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Think about the high level sources and uses here - based on h_man's walkdown, there will be ~$498M of cash coming into Whitehall's hands ($227M of cash and $271M of additional mortgages and mezz, which I presume will be used to finance the other 20 hotels) and ARCHT will issue $451M of preferred equity interests in the two new HoldCo's that they will grant to Whitehall in consideration for the assets.
~$158M in CASH will be used to retire the mortgages encumbering the 20 hotels. We are now down to $340M in cash and $451M in pref interests against ~$284M in other liabilities ($50M Trust Pref, $146.3M in Pref B&C and ~$87M accumulated divs). CASH needs to be utilized to retire these obligations - per the charter, only shares, options or warrants to purchase shares of Junior Stock (which would need be issued by the company) can be utilized to retire Prefs and/or accumulated divs.
While this clearly demonstrates there is enough CASH coming into the system to service all of the debt liabilities (and in a plain vanilla structure, the path to full recovery), the clear issue pertains to what the Company actually "owns." As Enterprising Investor has pointed out numerous times in the past, the Company has demonstrated a very clear fact pattern that the money flowing in from the real estate assets is fungible across all of the downstream entities (i.e. proceeds the sale of an encumbered hotel can be used to pay down debt on the 106 hotel pool). This demonstrates to me that these Trust Preferred and Preferred liabilities would need to be serviced similarly given they are entity level liabilities.
I think h_man_investor's walk down of implied value is a legitimate scenario. I also agree that the issuance of new pref shares from Whitehall's seller financing is a possibility, but ARC would be very motivated to pay off this seller financing as quickly as possible since it would be dilutive to their dividend thresholds(they need to distribute dividends of ~6.5% versus the coupon on the pref in one of the SEC filings which is something like 7.5% - they will want to take this out as quickly as possible with cheaper equity dollars). My scenario analysis and implied share value is as follows (assuming a roll-forward to 09/30/14):
Scenario A - deal with ARC falls through. You can nibble around the edges on price, but the PSA that has been entered into at $1.925 billion has established that there is equity beyond the debt and preferred equity liabilities on all 126 hotel assets. That said, all of the accumulated dividends must be brought current for Whitehall to receive any equity distributions, therefore I set a floor value at the accrued dividend amount, or ~$15/share.
Scenario B - h_man_investor's scorched earth scenario. The 20 hotel pool serves as collateral for the Trust Preferred debt liability and only proceeds that flow to the Company (3% of Senior Mezz LLC and 100% of the 20 hotel Pool) are used to pay off accumulated dividends and release the dividend blocker resulting from the suspended dividends. Value ~$22/share.
Scenario C - Same as Scenario B only now accounting for roughly $10 million of operating cash on-hand and repayment of the ~$46 million of net proceeds from asset sales that were 100% owned by the Company and were voluntarily utilized to paydown the prior GE senior debt proceeds - this is super relevant because the Company is now only receiving 3% of the benefit from that (which would have otherwise flowed 100% to the Company). Value ~$32/share.
Scenario D - The Trust Preferred, Preferred B & C, and Accumulated preferred dividends are treated as ENTITY LEVEL liabilities and are therefore serviced with total pro rata net proceeds prior to equity distributions upstream. So yes, WNT Holdings does now own 97% of Senior Mezz LLC, but Senior Mezz LLC is encumbered by mortgage, mezzanine, and preferred equity liabilities and those liabilities need to be serviced before any common equity distributions can be made. Value is par plus accrued or ~$40/share.
I just find this intriguing and want to share - not anything that anybody doesn't already know:
Section 5.(B)(6)(b) of the Amended and Restated Charter of W2007 Grace Acquisition I, Inc., Voting Rights (with respect to either preferred class of stock), states:
"If and whenever distributions on any shares of Series B Preferred Stock or class of Parity Stock shall be in arrears for six or more quarterly periods (whether or not consecutive), the numbers of directors then constituting the Board of Directors shall be increased by two and the holders of such shares of Series B Preferred Stock...will be entitled to vote for the election of the two additional directors of the Corporation at any annual meeting of stockholders or at a special meeting of the holders of the Series B Preferred Stock and of the Voting Preferred Stock called for that purpose. The Corporation must call such special meeting upon the request of any holder of record of shares of Series B Preferred Stock..."
