Eagle Hospitality Properties Trust 8.25% Series A Cum PFD (EHPTP)

[vpagano]

Castle Union LLC has a position in EHPTP. How do I know? Take a look at their Q3 Letter to partners.

http://www.scribd.com/doc/110841832/2012-Q3-Letter-External

Eagle Hospitality Preferred

We have a stated strategy to invest in obscure securities, and we wasted no time by quickly establishing a position in the preferred stock of Eagle Hospitality. Eagle is a hotel REIT with a portfolio of 13 hotels that Apollo took private at the height of the bubble. The company’s $600 million of debt was purchased by Blackstone in May from the Federal Reserve for roughly 75 cents on the dollar. The debt came due at the beginning of September, but we never thought bankruptcy was a viable option for the parties involved given Eagle’s corporate structure, which would have required a long, complicated bankruptcy, and the bad boy guaranty given by Apollo (i.e., Apollo would be liable for any deficiency on the loan).

Indeed, bankruptcy did not come to pass as the company announced Blackstone has agreed to take a “meaningful” discount on its debt in conjunction with a sales process for Eagle’s hotels. Blackstone used a $350 million loan from J.P. Morgan and $125 million of equity to buy the Eagle loans, so even if Blackstone took a 90 cent pay off, they would make $65 million -- a fairly nice return on equity in less than a year.

Looking at comparable transactions, if Eagle is able to sell its hotels at an
8% cap rate, or a roughly $160,000/key, the preferred would recover $15/share. Our cost basis is $1.95/share.

I do want to quickly note the Wall Street cycle of life here with Eagle. Eagle was a bubble-vintage LBO lead by private equity firm Apollo with loans from Bear Stearns. As we all know, Bear failed and was taken over by J.P. Morgan. The Eagle loans were too toxic for J.P. Morgan, so they wound up at the New York Fed in the Maiden Lane portfolio. Five years later, another private equity firm, Blackstone, gets a loan from J.P. Morgan to buy the Eagle loans from the Fed, and thus the cycle of life is complete.