Ashford JV to Acquire Premium Hotels

Ashford Hospitality Trust Inc. (AHT - Snapshot Report), the second largest lodging real estate investment trust (REIT) in the U.S., has recently formed a joint venture with an institutional partner to acquire a portfolio of 28 hotels of Highland Hospitality operated under major brands such as Hilton, Marriott, Hyatt and Starwood.

The acquisition was made for a total price of $1.3 billion at a capitalization rate of 6.1%, which equates to a purchase price of $158,000 per key and an EBITDA (earnings before interest, tax, depreciation and amortization) multiple of 13.4x based on 2010 results.

The acquired portfolio primarily comprises full-service, upper-upscale and luxury hotels widely spread across the U.S.– about 36% in South Atlantic region (based on 2010 EBITDA), 29% in South Central, 17% in New England, 11% in Middle Atlantic and 5% in North Central. The asset management services for the entire portfolio would be provided by Ashford Hospitality on behalf of the joint venture.

The deal strengthens the leading position of the company and is expected to be accretive with immediate effect. During 2010, total revenues for the acquired properties were $386 million, with hotel revenue per available room (RevPAR) increasing 3.7% to $91.91 and an occupancy of 69.4%.

Furthermore, both the participating companies in the joint venture have mutually agreed upon to invest approximately $43 million in capital improvements to upgrade the hotels over the next 10 months. The renovation program will be funded through existing and on-going reserves at the property level along with a corpus of $32 million set aside for owner-funded capital improvements.

In concurrence with the recent developments in the industry, Sunstone Hotel Investors Inc. (SHO - Snapshot Report), a lodging REIT, had announced its plans to acquire premium hotels across the U.S. worth approximately $1 billion. The company is mulling to buy upscale hotels of 400 rooms or larger in 2011 in major cities on the East and West coasts of the U.S. The acquisition spree is part of the long-term strategy of the company to own assets in some of the premium markets of the country at discounted prices as property prices has nose-dived in the last couple of years.

We currently have an ‘Underperform’ rating on Ashford Hospitality, which presently has a Zacks #5 Rank translating into a short-term ‘Strong Sell’ recommendation.

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