AHIP is selling its 67 economy branded hotels to U.S.-based VCM, Ltd. (Courtesy AHIP)

American Hotel Income Properties REIT (HOT-UN-T) is selling its 45 “economy lodging” hotels to U.S.-based VCM Ltd., as AHIP zeroes in on what the trust’s management considers the more profitable premium hotel brands sector. 

The $285-million transaction (all figures Cdn), announced Monday afternoon, will leave Vancouver-based AHIP with 67 “premium branded” hotels in its portfolio. The trust says, in a release announcing the deal, it plans to invest the bulk of its net proceeds of about $118 million (after paying mortgages and other costs) in more premium brand properties.

The transaction represents a selling cap rate of 8.2 per cent.

“This is a transformational transaction for our business, and will simplify our corporate structure, cost base and investment story, while providing us with the opportunity to redeploy capital towards initiatives we believe will generate stronger growth prospects, as well as higher and more consistent returns for our investors,” said AHIP’s CEO John O’Neill in a prepared statement.

“Following the sale of our economy lodging properties, AHIP will be better aligned with our U.S. hotel REIT peers by owning a focused portfolio of purely mid to upscale, select-service branded hotels.

“We anticipate this more focused strategy will help effectively value our business in the public markets.”

The REIT was trading Tuesday morning largely unchanged at $6.71, near the midpoint of its 52-week range of $5.80 to $9.30. As recently as mid-2015, the stock traded regularly above $10.50, after peaking in the $11.25 range in 2015.

AHIP divests all of its economy hotels

AHIP says the sale follows 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 hotel portfolio . . .” Those premium properties are located in larger, secondary U.S. markets and are affiliated mainly with Marriott, Hilton and IHG.

“As part of our previously announced capital recycling initiative, this transaction also completes our shift away from economy lodging properties,” O’Neill said in the release. “Our long-term strategy is focused on enhancing the quality of our hotels and cash flow by concentrating on a growing portfolio of premium branded hotels.”

He goes on to note AHIP’s total portfolio RevPAR for the 12 months ended March 31, 2019 was $73.31. However, RevPAR for its premium branded portfolio RevPAR was 20 per cent higher at $88.23.

AHIP’s premium branded hotels also deliver a higher NOI margin of 34.2 per cent in the 12 months ended March 31, about 2.5 per cent higher than the economy properties.

“Going forward, we intend to concentrate on accretive growth within the upper-midscale to upper-upscale categories of hotels in secondary metropolitan U.S. cities,” O’Neill explained in the release.

“We have already begun our review of potential hotel acquisition opportunities that we believe could be highly complementary to our existing premium branded portfolio, and are available at capitalization rates near to what we are selling our economy lodging portfolio for.”

Lower debt expenses

O’Neill said the sale will allow it to shed some higher-cost debt, compared to the rates it anticipates being able to access for any new acquisitions. This will also reduce ongoing expenses for AHIP.

“Combined, we believe higher-quality properties, lower-cost debt, and more attractive financing terms will drive accretion and preserve cash for our company over the long term,” said O’Neill in the statement.

The transaction remains subject to customary approvals and due diligence, and is slated to close in September.

The company expects to maintain its current monthly cash distribution of US$0.054 per share.

CIBC Capital Markets and R.W. Baird & Co. Incorporated are acting as financial advisors, and Farris LLP is acting as legal advisor, to AHIP.

About AHIP

American Hotel Income Properties is a limited partnership formed to invest in hotel real estate properties located in the United States.

AHIP currently has 112 hotels, and is engaged in growing its portfolio of premium branded, select-service hotels in larger secondary markets that have diverse and stable demand. AHIP hotels operate under brands affiliated with Marriott, Hilton, IHG, Wyndham and Choice Hotels through license agreements.

The company’s long-term objectives are to build on its track record, deliver reliable and consistent U.S. dollar denominated distributions to unitholders, and generate value through the continued growth of its diversified hotel portfolio. 

About VCM, Ltd.

VCM, Ltd. is an investment firm founded in 2010 which focuses on alternative investments.

The firm and its affiliated companies manage over US$900 million on behalf of institutions, family offices, and high-net-worth individuals.

VCM’s investment activities are focused on real estate private equity, public market investments and private equity.