AHIP to Sell 45 Economy Hotels for $215M

VANCOUVER—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 $215.5 million to an affiliate of VCM Ltd.

This sale culminates an extensive review of the portfolio that reinforced AHIP’s view that its long-term strategy is better focused on expanding and driving growth from its premium-branded hotel portfolio, which currently consists of 67 hotels in larger U.S. secondary markets that are predominantly affiliated with Marriott, Hilton and IHG hotel brands.

“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.”

After the repayment of property mortgages and transaction closing costs, the net proceeds from the sale of approximately $90 million will be redeployed to acquire additional premium-branded hotels that are better suited to AHIP’s long-term strategy, and also used for general corporate purposes.

O’Neill noted that the company is pivoting away from economy and moving toward upgraded offerings. “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 the company’s 45 economy lodging properties is the first step in that strategy. The existing total portfolio’s RevPAR for the trailing 12 months ended March 31, 2019 was $73.31, on its own, and its premium-branded portfolio RevPAR was 20% higher at $88.23, according to the company. AHIP’s premium-branded hotels also deliver a higher net operating income margin of 34.2% in the trailing 12 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,” he said.

“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.”

AHIP intends to redeploy the net proceeds from the sale into new, income-generating investments. Based on AHIP’s current estimates of go-forward cash flow for the premium-branded portfolio and the strength of its balance sheet, the company expects to maintain its current monthly cash distribution of $0.054 per unit following the completion of the transaction.

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.