Holloway Lodging REIT’s years as a sleepy, under-followed and underperforming real estate company appear to be over. Earlier this month the Halifax REIT was asked by the Toronto Stock Exchange to explain unusual trading in its stock. With the request, Holloway was forced to disclose that it has signed a letter of intent and is in talks with a third party buyer.
The REIT, which owns 18 hotels, will not divulge the identity of the mystery buyer, saying the talks are only in the early stages and may not pan out. In fact, it said said it should never have been forced to make its disclosure in the first place.
“It’s a bit of a funny story,” said Michael Rapps, the REIT’s Toronto-based Chairman. After REIT’s stock started to trade up on above-average volume, the TSX came calling and urged to announce its early-stage discussions with the potential buyer.
“It turns out the reason for the increase in volume and the increase in price was completely unrelated, there was an investment conference being held…and someone presented the idea of Holloway REIT being a good, long-term investment.”
The investment case for Holloway was made by Guy Gottfried, founder manager of investment fund Rational Investment Group at the twice-yearly Value Investing Congress. His stated thesis is that Holloway was undervalued, has a strong Western Canada presence, was a takeover candidate and displayed “panic buying by insiders,” according to a report of his presentation.
“It is a fairly well-attended conference with very good presenters so generally these things move markets, especially in a small illiquid stock like Holloway,” said Rapps.
Hotel REIT Under Renovation
Besides being the current Chairman of Holloway, Rapps is Managing Director of Geosam Capital Inc. a holding company controlled by investor George Armoyan. Geosam is a major shareholder, owning more than 21% of Holloway. Winnipeg’s Temple REIT is the other big shareholder owning about 25%. One of the two groups may be behind the takeover talks, or someone else, but Rapps is not saying.
Holloway has cleaned up its operations in recent years under the direction of Armoyan and Rapps. Geosam bought up millions worth of Holloway’s debt in 2010 and a year later took positions on the Halifax REIT’s board. Last year Rapps was also named Chief Executive and Chief Financial Officer and headed an ambitious remake of Holloway.
“I think there were probably always people who were interested in some or all of the assets but the company was pretty messed up,” said Rapps. “In terms of its capital structure it had a lot of debt out there…and that debt was spread across a number of different types of securities.”
Over the past year “management really went after the balance sheet issues and cleaned it all up.” The REIT sold four hotels and used the proceeds to buy back its debt at a discount, repaid some debt at face value and converted some other debt to equity. Holloway has managed to reduce its debt load by nearly half which helped it transform a year-ago first-quarter loss of $3.2 million in 2011 to a profit of $4.7 million in the 2012 first quarter.
Holloway ran into trouble in 2009 and 2010 partly because of the downturn in the economy slamming the hotel industry. Currently, it the REIT is prospering because of improving economic conditions. “You are just following the economy and you can’t do well independent of the economy,” said Rapps. “You can have the best hotel, and the best location in the country, if the economy sucks, the hotel is not going to do well.”
Interest in the hotel market is booming, according to Colliers International Hotels. There was $360-million in hotel investment activity in the first quarter of 2012, a period that saw 20 hotels change hands, setting a new dollar record for the three-month period. A year earlier 22 hotels changed hands for a total transaction value of $159-million for the same period in 2011. Colliers said “it is expected the pace of sales will continue.”
Holloway’s major shareholder George Armoyan, named activist of the year in 2009 by Progress Magazine has interests beyond the REIT. Earlier this month he was reelected to the board of Halifax hotel chain Royal Host Inc. The Syrian-born, now Toronto-based businessman controls about 30% of Royal Host, mainly through value investment firm Clarke Inc.