Holloway Lodging gets a stealth takeover

It appears that Holloway REIT (TSX: HLR-UN.TO) had its prior trustees, including the CEO W. Glenn Squires, were kicked out by George Armoyan’s group of people by a margin of 85% to 15%, according to SEDAR filings.

Now that Armoyan has full control over the company (and indeed, roughly a 20% equity stake by virtue of his ownership in Royal Host REIT (TSX: RYL.TO), it remains to be seen what his plans for the two companies are. There are logical synergies between both companies, but both companies face huge balance sheet issues – mainly that the cash that the properties are generating is not proportionate to the cost of capital required to finance such properties.

Looking at the last quarterly report for Holloway, their balance sheet has stacked up a significant amount of current debt maturities, including a $3.6M line of credit, $42.1M of mortgages requiring refinancing, and perhaps more urgently, $20.2M of convertible debentures that are maturing on July 31, 2011, just under two months away! The company has $300,000 in cash on the balance sheet and the line of credit is good for $5 million.

It should be noted on their MD&A that the company states that:

The REIT has a signed term sheet to finance the repayment of the debentures. The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties, or some combination thereof.

One wonders what the terms on this term sheet is and who the heck would be willing to lend this company money on an unsecured basis.

The market capitalization for the firm at their existing price of 34 cents is about $13M, which means that if the company wished to pay off the debenture using equity (which I am not sure is legal without shareholder approval) then that would represent a significant dilution.

Interestingly enough, these debentures are trading at par.

Also, I have no position in any of these securities.

17 thoughts on “Holloway Lodging gets a stealth takeover”

  1. “which I am not sure is legal without shareholder approval”

    In a nutshell (a bit more complex but for the sake of not going into legalese), if the rights of existing shareholders are affected (ex. diluted), they need to approve the operation.

  2. It was my recollection that a company can dilute up to 20% without triggering approval, but again, I’m going from distant memory.

  3. Note that Michael Rapps (Geosam employee, Armoyan associate) continues to accumulate shares.

  4. http://www.digitaljournal.com/pr/346166

    Yesterday’s news released confirmed that Geosam (Armoyan) coughed up the $20MM to repay the 8% debentures. Nice 12.5% yield for George plus 3 million warrants at 40 cents. Now we know why the 8% debentures traded so close to par. How long until the 2012 6.5% debentures move toward 100?

  5. GTA, the important note is that this loan is secured, while the June 2012 debenture is not – hence, Armoyan can pull the plug on the firm on June 2012 if they don’t receive sufficient financing (which is likely the case – ask yourself how much yield/security pledge you would want from the company if you had $50M burning in your pocket to give to them). The only person to make any sort of money from Holloway will be him and his group.

    Also something amusing to note is that this will bleed another ~$1.3M/year from the corporation with the elevated rate of interest (12.5%) compared to the 6.5% on the previous debenture.

    The only case for buying the A series debentures is if you think Armoyan will bail you out. Not being a mind reader, this is a risk I wouldn’t want to take.

  6. I think you are being a bit too cynical about his intentions. He owns 992,900 shares of the company and now controls the right to acquire another 3MM shares at 40 cents over the next three years.

    George has tremendous vested in interested in driving the company forward, not taking it down. (Also note that Rapps is buying – he works for George, why would he buy in?). HLR owns hotels in western Canada. RevPar and other metrics are all improving in the west.

  7. … also Royal Host owns 11.9MM shares. Armoyan still has money in them and Clarke Inc. has a major position (and George/Geosam have a major position in them!).

    Armoyan is hooked into the equity of Holloway big time. Getting paid while he waits via the term loan is just plain smart.

  8. GTA, I am very cynical, but that’s because it is a survival instinct in the investment world that has served me well. Although you are completely correct in saying that he has a good chunk equity stake in the company, that minority stake is what he used to get his foot into the board room and control of the company.

    It is equally plausible that his method of extracting assets out of the company will be through other means than the equity. I find it very difficult to believe how equity holders get out of this one alive without substantial improvements in RevPar metrics, more than we saw in the last update.

    Also, going back to the last question I asked – if you gave this company $50 million debt financing (to allow them to refinance their next debenture), what compensation would you want in return?

