Forgive my sarcasm, but my favourite nearly insolvent REIT, Holloway Lodging REIT (TSX: HLR.UN) announced their latest quarterly results. They weren’t that bad relative to the previous year, but the company has a huge debt anchor around its throat while it is being asked to swim across the Pacific Ocean.
More specifically, in order to pay off an earlier debenture, the company through a related entity, borrowed money at double-digit rates of interest and continues to have about $12M outstanding at this time through that loan. There is another debenture maturing in less than 8 months worth approximately $50M face value that they admitted they won’t be able to pay off when it becomes due.
The likely scenario is that they will be doing a debt-for-equity swap. However, there is a game of “chicken” being played – there could also be a chance that the controlling shareholder would float another bridge loan to the company and pay off the debenture to avoid massive dilution – similar to what happened with the first debenture.
This is the only reason why I can think that the debenture has a bid at 50 cents on the dollar. Even with this debt anchor removed, the underlying operations are not all that profitable – most of the profit is being sucked off by the controlling shareholder through related entities.