Why Chatham Lodging Trust Regained Innkeepers Portfolio Out of Bankruptcy
Q&A With Jeffrey Fisher, Chatham Lodging Trust
While most hotel REITs chase full-service and luxury hotels in major markets, Chatham Lodging Trust continues to focus on what it knows best: extended-stay and select-service hotels. And the REIT’s latest acquisition is one that Jeffrey Fisher, chairman and CEO of Chatham, is intimately familiar with.
When the U.S. Bankruptcy Court approved the plan of reorganization for Innkeepers USA Trust on June 29, Chatham was in line to buy five hotels outright and a share of 64 more hotels in a joint venture with affiliates of Cerberus Capital Management LP. After completing these acquisitions, expected to close this month, the lodging REIT based in Palm Beach, Fla. will own interests in 83 hotels (19 wholly owned) after raising $150 million in an initial public offering in April 2010.
The 69 properties comprise Innkeepers’ former portfolio of mostly premium-branded extended-stay and select-service hotels, and all were part of the portfolio Fisher built after founding Innkeepers in 1994 with seven hotels. Apollo Investment Corp. bought the company that had grown to 74 hotels in 2007 for $1.5 billion.
Now, as part of a $1.1 billion joint-venture acquisition with Cerberus Capital, Fisher regains a 9.2% interest in 64 of those hotels. Chatham is investing $37 million for its share, and another $195 million for the outright purchase of three Residence Inns (in Anaheim, San Diego and Tysons Corner, VA), the DoubleTree Guest Suites in Washington, D.C., and the Homewood Suites San Antonio Riverwalk.
Fisher says the prices of the two acquisitions represent a 30% discount from the peak valuations of the assets in 2007. The majority of the properties have been renovated in the past three years.
Ninety-three percent of the rooms purchased by the joint venture are hotels operating under Marriott, Hilton, Hyatt and Starwood flags. The majority are select-service brands such as Residence Inn, Hampton Inn, Summerfield Suites and Courtyard by Marriott. All but one of the 69 hotels will continue to be operated by Island Hospitality, a management company that is 90% owned by Fisher.
Fisher recently discussed the transactions and what he sees ahead in the lodging sector.
Eric Stoessel: How big of an advantage was your familiarity with the Innkeepers portfolio?
Jeffrey Fisher: Naturally we understand these hotels, the ins and outs of the markets and our affiliated management company has been running the hotels since the beginning. It makes for a seamless acquisition. Apollo did not add any hotels and sold a few, so I am intimately familiar with all these.
Stoessel: Did you see the bubble bursting in 2007 when you sold the portfolio?
Fisher: We got lucky there. When you’re a buyer of hotels and come back to the board four or five meetings in a row for a year and half and everything is too expensive to buy and you keep getting outbid, you have to ask yourself, ‘Why not be a seller rather than a buyer?’ That’s what happened with Innkeepers. We recognized things were bid up to a point that was pretty hefty, but we never thought the world would implode the way it did almost right after we sold.
Stoessel: How does the price you sold for compare to today’s acquisition price?
Fisher: It’s $135,000 price per room for those 64 hotels, a 30% discount from the peak valuation of $188,000 price per room in 2007. And the $255,000 price per room for the five hotels we bought outright is about the same discount from the peak.
Stoessel: Why does Chatham focus on select-service hotels while most other REITs chase full-service and luxury properties?
Fisher: We see value where we’ve been operating for almost 30 years since I built my first Hampton Inn. We think somewhat contrarian, and believe select-service hotels provide a more stable cash flow component because of a lower cost structure. When things turn bad, these hotels don’t do as badly as full-service hotels.
Stoessel: Are there more distressed portfolios and assets like these out there?
Fisher: I don’t know. There probably won’t be a lot as big as this one. But we’ve been able to buy below replacement cost from distressed owners, or those with capital needs or mortgages coming due. Those things are going to continue to be a big piece of the story. Depending on how much CMBS debt comes back to the market, there are a lot of refinancings coming. So, I see two to three years of good running room to buy in this market.
Stoessel: Does Chatham have any ammunition left for more acquisitions?
Fisher: We’re pretty well maxed out right now, and we’re not going to raise equity with the stock price where it’s at ($15.98 as of closing on the New York Stock Exchange Monday, July 11, down from $16.45 a year ago). We will try to recycle some capital in the portfolio and continue to be opportunistic with what we do to make deals.
Stoessel: Could some of these newly acquired assets be sold?
Fisher: Yes, the joint venture will go ahead and look at some dispositions immediately of the really non-core assets. There are some independents and some hotels that lost their franchises during the bankruptcy, and we’ll cull them out to concentrate on the core group of assets.
Stoessel: Will many of these properties need to be repositioned or renovated?
Fisher: That’s the beauty of this portfolio. The brands are the best, and there’s not a lot of repositioning needed. Twenty-six of these assets are being renovated now and the work will be done almost at the time of the close of the acquisition. Most of the other properties are in pretty good shape, if not great.
Stoessel: Will other lodging REITs turn their attention to select-service and extended-stay hotels?
Fisher: They are not going to because it’s really a different business model. I don’t see too much morphing from those who want luxury or full-service assets.
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