Why doesn't a holder of record request a special meeting to elect two board members? Per the Charter, the Corporation must oblige otherwise they are in breach of contract. There is no excuse, they simply must oblige per the letter of the governing document. After the last meeting was called and a quorum was found not to be present, they simply have not met their contractual duty (unless no holder of record has requested a special meeting).
FYI - the value that is mentioned ($17/$17.50) as being carried on the balance sheet is simply the mark-to-market at that point in time (03/31). No other magic behind it.
EQTY 2014-INNS
Joint securitization by Deutsche Bank and Goldman Sachs.
In reading through the FAQ again very literally, it's clear that the Company owns 3% of the Equity in the 106 hotels and 100% of the Equity in 20 hotels. There are three critical points here that will determine implied pref value:
1) In order for WNT to receive any common equity distributions (it owns 97% of senior mezz llc), the prefs have to be brought current. Which set of sources do those economics come from - proceeds on the 106 hotels or proceeds on the 20 hotels?
2) What is the collateral package for the $50 million Junior Subordinated Debt (which is a Trust Preferred security)?
3) Overarching all of this, how does Goldman allocate value to each individual hotel?
In any event, my rough math suggests that there is absolutely value beyond the liquidation preference ($25/share),and with a literal read of the charter, I still believe the prefs will be brought current with the pro rata portion of equity from the 106 hotels and 20 hotels, which would leave enough proceeds to redeem the prefs at $25/share. So I think fair value is par plus accrued.
The updated FAQ seems to imply a pref share value of ~$36/share. Per the FAQ, the Company owns a 3% interest in 106 hotels with ~$1.03 billion in debt obligations and wholly owns the equity interest in 20 hotels with ~$158 million in debt obligations. Per the CMBS issued on the 106 hotels, the value of those 106 hotels are appraised at $1.6 billion which would imply a value of ~$350 million on the other 20 per ARC's purchase price. This implies the Company owns equity interests worth ~$209 million against ~$78 million in accrued dividends and ~$146 million in liquidation preference. Accrueds have to be brought current to distribute to common, which would leave ~89 cents on the dollar for the liquidation preference of the prefs, or ~$22.50/share.
Does this make sense? Thoughts?
EI - I would be interested to hear your thoughts on the 2Q 2014 dividend - do you think they declare a 2nd quarter dividend today? Given the cash trap on the senior obligations is gone, I don't know how they would justify NOT declaring, other than the "we do not have to" argument. At least prior, they had a legitimate reason as to why no dividends were paid (i.e. the cash trap).
Right, but everything rolls up to Grace Acquisition I Inc, which is ultimately what Whitehall owns. So yes, WNT Holdings now owns 97% of a subsidiary entity, Senior Mezz, LLC via the exercise of the warrant. The way all of the press releases read suggests this 97% is a common equity interest, which under the charter is still subject to a dividend blocker until the preferreds are brought current. The semantics behind the creation of the warrant, the purchase by WNT Holdings and simultaneous exercise are simply to extinguish the substantial amount of mezzanine debt that existed prior to the 2008 restructuring that would have otherwise had a priority cash flow claim to both the preferred and common equity. Given WNT Holdings is an SPE owned by Whitehall, the money is now fungible, so it doesn't really matter.
Two other points as well - if the shareholders get nothing, than PFD Holdings gets nothing. PFD Holdings is, again, a subsidiary of Whitehall. Why would Goldman throw good money after bad? IF their intent is to in fact eliminate the preferreds, they could have achieved this without injecting additional equity dollars into the transaction through PFD Holdings. IF PFD Holdings is truly an arms length entity and they do not receive consideration for their investment, wouldn't they seek to exercise any remedies available to them, including legal action? Very convoluted, I know, but I am just trying to make the argument as to why I believe this is simply a strategic discounted payoff of the preferreds. One could reasonably make the case that PFD's basis in the prefs is in the mid-single digits which would suggest that the preferred liability is now a self-funded liability. Said differently, if they pay themselves par plus accrued, they can pay themselves back their investment basis, pay off the remaining ~40% prefs at par plus accrued and still post a profit on those dollars.
Just some food for thought. Maybe I am way off, but this is the thesis that keeps me going.....
Very simply though, Enterprising Investor's point about it only mattering to the flow of COMMON equity to various entities feels spot on. Remember, per the charter NO common equity may be distributed to ANY downstream entities unless and until all prefs are brought current. So, at the very least, these should theoretically become current paying securities.
