VANCOUVER—Having carved its niche with a two-pronged strategy that includes both railway facilities as well as branded, select-service hotels in secondary and tertiary U.S. markets, American Hotel Income Properties REIT LP (AHIP) continues chugging along toward a larger presence in the hospitality industry.
Last month, the publicly traded REIT—which was founded in 2013 and is listed on the Toronto Stock Exchange—agreed to acquire a portfolio of five strategic railway lodging facilities in the U.S. for some $44 million, or $76,000 per key. The deal, which is expected to include two additional property conversions, would bring the company’s portfolio to 80 properties. But, that’s only the beginning for AHIP, according to founder and CEO Rob O’Neill, who noted the company is “actively considering” a dual listing, which would include the New York Stock Exchange as well.
O’Neill noted AHIP is able to consider such an initiative “now that we’ve got some good size,” and he pointed out that the company’s U.S. investors have pushed for it as well. O’Neill touted the company’s balanced portfolio of branded hotels and railway properties, which are positioned under the Oak Tree Inn brand, and outlined his growth expectations. “I’m pretty convinced we’ll be at 50 and 50, certainly by the end of 2016 or by mid-’16, which is 100 hotels. We believe that there are still some steps to go in the lodging cycle,” he said.
The company will move closer to that milestone with the most recent deal, which is expected to close in the coming weeks and includes railway lodging facilities in Gillette and Guernsey, WY; Ravenna, NE: Belen, NM; and Edgemont, SD. The portfolio is secured by long-term lodging contracts with one of the top railway companies in the U.S.
O’Neill—who developed the rail strategy in large part because of his own background in the family business, which catered to Canadian railways—talked about how the aforementioned acquisition came to fruition. “I think we were able to accomplish the transaction because of the rail’s confidence in our ability to improve and run the hotels to meet the requirements of their employees who are unionized,” he said, adding, “There’s a whole rail culture that has been developed, and we continue to work on it in that side of the business.”
As such, O’Neill further added that the universe of buyers was small for such a portfolio, and maintains AHIP is getting a good return in terms of price. While he described the properties as being in “good condition,” he noted they will be undergoing property improvement plans (PIPs), and the company has set up a seven-figure capital program to improve them.
The company’s properties are operated by TR Lodging Enterprises Inc., a wholly owned subsidiary of Tower Rock Hotels & Resorts Ltd. O’ Neill described the company’s Oak Tree Inn brand, which sells primarily to the rail business but does include some surplus accommodations, as looking very much like a Holiday Inn Express, “but a lot quieter.”
He talked about the benefits of the rail business and the opportunity it affords AHIP. “We think the rails are a good indicator of the strength of the U.S. economy; they continue along at a very steady and healthy pace. Our opportunity really is to take equity that we raise in the public markets at an attractive rate and put it to work to do what other rail hoteliers have to do, and that’s to identify where there is a need. The big area for us is conversions. You’re not going to grow to 1,000 hotels, but I can certainly see us with new-builds and conversions doing five a year for a long time.”
He emphasized that the company is not looking to sell any assets and would be characterized as a long-term holder of assets. “I’d develop a hotel before I would buy it just on a yield play because we’re not 48-month holders. We pay high dividends to our Canadian investors. We have really a 10-year horizon with everything, so we’re buying younger hotels with good yields,” he said, adding, “We want to be very careful about not overpaying for hotels, we’re not cap rate buyers per se.”
O’Neill stressed that, in addition to the railway opportunities, he has long been bullish on branded, select-service properties in secondary and tertiary locations, which make up the rest of the company’s portfolio. “We’re really focused on the unique attributes of proximity to airports, factories and busy highway interchanges. There’s a little more of the contract aspect to these branded hotels, so we feel we’re not buying 30% occupancy turnaround prospects. We’re buying hotels that are producing already and have the opportunity to grow,” he said.
O’Neill noted that, while many competitors are executing one-off acquisitions in this segment, AHIP prefers portfolio deals ranging from three properties to as many as 10.
As an example, the company purchased a nine-hotel portfolio in June for some $53 million. The properties, which total 632 guestrooms, are within the IHG, Hilton Worldwide and Carlson Rezidor Hotel Group brand families. They are located in five different states situated along major interstate highways near transportation hubs and other major demand generators.
Meanwhile, in August, the company completed its previously announced acquisition of a portfolio of three select-service Marriott properties in Ocala, FL—a Courtyard, Fairfield and Residence Inn—for $30.8 million.