06/08/2012

JP Morgan Backs Hotel Play by Blackstone

J.P. Morgan has agreed to provide a $350 million floating-rate loan to finance Blackstone’s purchase of a mortgage on 13 high-quality but overleveraged hotels that it is angling to seize.

An AREA Property partnership acquired the 3,540-room portfolio in 2007 via its $700 million buyout of Eagle Hospitality, a REIT in Covington, Ky. It financed the top-of-the-market purchase with $639 million of debt from Bear Stearns.

But the hotels’ value plummeted during the downturn. Despite some recovery in recent years, it remains well below the current loan balance of $607.1 million. While the properties generate enough revenue to cover payments on the floating-rate mortgage, thanks to the historically low Libor rate, the AREA partnership is unlikely to be able to refinance when the debt matures in September. That would open the door for Blackstone to foreclose.

New York-based AREA and its partners — JF Capital Advisors of New York and Aimbridge Hospitality of Plano, Texas — have said they are exploring their options, including the possibility of restructuring the debt. Blackstone, perhaps the most-aggressive buyer of distressed debt, has a track record of working out settlements with owners.

Blackstone has agreed to pay $468 million for the Eagle loan, or a 23% discount to the face amount. The seller, advised by Eastdil Secured, was the Federal Reserve Bank of New York, which assumed the debt in 2008 when it arranged J.P. Morgan’s takeover of Bear.

Bear carved the Eagle loan into a $370 million senior piece and five mezzanine tranches. The investment bank intended to securitize the senior portion, but was caught short when the debt market seized up.

The AREA partnership this year sought unsuccessfully to negotiate with the New York Fed for a discounted payoff of the junior portion and an extension of the maturity date for the senior debt.

The properties are full- or select-service hotels branded as Embassy Suites, Hilton, Hyatt or Marriott. They are in Kentucky, Ohio, California, Massachusetts, Colorado, Florida, Illinois, New York and Puerto Rico.

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