Per the Street Insider about a half hour ago....
NEW YORK, June 2, 2014 /PRNewswire/ -- American Realty Capital Hospitality Trust, Inc. ("ARC Hospitality") announced today that it has entered into an agreement to acquire the Equity Inns lodging portfolio ("Equity Inns" or the "Portfolio") for an expected purchase price of $1.925 billion from subsidiaries of W2007 Grace I, LLC and WNT Holdings, LLC, each of which are indirectly owned by one or more Whitehall Real Estate Funds ("Whitehall"), real estate private equity funds sponsored by The Goldman Sachs Group, Inc.
The Portfolio, which consists of 126 hotels totaling 14,934 rooms across 35 U.S. states, is franchised by leading global hotel brands including Hilton Hotels & Resorts, Marriott International, Hyatt Hotels and InterContinental Hotels Group. It encompasses a number of well-known hotel flags, including Hampton Inn, Hilton Garden Inn, Homewood Suites, Embassy Suites, Courtyard, Residence Inn, Hyatt Place and Holiday Inn.
Sorry for the confusion, debt yield meaning net operating income or net cash flow from the portfolio of collateral divided by the outstanding principal balance of the loan. Per the press release on the Equity Inns website, they secured the debt at a cost of capital of LIBOR plus 3.30%, which I assume is meaningfully below the cost of capital that was replaced.
I don't. However, this loan is scheduled to be securitized as a single borrower deal, and from what I can ascertain, the entire loan is a senior mortgage with no mezzanine debt being borrowed. Understanding how the securitized market works, no lender would try to securitize a stand alone floating rate senior mortgage execution unless they were comfortable that the "A-Note" would be rated as investment grade and they could syndicate the "B-Note". In todays market, securitized floating rate loans are being cut off at around 50% loan to value and 13% to 14% debt yields. Even assuming there is a "B-Note," hard to envision the LTV being much above 60% and debt yield much below 11% to 11.5%.
Taking all of this into consideration, it would be absolutely "off market" if the new senior loan contained cash trap and/or dividend blocker provisions out of the gate with that level of credit support. That is the thesis supporting my comment, but I could very well be wrong. However, I would also say that if my thesis is relatively accurate, and the credit metrics are strong and Whitehall accepted a cash trap/dividend blocker in the structure, I would confidently say that there is a lender out there today that would have written the same loan without that level of structure.
Rumors swirling that Whitehall is close to agreeing to terms to sell the Equity Inns Portfolio. Pricing for the assets is unclear. What WH will do with the proceeds is also unclear.
The critical date to watch here will be June 30, as that is the next dividend distribution date, and seeing as how the senior debt no longer contains any restrictive cash traps, Whitehall has no argument as to why they would not declare a dividend.
Take a look at the following website for updates on the Grace Pref shareholder lawsuit:
http://www.chimicles.com/w2007-grace-acquisition-i-inc-preferred-shareholder-litigation
Specifically, the Opposition to Motion to Dismiss document that was posted today does a great job of framing the situation here in its entirety. It is very hard to understand how this has not received more front page press given Goldman's involvement - this has elements that make every internal/legal team cringe including breach of fiduciary responsibility and self-dealing - these are crushing allegations that could turn the entire institution on its head when you think about the dishonesty and illegal maneuvers alleged. This further strengthens the logic that they will use this refinance as an opportunity to likely clean-up the preferreds and probably settle the lawsuit. No astute world-class financial institution would risk this level of reputational damage to grand-stand for what they purportedly believe to be their legal rights in this day in age. For such a small sum of money in the grand scheme of things, no less.
Last Friday's edition of Commercial Mortgage Alert suggests the following:
"Deutsche Bank and Goldman Sachs have agreed to provide a hefty floating-rate loan to a Goldman fund on the former Equity Inns hotel portfolio. The fund, which controls the REIT that acquired Equity Inns seven years ago, needs to retire a big chunk of debt — believed to be in the neighborhood of $1.25 billion. Although the exact size of the new loan couldn’t be learned, it apparently would be big enough to retire most or all of the existing debt."
One might logically assume that the use of these proceeds would go to retire the traditional debt in-place as well as retire the prefs plus accrued in order to clean-up the capital structure for an eventual exit. Given Goldman's basis in the ~60%+ of the preferred float that they own, they would be DPO'ing at a substantial basis (or paying themselves back a very hefty return).