American Hotel Income Properties REIT LP (TSX:HOT.UN)(OTCQX:AHOTF) announced today that it has agreed to acquire through its subsidiaries a geographically targeted portfolio of 18 premium branded Marriott and Hilton hotels containing 2,187 guestrooms and located in Maryland, New Jersey, New York, Connecticut and Pennsylvania for approximately US$407.4 million, including brand-mandated property improvement plans.
"The Eastern Seaboard Portfolio meets our disciplined investment strategy to acquire premium branded, select-service hotels with stabilized in-place income, which are younger and well-maintained and where acquisition costs are below replacement cost," said Rob O'Neill, CEO of AHIP. Mr. O'Neill continued, "Additionally, these branded hotels are located within high barrier-to-entry secondary metropolitan markets in close proximity to major population centers such as Washington, D.C., Philadelphia, Baltimore and New York City."
The Eastern Seaboard Portfolio consists of ten Marriott branded hotels totaling 1,206 guestrooms (five Residence Inns, two Springhill Suites, one Courtyard, one Fairfield Inn and Suites and one TownePlace Suites) and eight Hilton branded hotels totaling 981 guestrooms (four Homewood Suites, two Hampton Inns and two Hilton Garden Inns).
"This transformational transaction increases our total guestroom count by over 23% and is immediately accretive to AHIP's adjusted funds from operations ("AFFO") per Unit. It is also a significant step in geographically diversifying our portfolio into the dominant Northeast corridor of the United States, which generates approximately 20% of the country's GDP," said Ian McAuley, President of AHIP. Mr. McAuley continued, "Each acquired property currently outperforms its competitive set in occupancy and revenue per available room ("RevPAR"), in part, as suite-style guestrooms make up 69% of this portfolio leading to above average RevPAR potential and higher margins given their extended stay clientele."
- The Eastern Seaboard Portfolio is being acquired at a weighted-average capitalization rate of approximately 7.9% on trailing twelve months net operating income (after inclusion of all hotel management fees, brand franchise fees, a 4.0% furniture, fixtures and equipment ("FF&E") reserve and the PIPs).
- The 18 premium branded hotels are being acquired for approximately US$186,000 per guestroom, inclusive of the cost of the PIPs, which is below management's estimate of replacement cost.
- The average age of the hotels is 10 years and each hotel has been recently built or renovated.
- AHIP expects to fund the purchase price, including the PIPs, using a combination of a portion of the net proceeds from the Offering (defined below) and an approximately US$236.2 million commercial mortgage-backed securities ("CMBS") loan packaged into four pools (collectively the "Mortgage Pools"), with each of the four pools receiving an FF&E reserve waiver for the first two years.
- The Mortgage Pools are expected to be US$69.6 million, US$57.7 million, US$52.4 million and US$56.5 million, with an expected weighted average fixed interest rate of approximately 4.55%. The first three pools are expected to have 10-year terms, with interest-only payments for the first five years and the fourth pool is expected to have a five-year term, with interest-only payments for the first two and a half years. The Mortgage Pools will then be amortized over 30 year terms. The Mortgage Pools are expected to be secured against 17 of the 18 hotels in the Eastern Seaboard Portfolio.
- The hotels will be managed by AHIP's exclusive hotel manager, ONE Lodging Management, a wholly- owned subsidiary of O'Neill Hotels and Resorts Ltd.
The Acquisition of the Eastern Seaboard Portfolio continues to expand the size of AHIP and increase the proportion of its portfolio that is comprised of premium branded, select-service hotels as follows:
|March 31, 2017||Pro Forma|
|Number of Hotels||95||113|
|Number of Guestrooms||9,383||11,570|
|Branded Hotels - % of Revenue1||74%||80%|
|Rail Hotels - % of Revenue1||26%||20%|
|Branded Hotels - % of Guestrooms||59%||66%|
|Rail Hotels - % of Guestrooms||41%||34%|
|(1) Based on figures for the three months ended March 31, 2017.|
The Acquisition is expected to close by the end of June 2017, subject to customary closing conditions and documentation.
After the expected completion of this transaction, AHIP's portfolio will consist of 113 hotels located in 33 states across the United States, representing an aggregate of 11,570 guestrooms with 67 premium branded, select-service hotels (with 7,684 guestrooms) and 46 select-service rail hotels (with 3,886 guestrooms) secured by railway contractual revenue guarantees.
