The transaction represents a per-room value of $88,200 (excluding vendor take back mortgages and Holloway’s office properties) and a cap rate of 6.4 per cent, the companies said in a release.
Clark currently owns 51 per cent of Holloway’s shares. The investor says the acquisition also has support from investors who hold an additional 32 per cent of Holloway’s shares, including Letko, Brosseau & Associates Inc. which controls more than 20 per cent of shares.
“We are pleased to acquire the remainder of Holloway and welcome everyone on the Holloway team to Clarke,” said Michael Rapps, president and CEO of Clarke, in the release.
“Holloway is a hotel-specific example of Clarke’s general investment framework, namely buying an asset or business opportunistically, investing the time, energy and capital required to improve that asset or business and then monetizing that asset or business at an attractive price and time.
“We look forward to continuing to enhance the value of Holloway’s properties.”
Clarke, Holloway boards onside
The transaction has the unanimous approval of Holloway’s board (with George Armoyan and Rapps, who are also directors and officers of Clarke, abstaining). Clarke’s board has also unanimously approved the transaction.
Both companies are based in Halifax.
If approved, Holloway shareholders will receive 0.65 shares of Clarke for each Holloway share they currently hold. Based on the closing prices on Aug. 8, it translates to an acquisition price per Holloway share of $8.46 and a premium of 14 per cent to Holloway’s value on that date.
The acquisition is valued at approximately $132 million on an equity basis ($265 million in enterprise value).
“In recent years, Holloway has demonstrated the value of its hotel investment strategy and operational capabilities. The result has been a meaningful increase in the company’s book value per share and attractive total shareholder return,” David Wood, lead member of Holloway’s special committee which considered the offer, said in the release.
“We believe this transaction provides Holloway’s shareholders with an attractive value proposition, where the value of the company’s efforts in recent years is being recognized while also allowing shareholders to continue to participate in the next phase of Holloway’s growth.”
Holloway Lodging’s recent moves
Among its most recent moves, in May Holloway purchased three vacant office buildings, comprising more than 470,000 square feet, in Houston. It paid $13.2 million for the properties.
Holloway also divested four hotels in two similar transactions during the past two months. First, it sold Super 8 and Travelodge properties in Timmins, Ont., and a few weeks later announced the sale of its Super 8 and Travelodge hotels in Truro, N.S.
The Clarke-Holloway transaction remains subject to various regulatory and shareholder approvals, including the issue of approximately 4,940,193 Clarke shares as part of the consideration for the acquisition. If all approvals are granted, Clarke expects to close on Sept. 30, 2019.
Following the close, Marc Staniloff is to be appointed as a director of Clarke. Staniloff is president, CEO and the founding partner of Superior Lodging Corp., a privately owned hotel developer owner and operator.
Benefits of the transaction
Both companies say the acquisition will provide several benefits:
* increased cash flow. Clarke currently generates minimal cash flow from its investment portfolio, consisting principally of dividends on owned securities and cash flow from its ferry operation;
* upside. Shareholders of Clarke and Holloway will participate in the upside that both companies believe exist in the other company’s portfolio, including any rebound in Holloway’s Western Canadian hotels and the repositioning of assets. Holloway shareholders will benefit from continued growth anticipated at Terravest and the substantial upside in Trican should Canadian energy commodity prices recover;
* improved profile and trading liquidity due to increased cash flows, Clarke’s expanded asset base and investment returns.
“We believe the acquisition of Holloway helps us increase the scale and scope of our investment operations.,” Rapps said. “We gain a capable team, assets that offer upside through redevelopment or repositioning and additional cash flow that we can deploy to opportunities within the hotel business or in other areas.”
Clarke says it will have three areas of focus following the transaction, including adding value to the existing assets. Initially, this will consist of Holloway’s buildings in Houston and the potential redevelopment of some Holloway hotel properties.
The company says it has also “consistently generated attractive returns by acquiring meaningful interests in public companies” and then working to increase shareholder value. This will continue as a “critical” core activity.
Finally, it intends to remain a business owner/operator. Initially, this will consist of Clarke’s ferry operation, Holloway’s hotels and its third-party hotel management business. In future, Clarke says it could expand this investment activity.
Record time for Canadian hotel sector
The decision to acquire all of Holloway comes at a record time in the Canadian hotel sector, where a new Lodging Econometrics (LE) Q2 2019 report reveals Canada’s hotel construction pipeline in Canada hit an “all-time high with 273 projects/35,787 rooms.”
This is a 14 per cent increase in development and a 20 per cent increase in rooms year-over-year, the report says.
LE says there are 92 projects and 11,118 rooms under construction. During the next 12 months, it says 95 projects, comprising 11,097 additional rooms, are slated to begin. Finally, an additional 86 projects and 13,572 rooms are in early planning stages.
So far in 2019, LE says 28 new hotels with 3,213 rooms have opened across the country. Toronto, Vancouver, Ottawa, Calgary and Niagara Falls are the five most active cities, it says.
About Clarke and Holloway
Halifax-based Clarke invests in a variety of private and publicly traded businesses and participates actively where necessary to enhance the performance of such businesses and increase its return.
Holloway is a real estate corporation focused on acquiring, adding value to and operating select real estate assets and managing hotels for third parties. Holloway owns 23 hotels with 2,723 rooms and three office properties with approximately 435,000 square feet of space.
It generally owns and operates economy brands in secondary and tertiary markets across Canada.
Formed in 2005 as Holloway REIT and Holloway Capital Corp, the trust became a corporation in 2012.