American Hotel Income Properties REIT LP (“AHIP”) has agreed to sell its Economy Lodging portfolio of 45 hotel properties for a total sale price of US$215.5 million to an affiliate of VCM, Ltd. (“VCM”).
The sale price represents selling capitalization rate of approximately 8.2%, based on trailing 12-months net operating income, after management fees and FF&E reserve.
“This is a transformational transaction for our business, and will simplify our corporate structure, cost base and investment story, while providing us with the opportunity to redeploy capital towards initiatives we believe will generate stronger growth prospects, as well as higher and more consistent returns for our investors,” said John O’Neill, CEO.
“Following the sale of our Economy Lodging properties, AHIP will be better aligned with our U.S. hotel REIT peers by owning a focused portfolio of purely mid to upscale, select-service branded hotels. We anticipate this more focused strategy will help effectively value our business in the public markets.”
“As part of our previously announced capital recycling initiative, this transaction also completes our shift away from Economy Lodging properties. Our long-term strategy is focused on enhancing the quality of our hotels and cash flow by concentrating on a growing portfolio of Premium Branded hotels. The sale of our 45 Economy Lodging properties is the first step in that strategy. While our existing total portfolio RevPAR for the trailing twelve months ended March 31, 2019 was $73.31, on its own, our Premium Branded portfolio RevPAR was 20% higher at $88.23. AHIP’s Premium Branded hotels also deliver a higher Net Operating Income margin of 34.2% in the trailing twelve ended months March 31, 2019, compared to the Economy Lodging hotels at 31.7%. Going forward, we intend to concentrate on accretive growth within the upper-midscale to upper-upscale categories of hotels in secondary metropolitan U.S. cities. We have already begun our review of potential hotel acquisition opportunities that we believe could be highly complementary to our existing Premium Branded portfolio, and are available at capitalization rates near to what we are selling our Economy Lodging portfolio for. In addition, we expect such acquisitions to benefit from improved debt financing terms available to us today, including longer amortization periods and lower interest rates, which will meaningfully lower our financing costs relative to the debt currently secured against the Economy Lodging portfolio. Combined, we believe higher-quality properties, lower cost debt, and more attractive financing terms will drive accretion and preserve cash for our Company over the long-term.”
Mr. O’Neill continued, “We’re also pleased with the approximately 8.2% cap rate achieved on this sale of this portfolio, which demonstrates the enhanced value we built in that segment of our business since originally acquiring it in 2013.”
Post sale of the Economy Lodging Portfolio, AHIP’s portfolio will be comprised of 100% Premium Branded hotels.
The transaction is currently targeted for completion in September 2019. CIBC Capital Markets and R.W. Baird & Co. Incorporated are acting as financial advisors, and Farris LLP is acting as legal advisor, to AHIP on this transaction.
American Hotel Income Properties REIT LP (TSX: HOT.UN, TSX: HOT.U, TSX: HOT.DB.U), or AHIP, is a limited partnership formed to invest in hotel real estate properties located in the United States.
VCM, Ltd. is an investment firm founded in 2010 which focuses on alternative investments. The firm and its affiliated companies manage over US$900 million on behalf of institutions, family offices, and high-net worth individuals. VCM’s investment activities are focused on real estate private equity, public market investments, and private equity.