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Eagle Hospitality 8.5% preferred is trading at $2.70.  Par is $25 and there is another $7 in accrued dividends.  No dividends have been paid since late 2009.  I think there’s a good chance to make ~3x your money in the near future by purchasing the shares. 

Eagle was a hotel REIT taken private in 2007 by AP AIMCAP, which is a JV between Apollo Global Management, Aimbridge Hospitality, and JF Capital Advisors.  (Since this was led by Apollo, I’ll just refer to the JV as Apollo going forward)  At the time of the acquisition, Eagle owned 13 hotels with 3,500 rooms – mostly airport locations in smallish cities.  They had $437m in hotel assets and $258m in debt (mostly mortgage debt) and $100m in preferred stock.  Apollo paid $318m for the equity, for a total EV of about $575m. 

I know you’ll find this shocking and totally out of character, but shortly after acquiring Eagle, Apollo turned to Bear Stearns for a giant loan that they used to lever up the properties and pay themselves a massive dividend.  Bear happily loaned Apollo something like $750m in mortgage debt (important!) with ultra-low rates.  The loans were eventually picked up by the Federal Reserve Bank of New York through the Maiden Lane funds after Bear collapsed, and earlier this year Blackstone acquired the loans ($606m principal) from the FRBNY for $465m.  The loans are due on September 9, 2012.  Today, Eagle still owns the same 13 hotels. 

Okay, now here’s where the idea is a hassle and I’m sorry to do this to you but I don’t have a choice.  Despite orphaning the preferred, Eagle went dark after being taken private.  You can obtain limited annual financials (balance sheet, income statement) from the company but only by snail-mailing them a copy of a brokerage statement showing you own shares.  I think if you bug the contact person enough (Patti Hawkins, 214-295-3607) she’ll email you copies of the financials.  The problem is that they come with a confidentiality agreement, so unfortunately I cant directly discuss Eagle’s financials in this writeup.  I can however, paint the general picture of how to look at the stock and you can then fill in the blanks yourself when/if you obtain the financials.  Think of it like busted preferred stock mad libs.

The truth is, the solvency of Eagle and the hotels’ profitability has relatively little to do with what makes EHPTP interesting.  What’s really interesting about this is the fact that the debt is all secured mortgage debt (there is NO corporate debt) and that the preferred stock is first in line at the corporate level.  In order to realize this potential value, all we need is an event to cause Eagle to either (a) get foreclosed upon or (b) sell the hotels, and with the loans about to come due, I think either will happen soon.  The loans will travel with the properties, and the corporate entity will still have “stuff” that the lenders cant touch if there’s a deficiency.  The hotel market has been on fire, even for lower-end properties, so I’m not terribly concerned about whether these are marketable or not.  If not sold outright, I think Blackstone would be perfectly happy owning these properties. 

Here’s the model to figure out what the preferred could recover:

Unencumbered Cash     _____

+

Restricted Cash Portion _____ (1)

-

Net Working Capital        _____ (2)

+

Cash Build Since 12/31   _____ (3)

=

Preferred Recovery        _____ (4)

(1) A portion of the restricted cash should be kept at the corporate level in the event of a sale/bk/foreclosure.  For most REIT’s, a large chunk of the restricted cash is for tax escrow and insurance, which would travel with properties (effectively) in a sale.  But there’s also a decent portion (I don’t know how much) that’s usually held because of (a) property improvement holdbacks and (b) a loan reserve account, neither of which travel and would be retained by the corporate entity.

(2) I assume that the net working capital would travel with the properties since it’s mostly AR/AP related to payrolls and other hotel operations.

(3) There’s not much I can say about this, you have to see the financials.  I am making a logical assumption.

(4) 4m shares outstanding.

Also worth mentioning is the involvement of Esopus Creek Capital, who own 10% of the preferred.  Esopus elected two directors to the board in 2011 after Eagle missed the customary six dividend payments.  Esopus is a smart firm and it’s nice knowing they’re involved.  They wont discuss Eagle so don’t bother calling them. 

Sorry again I cant reveal the financials, which also makes it a little challenging to discuss the risks.  I’ll do my best in the q&a.

Disclaimer:

The author of this posting and related persons or entities ("Author") currently hold a long position in this security. The Author makes no representation that it will continue to hold positions in the securities of EHPTP.  In fact the Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions.  Additionally, because the Author has these current positions the reader may assume that the Author is biased in favor of his investment view and may also be mistaken.  While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note.  The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer.  Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.

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