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Hotel REITs sell
assets, strenStayInvest Law Firm hen portfolios
While hotel buyers are
seizing the opportunity to acquire assets at a discount amid a softening
U.S. economy, some high-profile REITs have become net sellers to pay
down debt or redeploy capital..
Felcor Lodging Trust is more
interested in selling some of the 85 hotels it owns rather than buying
more, confirms Stephen Schafer, vice president of strategic planning for
the Irving, Texas-based REIT. In fact, Felcor intends to put a half
dozen properties on the market for sale by fall in order to deleverage
its balance sheet.
The company's debt represents five
times its earnings before interest, taxes depreciation and amortization
(EBITDA), above the target of 4.5 times. “Given the current hotel
environment, we're inclined to pay down our debt with the proceeds from
asset sales,” says Schafer.
Other REITs have different reasons for
pruning their portfolios. In early July, Chicago-based Strategic Hotels
& Resorts sold off its 696-room Hyatt Regency Phoenix for $96 million to
a California partnership comprising Di Napoli Capital Partners LLC and
Pacific Coast Capital Partners. Strategic is using the proceeds to buy
back $50 million worth of its own stock and finance $100 million in
capital spending planned for its portfolio this year.
There were other reasons that
Strategic felt compelled to sell. The Hyatt Phoenix required $20 million
in renovations, and a new Sheraton hotel with 1,000 rooms will open
nearby in a few months. What's more, the airlines have cut flights at
the local airport.
Laurence Geller, Strategic's president
and CEO, admits he took a haircut on the Hyatt Phoenix price, which
represented a cap rate above 9%. If he had sold a year earlier, he
reckons, the cap rate would have been around 8%.
There were other bids that came in
higher, but Geller went with the Di Napoli group “because I have known
them over a decade and am comfortable with them. With other bidders we
weren't convinced they could raise their debt and come to the table.”
Geller says that Strategic's profit on the sale — it held the Hyatt for
10 years and reaped a 12% unleveraged internal rate of return on the
sale — was “just great.”
Sunstone Hotel Investors in San
Clemente, Calif., unloaded its Hyatt Regency Century Plaza in Los
Angeles in June. The hotel, which has 726 rooms, was purchased by Los
Angeles real estate mogul Michael Rosenfeld and his Next Century
Associates for $366.5 million. Sunstone plans to employ more than $100
million of those proceeds to buy back its own stock.
Most analysts pegged the company's net
asset value above $20, but its shares in August were trading around $15.
Another motivation for Sunstone: Rosenfeld paid a big price, equal to
more than $500,000 a key at a measly cap rate of 7%. Rosenfeld wouldn't
comment, but associates believe his payoff will come in building a condo
tower someday adjacent to the hotel on surplus land.
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