Familiar names behind new hotel REIT

American Hotel Income Properties REIT LP (AHIP), which successfully raised $95.7 million in its initial public offering this week, has some serious hotel cred behind it.
“We have been in the hotel business all our lives I guess and I am not so young anymore, over 40 years,” said Robert O'Neill, AHIP’s Chief Executive Officer. Hospitality has been a family business for the O’Neills.
O’Neill and his brother John began their careers in the hotel-management business with Coast Hotels & Resorts, a company which was founded by their father, John (Jack) O’Neill, in 1972 and which continues to be a fixture in the U.S. and Canadian hospitality industries.
The brothers founded Canada’s first hotel REIT,  Canadian Hotel Income Properties Real Estate Investment Trust (CHIP REIT) in 1997. Brother John is currently President and Chief Executive Officer of O’Neill Hotels & Resorts Ltd.
Secondary is first choice
AHIP’s strategy is to buy economy and mid-scale hotels in secondary markets in the U.S. “At the time they are priced below replacement cost which is a mantra that in my original acquisitions at CHIP REIT we held as one of our goals,” said O’Neill.
AHIP’s chief executive does not expect pickings to be slim even though the REIT will be a picky buyer. “The U.S. hotel market is a huge market, there is about 5 million hotel rooms in the marketplace, compared to about 400,000-odd hotel rooms in Canada, so it is 12 times as large. The secondary markets that we are looking at our considerably larger than Canada in total,” comprising about 1.5 million rooms that would fall under the REIT’s acquisition criteria.
“There are segments in the U.S. markets that are attractive right now. Major metropolitan markets, top 20 markets, are not attractive to REIT investors, especially Canadian REIT investors that require a higher yield.”
REIT's first big purchase
AHIP begins REIT life with an initial portfolio of 32 hotel properties in the U.S. of 2,565 rooms all operating under the Oak Tree Inn brand name with the exception of one Best Western hotel.
The portfolio, which AHIP acquired from a private equity company in the U.S., is highly profitable given that it has a captive customer in the form of U.S. freight railroad employees. “The hotels are close by large rail switching yards and hubs,” O’Neill explained. “We are in the unique position that 74% of the occupancy of the hotel is guaranteed by the railways.”
It is an acquisition that O’Neill had been working on for about a year and dovetails nicely with his family’s business history. “Our family was originally in the camp, catering remote site business and also Western Canada’s largest railroad caterer. So I had some familiarity with the endeavour having been in the contract business and having been in the hotel business.
“I saw that if I was able to acquire it at the pricing range that I identified that it would be a very strong initial portfolio for a public company,” he said.
AHIP paid approximately $143 million for the Oak Tree Inn portfolio in a combination of debt and equity.
Growth on and off the Rails
O’Neill expects future growth to come from a combination of expanding its initial relationship with the railroad industry and by making other acquisitions around transportation and business hubs around universities, manufacturing plants and airport. “We like a focus on contract revenues as well as high occupancies.”
The deals will likely be smaller than its initial 32-hotel acquisition but it will not be mom and pop deals either. “It is difficult to do small hotel acquisitions on a one-by-one basis, I would think that we are going to be looking at mid-sized portfolios” of between six to 12 hotels.”
How fast can AHIP grow? “We have a considerable amount of excess cash to put to work. I would expect as fast as prudently possible.”
AHIP’s initial public offering saw the sale of 9,570,000 limited partnership units priced at $10.00 per unit, for total gross proceeds of Cdn$95.7 million.
Included in the closing were 870,000 units from a partial exercise of the over-allotment option. The balance of the over-allotment option, being for 435,000 Units, remains exercisable for a period of 30 days and, if exercised, would bring the total gross proceeds of the offering to $100.1 million.
Who bought AHIP's units also provide O’Neill with validation of his initial concept.
“We were pleased and somewhat humbled that we had over 60% take-up by institutions in our approximately 55 institutional meetings.”
The big money investors were attracted by AHIP’s 9% yield as well as its initial portfolio of properties with a 10-year record of 90% occupancy.
A strong board didn’t hurt either. “Clearly they liked the deal. They liked our history and quite a few of the institutions were familiar with our past public market experience, some of our elite orders especially and our board,” he said.
“This is definitely a very high powered and supportive board that knows the rail transportation and hotel business intimately.”



Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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