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Ashford spinning off new 'Prime' REIT
June 18 2013

Ashford Hospitality Trust is spinning off its highest RevPAR hotels with the creation of Ashford Hospitality Prime, a public REIT focused on higher chain scales.

Highlights
  • Ashford Hospitality Prime will look to acquire upscale, upper-upscale and luxury properties in gateway markets that generate RevPAR of at least $130.
  • One reason for the creation of the new REIT was to help bring down Ashford’s high cost of capital.
  • “This is a long-term project, and we’ll take it as we go,” Ashford’s Monty J. Bennett said.

DALLAS—Ashford Hospitality Trust is spinning off eight of its top revenue-per-available-room hotels into a separate publicly traded real estate investment trust that will focus on the upper chain scales.

The new REIT, named Ashford Hospitality Prime, will look to acquire upscale, upper-upscale and luxury hotels located in gateway cities that generate RevPAR of at least $130, bringing it into direct competition with such high-end REITs as Pebblebrook Hotel Trust, LaSalle Hotel Properties and DiamondRock Hospitality Company. Ashford Trust will continue to focus on hotels that have RevPAR below the target of Ashford Prime.

The eight U.S. hotels, comprising 3,146 rooms, which initially will be included in Ashford Prime are:

Ashford Prime, which will be managed on a day-to-day basis by Ashford Trust subsidiary Ashford Advisors, will have the option to buy 697-room Crystal Gateway Marriott in Arlington, Virginia, and the 142-room Pier House Resort & Spa in Key West, Florida. Additionally, the new REIT will be granted the right of first offer on up to 12 hotels comprising 3,110 rooms.

The portfolio recorded a 2012 RevPAR of $140.20. Ashford’s portfolio RevPAR minus these hotels is approximately $95, Monty J. Bennett, Ashford’s chairman and CEO, said during a conference call with analysts Monday. Overall, Ashford has 122 hotels and 25,573 rooms in its portfolio.

“We wanted to put in the highest RevPAR, highest quality assets into this portfolio,” Bennett said.

Ashford Trust's stock price was at $13.90 per share as of 10 a.m. eastern time Tuesday, up slightly from Monday's close of $13.88 per share.

Rationale for the deal
Ashford executives outlined several reasons for the launch of Prime, which intends to trade under the symbol “AHP” on the New York Stock Exchange. For one, Bennett said the new REIT should help reign in Ashford’s high cost of capital.

The REIT has had to watch deals be done from the sideline because Ashford’s high cost of capital prevented it from striking a deal. Ashford Prime, however, is intended to be more conservatively levered, which should aid in transacting.

“We’d bang our heads against the wall: ‘How can we (transact)?’” Bennett said, adding, “This seems to be the best way to do it.”

Ashford Prime’s start off leverage is high, but Bennett said he is “very confident” the leverage level will decrease over “several years” time.

 “We didn’t have the option to jump out there where we wanted to be,” Bennett said.

Analysts asked Bennett why Ashford didn’t do a capital raise at the start to help bring Ashford Prime’s leverage level down. Bennett didn’t entirely dismiss that idea, but said Ashford is taking things slowly for now. The deal is expected to close in late September.

“This is a long-term project, and we’ll take it as we go,” he said.

The executives were also asked why an investor would buy shares in Ashford Trust when Ashford Prime has the higher-quality product in its portfolio. Bennett said the two REITs will have different capital structures that will suit a broad array of investors. Ashford Prime will be more conservatively levered, while Ashford Trust will have a higher leverage level.

Further, Bennett said Ashford Trust’s portfolio is largely similar to what it was before the deal, with both the number of hotels and overall RevPAR not changing much post-deal.

“Our existing platform looks hardly different at all,” he said.

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