  9. Yes, I can see your survival instinct is very acute which is very good. I think most investors have a really hard time thinking about debentures. Even you “… I find it very difficult to believe how equity holders get out of this one alive …” seem to fall into this trap. Debenture holders don’t have to care about equity value. The only real questions are “can Holloway pay me back at $100 next June?” and if not, “what will my debentures be worth?”. In this sense, I think improving metrics and Armoyan’s equity chunk lead to yes answer to the first question.

    To your point, for me to (hypothetically) provide $50MM in debt to refinance the debentures, I would want to be senior.

    I think it is very important to note that the 2012 debentures do not have to be paid in cash. They can be paid in shares. This would, of course, seriously dilute existing shareholders but would eliminate interest payments going forward and, combined with improving metrics, likely return HLR to profitability. Debenture holders will not be seriously wounded by an election to pay out in shares because the equity price will adjust prior to payment.

  10. Forgot to mention …

    at the last price of $72, the 2012 debentures have a yield to maturity of 44%.

    … this is the carrot.

  11. GTA, just curious if you have a position in HLR in any shape…

    Your comment (5:25) is quite correct, debenture holders only care about being paid back – and in this case, if you are holding the June 2012 debentures you are sitting behind the mortgages and also Aryoman’s $20M senior secured loan in the event of a liquidation.

    If they exchange to equity at existing rates, prior equity holders would hold about 18% of the company. I also don’t think debenture holders would be able to effectively liquidate their stock.

    I don’t see how anybody can win except Aryoman.

  12. I bought the 2012 debentures a few weeks after the press release that Armoyan wrestled his way on to the Board. I will not have to liquidate them if they are paid out in equity. I can be patient on price in that event.

    I don’t know George Armoyan or have anything to do with Geosam or Holloway or Clarke or Royal Host other than in the capacity of a small, unrelated small investor. I do think that you are misjudging motive in this case. This is not a zero sum game. If Armoyan succeeds in creating a sound business out of Holloway, then everybody wins. If he fails, then he has taken the steps to ensure he is covered first.

  13. I hope your investment matures at par! I didn’t deem the risk acceptable, but it is interesting to know the mentality of people that do.

    I agree that it is not a zero sum game if the company can improve its results, but operationally the company is really concentrated in “middle of nowhere Northern Alberta” – Grand Prairie is 23% of the company’s room portfolio! It is very difficult to see how they can improve results without another natural gas boom.

    One very easy cost synergy is a merger with RYL, however. Both companies are very similar except in scale.

  14. I note that the CFO resigned her seat, and that Armoyan and officers took out a cool 201,741 trust units for themselves as “compensation for services”. Good luck liquidating them!

  15. Sacha, your comment about liquidation is a bit baffling. The CFO was replaced by Rapps, Armoyan’s man. This looks like a consolidation of power which will be helpful as they continue to remake the company. Other events of the past couple of weeks include the conclusion of an automatic arrangement to buy back the 2012 debentures, the sale of the first of the hotels lined up for divestment and unusually highntrading volume in the 2012s that did not involve insiders. Again, if the 2012s are paid in shares, the go forward company will much more sound than today. Existing equity holders get slammed but debenture holders would do well. IMO the debentures get extended in a deal favourable to holders or paid in cash. Too much equity is in the hands of those driving the bus to allow for major dilution.

  16. Thank you for keeping track of this discussion.

    The liquidation remark was a bit snide and I didn’t sleep too well the previous night. However, it was referring to the fact that the average volume in units is quite low relative to 200k, and that if they wanted to cash out those units they would have a difficult time without affecting the already low market price.

    If the company chooses to redeem the debentures in shares, at existing valuations that means an issuance of about 170 million shares, so original shareholders will have about 19% of the company. I don’t recall Armoyan’s group having that many of the debentures, although there’s no reason why they can’t keep scooping them off the open market.

    I believe their primary challenge is how to fold HLR into RYL without triggering a mandatory offer at par for the debentures in either company! As I’ve stated before, I don’t see value here. For Armoyan’s group, perhaps.

  17. We agree on the equity side. I wouldn’t touch the shares either. I think you are misjudging the risk on the debentures though. If we start to see the debentures being acquired under the normal recourse bid that will be highly favourable to my point.

    Keep up the interesring blogging!

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