American Hotel Income Properties REIT LP plans to sell 45 hotels—its entire economy-lodging portfolio—to an affiliate of Vukota Capital Management for $215.5 million. The transaction is part of the company’s plan to focus entirely on its premium-branded portfolio of mostly upper-midscale to upper-upscale hotels in the extended-stay and select-service segments.
“Our decision to sell these properties was the result of an extensive evaluation of our portfolio and our view that AHIP’s valuation and unit-holder return would be strengthened by expanding and driving growth as a pure-play, premium-branded, select-service hotel REIT,” said AHIP CEO John O’Neill in a call with investors.
The REIT expects to complete the transaction in September. After the repayment of property mortgages and transaction closing costs, the sale’s net proceeds will total approximately $90 million. According to O’Neill, AHIP plans to use this money to acquire newer, higher-quality properties with limited upcoming renovation and property improvement plan requirements. The company currently is reviewing properties that meet its criteria and expects to use the money from the sale to acquire new hotels by year's end.
Though he was not willing to disclose the specific cities AHIP will target, O’Neill said it is not looking at markets like Los Angeles, New York City and Chicago. Instead, the REIT is focusing on strong secondary markets consistent with the larger markets where it currently owns properties. “Those kind of markets have better growth potential, higher quality of assets and [are] consistent with our strategy going forward,” he said.
“From the proposals and market opportunities we’re seeing, we believe newer, higher-quality properties can be acquired at cap rate in line with our selling cap rate of the economy-lodging portfolio and with stronger growth potential,” said O’Neill. “Focusing entirely on premium-branded hotels will simplify our corporate structure, our reporting requirements and perhaps, most importantly, our investment proposition.”
Economy vs. Premium-Branded Portfolios
O’Neill highlighted the differences in AHIP’s economy and premium-branded portfolios to explain why the company feels the need to refocus. For the trailing 12 months ended March 31, AHIP’s total portfolio revenue per available room came to $73.31 Alone, its premium-branded portfolio’s RevPAR was 20 percent higher at $88.23 and more than double the RevPAR of the economy hotels. For that same time period, its economy portfolio’s average daily rate was $59, compared to $114 for its premium-branded hotels. Its economy hotels delivered a 31.7 percent net operating income margin compared to the 34.2 percent from its premium-branded properties. O’Neill said the company’s premium-branded portfolio generated 80 percent of its net income in 2018.
AHIP’s economy portfolio also is older with fewer rooms per property on average. The average age of these hotels is 18 years, three years older than hotels in its premium-branded portfolio. Their average size, at 85 keys, falls 30 guestrooms short of its premium-branded portfolio.
After the sale, AHIP’s portfolio will consist of 67 hotels with a total of 7,684 guestrooms. These properties are located in 19 states and 44 cities, with most hotels positioned within the upper-midscale and upper-upscale segments. They represent 14 hotel brands, largely from Marriott International, Hilton and IHG. O’Neill said the company plans to further develop these relationships and grow the proportion of its hotels under these brand families.
“We truly believe this is a transformational transaction for our business and one that will elevate our portfolio, investment proposition and public market valuation over the long term,” said O’Neill. “We’re confident that the compelling acquisition opportunities we’re evaluating of premium-branded hotels today will enable us to efficiently redeploy this capital into higher-quality properties and higher-quality cash flows.”