Vancouver-based REIT American Hotel Income Properties completed its sale of 45 economy assets and agreed to purchase 12 premium-branded ones. The move aligns the company’s structure closer to U.S. REITs and better presents itself to investors, executives said.
VANCOUVER, British Columbia—Canadian real estate investment fund American Hotel Income Properties on 28 November agreed to acquire a portfolio of 12 premium-branded hotels in the U.S. for $191 million.
The move sees the Vancouver-based AHIP move further up the segment ladder and concentrate on higher margins and yielding. With this announcement, the company also said it closed its previously announced sale of a 45-hotel economy portfolio to an affiliate of Vukota Capital Management for total gross proceeds of $215.5 million.
The latest deal caps off a period of restructuring for AHIP. In April 2018, the company transferred management of all of its portfolio, at the time 115 hotels, to Texas-based Aimbridge Hospitality, as part of its strategy to become a pure owner. Then in July 2019, AHIP agreed to the deal with VCM.
The VCM deal, which closed on 28 November, saw AHIP exit the economy segment and funded its latest acquisition, which comprises 12 hotels and 1,203 rooms in the U.S., in Michigan, Minnesota, North Dakota, Pennsylvania and Texas.
The largest hotel by room count is the 120-room Courtyard St. Paul Woodbury in Minneapolis. Seven assets are managed by Marriott International, four by Hilton and one by InterContinental Hotels & Resorts.
Aimbridge merged with Interstate Hotels & Resorts on 25 October, although between the AHIP-Aimbridge deal and the Aimbridge-Interstate merger, AHIP renegotiated its management-fee structure with Aimbridge. In an investor update released in coordination with the agreed-to buy and completed sale, AHIP said the new management-fee structure will “strengthen (its) margins, cash flow and growth potential over the next several years.”
Expected to close by the end of the month, the 12-hotel buy now gives AHIP 79 assets and 8,887 rooms in its premium-brand portfolio.
Jamie Kokoska, AHIP’s director of investor relations, said the completion of the sale of its 45 economy hotels alongside its new acquisition has transformed AHIP into a “pure-play” premium-branded hotel company.
The 12 hotels have been acquired at an “approximate 8% capitalization rate” and, with all built in the last five years, at below replacement cost, she said.
“By selling our economy-lodging portfolio, our business has become more streamlined and efficient and allows us to focus solely on driving growth from our growing portfolio of premium-branded hotels,” Kokoska said.
“We believe these transactions will also better align our company with other publicly traded U.S. hotel REITs and hopefully make our business more easy to understand for investors. Ultimately, we hope our trading multiples will more similarly reflect those of the broader hotel REIT sector,” she said.
Segment shift
AHIP CEO John O’Neill said in the news release announcing the deal that the “mostly all-suite” deal is the final chapter that completes “a significant component of our 2019 capital recycling program.”
Kokoska said Aimbridge will likewise manage the new portfolio.
Troy MacLean, equity research analyst at Toronto-based BMO Capital Markets, agreed the deal moves AHIP farther up the segment scale.
“The sale and new purchase is less about a price-point strategy than about becoming more of a pure play. They like select-service hotels,” MacLean said.
The hotel stock, both the bought and the sold assets, also is different in market and format, MacLean said, with the latest deal being likely an economically safer platform and one providing higher margins.
“The rail hotels were in tertiary markets with basically one buyer. When the rail business declined, they really suffered,” MacLean said, referring to the assets in the VCM deal and their associated rail crew-lodging contracts that were also transferred.
Kokoska said the new buy, due to close by the end of the year, continues AHIP’s strategic decision to focus on higher-quality, select-service premium-branded hotels that inherently have higher average daily rates.
The focus will remain primarily on the upper midscale to upper-upscale chain scales, mostly with brands offering suites or extended-stay accommodations located mostly in metropolitan secondary markets outside of the Top 25 in the U.S.
“Another target is to be in markets near multiple demand generators such as hospitals, universities, business parks and stadiums. We believe these kinds of hotels have the ability to provide strong, sustainable returns, while also being defensive in changing market conditions,” Kokoska said.
“These kinds of hotels do often generate higher margins due to less frequent guestroom turnover and lower operating expenses,” she said.
As of 27 November, AHIP’s market capitalization stood at $505 million Canadian dollars ($380.2 million), according to the investor update.
That update also showed the revenue-per-available-room rise across AHIP’s portfolio, even with inflation being taken into account, with that metric in 2013, when its assets were all in the economy segment, being $46.15; in September of this year, excluding the 45-asset economy-segment sale, being $76.80, and for just the 12 agreed-to hotels—although the rest of the portfolio is not included in the calculation—$97.
The average room count also has increased in the last six years from 80 to 115, with the 12 new hotels averaging 100 rooms.
Despite being listed on the Toronto Stock Exchange, Kokoska said AHIP still has no immediate plans to open its wallet for Canadian assets.
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