THE ACQUISITION PORTFOLIO
The following table sets out certain key characteristics of the Eastern Seaboard Portfolio:
|Hotel||Location||Year Built||# of Rooms||Occupancy (2016)||Average Daily Rate (2016)||RevPAR (2016)|
|Homewood Suites||Allentown, PA||2010||108||90.5%||$132.12||$119.58|
|Fairfield Inn & Suites Baltimore/White Marsh||Baltimore, MD||2008||116||82.2%||$115.64||$95.02|
|Hampton Inn Baltimore/White Marsh||Baltimore, MD||1997||127||79.1%||$125.61||$99.34|
|Hilton Garden Inn Baltimore/White Marsh||Baltimore, MD||1999||155||81.7%||$132.73||$108.39|
|Residence Inn Baltimore/White Marsh||Baltimore, MD||2003||131||87.7%||$124.48||$109.22|
|SpringHill Suites Long Island||Bellport, NY||2006||128||84.0%||$130.91||$110.00|
|Homewood Suites||Bethlehem, PA||2006||113||89.7%||$124.23||$111.39|
|Homewood Suites Dover Rockway||Dover, NJ||2009||108||84.1%||$124.47||$104.71|
|Homewood Suites Atlantic City Egg Harbour||Egg Harbour Township, NJ||2012||120||86.3%||$122.35||$105.62|
|Residence Inn Atlantic City Egg Harbour||Egg Harbour Township, NJ||2008||101||83.0%||$128.34||$106.50|
|Hampton Inn & Suites Baltimore/Arundel Mills/BWI Airport||Hanover, MD||2002||130||86.2%||$126.15||$108.78|
|Residence Inn Baltimore/Arundel Mills/BWI Airport||Hanover, MD||2003||131||86.4%||$129.95||$112.33|
|SpringHill Suites Baltimore/Arundel Mills/BWI Airport||Hanover, MD||2006||128||86.4%||$116.06||$100.30|
|TownePlace Suites Baltimore/Arundel Mills/BWI Airport||Hanover, MD||2006||109||86.9%||$114.78||$99.77|
|Hilton Garden Inn Milford||Milford, CT||2009||120||83.4%||$113.69||$94.85|
|Residence Inn Mount Laurel at Bishop's Gate||Mount Laurel, NJ||2007||144||85.5%||$121.20||$103.67|
|Residence Inn Neptune at Gateway Centre||Neptune City, NJ||2007||105||85.3%||$138.60||$118.20|
|Courtyard Wall at Monmouth Shores Corporate Park||Wall Township, NJ||2007||113||79.3%||$130.33||$103.35|
In connection with the Acquisition, AHIP also announced today that it has entered into an agreement with a syndicate of underwriters (the "Underwriters") co-led by CIBC Capital Markets and National Bank Financial, with CIBC Capital Markets acting as sole bookrunner, to sell on a bought deal basis: (i) 18,360,000 limited partnership units (each, a "Unit") of AHIP at a price of Cdn$10.35 per Unit for gross proceeds to AHIP of Cdn$190,026,000; and (ii) US$42,500,000 aggregate principal amount of 5.00% convertible unsecured subordinated debentures the "Debentures") due on June 30, 2022 (collectively, the "Offering").
AHIP has granted to the Underwriters over-allotment options to purchase up to an additional 2,754,000 Units and an additional US$6,375,000 aggregate principal amount of Debentures, representing 15% of the size of the Offering. Each of the over-allotment options may be exercised in whole or in part at any time for a period of up to 30 days following closing of the Offering, to cover over-allotments, if any, and for market stabilization purposes.
The Debentures will be convertible at the option of the holder into Units at any time prior to maturity at a conversion price equal to US$9.25 per Unit (the "Conversion Price"). The Conversion Price of the Debentures represents a conversion rate of approximately 108.1081 Units for each US$1,000 principal amount of Debentures, subject to adjustment in accordance with the trust indenture governing the Debentures.
The Debentures will bear interest at a rate of 5.00% per annum and will be payable semi-annually on June 30 and December 31 until maturity on June 30, 2022, commencing December 31, 2017. The Debentures will not be redeemable by AHIP prior to June 30, 2020. On or after June 30, 2020, but prior to June 30, 2021, the Debentures will be redeemable, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest, at AHIP's option, provided that the weighted average trading price of the Units is not less than 125% of the Conversion Price. On and after June 30, 2021, the Debentures will be redeemable, in whole or in part, at a price equal to the principal amount plus accrued and unpaid interest, at AHIP's option.
AHIP intends to use the net proceeds from the Offering to: (i) partially fund the Acquisition; and (ii) fund working capital, potential future acquisitions and for general corporate purposes. In the event that the Acquisition does not close, the net proceeds will be used for general corporate purposes, which may include other potential future acquisitions.
The closing of the Offering is expected to occur on or about June 9, 2017. The Offering is subject to customary regulatory approvals, including the TSX. The Units and Debentures will be offered in each of the provinces of Canada by way of a prospectus supplement to AHIP's short form base shelf prospectus, dated February 16, 2017 (collectively, the "Prospectus").
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