A RISK THAT SEEMS WORTH TAKING

Today's hospitality climate is so inviting, it makes perfect business sense for Ashford Hospitality Trust to assume major debt to buy 51 upper-tier hotels from CNL Hotels & Resorts, asserts Monty Bennett, president and CEO of Ashford, a Dallas-based real estate investment trust. Market analysts generally agree, with some reservations.

In mid-January, Ashford picked up $2.4 billion of a $6.6-billion buyout of the CNL real estate investment trust, which will virtually double the size of its portfolio once the deal closes as expected, in the second quarter. According to Merrill Lynch, average per-key purchase price of the portfolio is $177,000, with a per-key valuation of $215,000 for 24 full-service hotels and $125,000 per for 27 select-service properties. The acquisition covers 13,524 rooms, with the predominant brands Marriott, Hilton and Hyatt. The deal would put Ashford second only to Host Hotels & Resorts in REIT size.

However, getting the debt down is critical to Ashford — and to the market. “We have the benefit of not closing (the deal) for several months so we have plenty of time to formulate our strategy,” says Bennett. “However, one key component is to deleverage our platform. We have a policy that we don't like our platform to be more than 60-percent leveraged.” To reach that goal within 12 months of the deal closing, Ashford plans to sell some assets or engage in joint-ventures as necessary, Bennett says.

“We think that companies investing in hotels can sustain higher debt levels than 60 percent,” Bennett says. “However, the public markets have not shown a tolerance for debt levels much higher than that, so out of deference to what the market likes to see, we want to keep it at 60 percent or lower.”

According to A.G. Edwards analyst Jeffrey Randall, the acquisition will be funded with a $2.5-billion combination of existing debt and a financing package of debt and equity capital from Wachovia. The package will comprise 10-year and five-year fixed-rate commercial mortgage-backed securities financing, variable-rate CMBS financing, a variable-rate term loan and preferred equity.

According to Cheryl Boyer, president of Lodging Investment Advisors, Ashford's new leverage level is twice that of its peer group. She notes most analysts “are on board” with Ashford's strategy, but, she adds, “I think there is risk that if they're not going to be able to accomplish that deleveraging by the end of the year, their stock may be impacted.

“On the plus side, their market timing may be very good for the disposition they plan…we have such an active transaction market now that it may be in their favor,” Boyer adds. “It's an educated judgment on where they view the market to be going.”

What prompted Ashford to do this deal? A track record with CNL — in June 2005, Ashford bought 30 select-service hotels from that REIT for $465 million — and market conditions. “The market's been very strong thus far and continues to get stronger,” Bennett says. “The debt financing markets have been strong and continue to get strong. The availability of equity capital continues to grow.”

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