Canada’s AHIP REIT fuels growth, snaps up U.S. hotels

VANCOUVER—American Hotel Income Properties REIT LP (AHIP) has enjoyed a robust first half of 2017, meeting its mission goals of expanding its investment in U.S. hotels with the recent acquisition of 18 properties for $407.4 million from Texas-based MCR Development.

Located primarily in the Northeast in solid secondary markets, the so-called Eastern Seaboard portfolio is a combination of Marriott International (10) and Hilton (eight) products, representing 2,187 guestrooms in Maryland, New Jersey, New York, Connecticut and Pennsylvania.

The move comes on top of an acquisition of five hotels made earlier this year and brings the REIT’s overall portfolio to 113 hotels at press time.

According to AHIP’s CEO Robert O’Neill, the REIT’s focus is on premium-branded, select-service hotels in high-barrier-to-entry secondary markets, as well as select tertiary locations.

The lounge at AHIP’s Residence Inn at Arundel Mills has a cool vibe.

“I’m not nervous in smaller markets if we can determine there are good business generators in those markets,” said O’Neill. “If you think mathematically, I have a high distribution percentage to pay against the capital that I raise, so I can’t go into the four (%) cap markets of the top 10. Cap rate to me is a very misused term. Many people talk about perspective cap rate after capital expenditures, but don’t include the capital expenditures in the calculation. So somebody says it’s a five cap but by my calculations it’s a 3.7(%) cap because I look backwards to trailing 12, and in the trailing 12, I throw my capital and I put all the transition costs of the deal, etc., in that. I take a more-conservative approach. I can’t afford to be in the low-cap-rate places.”

In the portfolio are five Residence Inns, two SpringHill Suites, one Courtyard, one Fairfield Inn & Suites and one TownePlace Suites, all by Marriott, representing 1,206 keys, and four Homewood Suites, two Hampton Inns and two Hilton Garden Inns from Hilton representing 981 keys at an aggregate average purchase price of approximately $186,000, including a reserve for approximately $12.4 million of anticipated brand-mandated PIPs.

The buy bolsters AHIP’s acquisition activity. In Q1, the REIT, which is listed on the Toronto Stock Exchange and the OTCQX (a U.S. market for companies already listed on an international stock exchange), bought a total of five Embassy Suites by Hilton. In early January, AHIP closed on the 305-room Embassy Suites by Hilton Dallas DFW Airport South and the 224-room Embassy Suites by Hilton Phoenix Tempe for $57.6 million or approximately $109,000 per key (exclusive of a PIP reserve). Later that month, the REIT picked up a trio of Embassy Suites for $124 million or approximately $159,000 per key, this time including anticipated PIP costs. The properties included the 284-room Embassy Suites by Hilton Columbus Dublin and the 271-room Embassy Suites by Hilton Cleveland Rockside, both in Ohio; and the 227-room Embassy Suites by Hilton Cincinnati Rivercenter, located in Covington, KY.

“[We’re] trying to [buy]in diverse locations and buy newer hotels, which you can’t buy in Canada. In terms of age, most of the hotel product in Canada is 20 years or older. I believe we’ve built a very strong and conservative model for hotel investment,” said O’Neill.

AHIP has a number of U.S. institutional investors. “I would say we are today 15% owned by U.S. investors and 85% [from]Canada. Probably 75% of our investors are retail investors attracted by our high yield… We pay it monthly and for my Canadian investors, I pay it in U.S. dollars… It’s been a very attractive investment for them because they get a stable source of U.S. distributions at or above 8% paid monthly,” said the executive.

AHIP, which launched in 2013, is the second of such ventures by O’Neill, who established Canada’s first hotel REIT—Canadian Hotel Income Property (CHIP) REIT—in 1997 to make similar investments in that country.

“Canadian investors in 2012 were looking at using the high Canadian dollar—at that time we were close to parity [with the U.S. dollar]—to invest in U.S. real estate in a REIT transaction.

I acquired the U.S.’ largest hotel company in the rail-contract business called Lodging Enterprises in Wichita, KS, that operated under the Oak Tree Inns brand. That was 32 hotels (including one Best Western) that we IPO’d on in February 2013,” he said, adding: “It was a perfect segue for the capital markets (in Canada) to support. We raised our money in Canada for Canadians to invest in U.S. hotel real estate.”

AHIP’s Hampton Inn & Suites at Arundel Mills has a lively lobby design.

O’Neill said he also did the IPO “on the back of a promise to diversify into the select-service marketplace in secondary and tertiary markets in the United States. We knew we couldn’t grow the railway component as fast as we could grow the select service. Most of the secondary markets—anything after your Top 50—are many times larger than the markets that operate in Canada. So we felt pretty comfortable operating in locations like Amarillo, TX, which would be maybe the twentieth largest city in Canada if it was in Canada. A lot of U.S. REITs did not want to operate in secondary and tertiary markets at that time. They’ve since come to chase us in those markets.”

O’Neill and his family are veterans of the hospitality scene in Canada. His father, John (known as “Jack”), who had launched both Railway Catering Ltd. and National Caterers Ltd. to accommodate workers at remote construction camp sites with lodging, F&B and other support services, founded the West Coast chain Coast Hotels & Resorts with his son in 1972 and in 1985, they were joined by Rob O’Neill’s brother, John.

Three years later, Coast Hotels was sold to Okabe Co., although the brothers continued to manage 12 Coast Hotels until 1991, with Rob O’Neill serving as president/CEO. (Last year, Tokyo-based APA Group bought Coast Hotels for $210 million from Okabe Co. Ltd.) Rob O’Neill also served as president/CEO of Railway Catering Ltd. and National Caterers Ltd. from 1977 to 1991.

In 1990, the brothers established O’Neill Hotels & Resorts Ltd., which is helmed by John O’Neill. Three years ago, it launched hotel management company ONE Lodging Management Inc., which manages more than 115 hotels, including the hotels in the AHIP portfolio, composed of 67 select-service hotels (7,684 keys) and 46 rail-crew hotels (3,886 keys). 

The CEO expressed satisfaction with the Eastern Seaboard deal, particularly getting into the Northeast—a new market for AHIP—with a portfolio of hotels with an average age of 10 years, and acquired below replacement cost.

“I looked at the majority of them and I was very pleased with the age and condition,” he said, adding he felt now was a good time to do such a deal insofar as he expects the U.S. economy to remain strong.

“Hotel performance is very closely correlated to GDP and we believe underwritten the way we have for these hotels, they’re great long-term investments for us. We don’t have a short-term flip mentality, which is why a lot of the companies are not in the marketplace today—because of the short-term volatility that comes from taxation and other political considerations that are going on right now,” he said.

In making acquisitions overall, O’Neill said AHIP looks to “hold them, improve upon them and create continuing value for our shareholders.” HB

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