Hotel REIT's $500M Play Found Its Sweet Spots

To date, the Dallas-based REIT has spent $332 million and is poised to shell out another $46.4 million before the month ends for the 193-room Sea Turtle Inn, a beachfront resort in Atlantic Beach and 210-room Marriott Residence Inn in Lake Buena Vista, just a mile from the Disney World entrance. Late last week, the REIT closed a $25-million mezzanine loan for a US borrower with 5,234 hotel rooms in 17 properties as collateral.

The $500-million IPO launch in August 2003 came with a plan to spend $300 million to $400 million or 60% to 80% on direct hotel acquisitions and sale/leasebacks and apply the balance to mezzanine lending and first mortgages. "The early returns show direct hotel investments and mezzanine investments are the sweet spots for us," Douglas Kessler, Ashford's COO and acquisitions head, tells GlobeSt.com. He says the future could bring a gradual swing to first mortgages as the economic cycle changes, but sale/leasebacks aren't looking like likely contenders for the REIT's dollars.

The calculation to date shows Ashford spent $224 million on hotel properties, loaned $50 million in three mezzanine transactions, spent close to $8 million on renovations and closed a $60-million revolving credit facility that could be upped to $75 million under certain conditions. Kessler says the fast-paced push is just Ashford "doing what we said we would do"--with no surprises for investors in a diversified play to become "a single source of capital for the lodging industry."

With the till below the half-full mark, a second capital-raising campaign is a fairly safe bet, but all that Kessler can say due to IPO rules is that "to the extent we continue to see investment opportunities in the acquisitions market and the capital markets supporting our investment strategy, it will be taken into consideration."

Ashford's acquisitions appetite has been running the gamut from the widely marketed to the privately negotiated in primary and secondary US markets. "Every asset has a price," Kessler says of wheeling and dealing in a world that's producing yields consistent with the targeted thresholds. At the 2003 close, the REIT owned 15 hotel properties with 2,380 rooms. The portfolio, with no flag changes post-acquisition, had an occupancy average of 71.5%. The REIT's year-end accounting put RevPAR at $69.56 and ADR at $97.28 per key.

Kessler stresses Ashford isn't buying other hoteliers' throwaways. "We tend to carve out our own investment strategy, regardless of what we see going on around us," he says, admitting sometimes it's hard for outsiders to differentiate between "non-core" labels and a seller's need to get out from under an asset.