the independent auditors.
City Auditor Doud in an interview Thursday said there appear to be “inconsistencies” between the information in the 2018 financial audit that was recently provided to the city and information in the financial statements that was provided to potential investors earlier this year.
Doud said she is in the process of selecting an outside forensic accounting firm that will determine the scope of the investigation. Doud, an elected official, has previously conducted five other audits of the Queen Mary over the years.
The latest audit is a top priority considering the many critical repairs that are still needed on the ship, she said.
“The Queen Mary has always been a significant historical asset for the city and this needs to be a priority for us right now,” she said.
Since it took over operations of the Queen Mary in 2016, Urban Commons has been the focus of critical inspection reports about its stewardship of the longtime Long Beach attraction.
The city helped Urban Commons to secure $23 million in bonds for emergency repairs to the Queen Mary after significant structural and safety problems were discovered. Under the lease agreement, the money was to be used to fix immediate problems, and Urban Commons was to invest revenue from Carnival Cruise Line passenger fees and other income sources to address the remaining issues.
Many of the projects, however, went significantly over budget and the $23 million was spent before other critical projects could be addressed.
In November, Urban Commons provided an updated plan to address other critical repairs, including replacement of the ship’s expansion joints and corroded lifeboats for an additional cost of $5 to $7 million.
Wu said Urban Commons has “committed significant resources into attracting additional businesses, which have resulted in increased revenues, income and sales tax revenue for the city.”
“As a result, we have significantly increased income every year since 2016, with 2019 anticipated to generate more revenues than any year the Queen Mary has operated as a hotel,” he said.
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