AHIP has purchased 12 premium-branded U.S. hotel properties, including this Courtyard by Marriott in Bismarck, N.D. (Courtesy AHIP)

American Hotel Income Properties REIT (HOT-UN-T) said in June it planned to become exclusively an owner of “premium-branded” U.S. hotels. Today, the company has fulfilled that goal with the announcement it will acquire 12 such properties in six U.S. states, and has closed on the sale of its 45 economy properties.

AHIP is paying $254 million for the “well-maintained” portfolio, which comprises 1,203 guest rooms. That’s about $211,000 per room.

The trust sold the 45 economy properties for $286 million to U.S.-based VCM Ltd. (an affiliate of Vukota Capital Management).

“We’re very excited to complete a significant component of our 2019 capital recycling program by adding these 12 high-quality, mostly all-suite focused, recently built, select-service hotels to our portfolio of premium-branded hotels,” said John O’Neill, the CEO of AHIP, in Thursday’s release.  “We’re especially pleased with the acquisition cap rate and short closing timeline for this transaction, as the cash flow from these newer hotels will minimize the dilution from the sale of the economy lodging portfolio.

“With no major capital renovations required, the hotels in this portfolio should perform without any income displacement.”

AHIP says the purchase price represents a cap rate of approximately eight per cent.

About the portfolio

All the hotels AHIP is acquiring were completed within the past five years and the REIT says the price is below replacement cost. Six are located in Texas and two are in Minnesota.

Strategically, the acquisitions further diversify AHIP’s geographic markets, strengthening its presence outside of the U.S. East Coast.  In line with AHIP’s long-term strategy, all 12 hotels are in secondary metropolitan markets with more broadly based local economies. 

The properties are:

Eight of the 12 hotels are all-suite products and all of the brands are complementary to AHIP’s portfolio of select-service, premium branded, upper-midscale to upper-upscale properties. 

All of the properties are also already managed by Aimbridge Hospitality – AHIP’s exclusive hotel manager, which will help ensure a seamless transition.

Financing, closing the 45-property sale

AHIP intends to use proceeds from the sale of its economy lodging portfolio, alongside a $139.5-million fixed-rate term loan, to finance the acquisition. 

The loan will have a five-year term with fixed interest rates below four per cent, with exact terms to be confirmed when the acquisition closes.

“The improved debt financing terms we’ve secured for this transaction, including interest-only payments at lower fixed interest rates, will meaningfully reduce our financing costs and drive higher cash flows,” O’Neill said in the release.

“We continue to believe higher-quality properties and attractive financing terms will drive better risk-adjusted FFO accretion and create value for our unitholders over the long term.”

As part of the sale of its 45 former economy hotels to VCM, AHIP agreed on two conditions:

* approximately $9.3 million of the gross proceeds will be subject to an earn-out to be settled in the next 12 months based on the achievement of certain criteria;

* and AHIP will pre-fund a maximum of $9.8 million of brand-mandated property improvement plans for the hotels, with a credit for any cost savings.

“This profitable 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 select-service hotel portfolio,” AHIP says in the release.

The transaction is expected to close during December, at which point AHIP’s portfolio will consist of 79 premium branded hotels, representing 8,887 guestrooms.

Its properties are licensed primarily with Marriott, Hilton and IHG.