Chatham Provides Update on Major Sale, Acquisitions

PALM BEACH, FL—Hotel REIT Chatham Lodging Trust provided an update to analysts during a conference call on Tuesday on its previously announced $1.3 billion worth of acquisitions of late.

Chatham updated guidance with respect to the sale of its Innkeepers joint venture with Cerberus Capital Management LP and as well as on its acquisition of four wholly owned Silicon Valley Residence Inn by Marriott hotels. The firm also issued guidance on the formation of a new joint venture with NorthStar Realty Finance that acquired the remaining 47-hotel, 6,094-room Innkeepers joint venture portfolio. The combined total purchase price for the transactions was $1.3 billion, before capital expenditure reserves credited to the buyers of $39.7 million, Chatham Lodging reports.

The Innkeepers hotels were sold in two portfolios by a joint venture between Chatham and Cerberus Capital Management LP. Based on the net purchase price, Chatham estimates it will experience a non-GAAP economic gain of approximately $80 million or more than $3 per share, generating an approximate 81% internal rate of return on its original $37-million investment over the investment period. Chatham's gain is expected to be primarily rolled over tax-free between the basis of Chatham's investments in the joint venture and the four Silicon Valley hotels, the company states.

The acquisition of the Silicon Valley Residence Inn portfolio provides Chatham with a significant presence in one of the highest quality, upscale, extended-stay markets in the country. The Silicon Valley portfolio now comprises approximately 34% of Chatham's hotel investments at cost and brings Chatham's West Coast market presence to 54% of its investments (eight of its wholly owned hotels are located in West Coast markets), one of the highest among all lodging REITs. The Silicon Valley portfolio was acquired for $326.4 million and was funded with four new individual mortgage loans from JP Morgan Chase aggregating $222.0 million, an approximate $58 million tax-free rollover and the remainder from borrowings on its revolving credit facility. The new loans have a 10-year term at an interest rate of 4.64% with interest only payments for five years.

Chatham plans to redevelop and expand all four of the hotels, which would increase room count by 36% to a total of 1,023 rooms. The 272-room expansion would include a new lobby and public spaces in each location with an estimated aggregate cost of approximately $59 million, or approximately $217k per additional room. On a pro-forma basis, the all-in cash cost for the four hotels would be approximately $331.9 million, or approximately $324k per room. The expansion/upgrade would take approximately 12 months from commencement date in each location, but given the campus layout of the sites, disruption is expected to be minimal, the company notes.

The 47-hotel joint venture portfolio was acquired for a net cash purchase price of $933.9 million, or $153k per room. NorthStar acquired Cerberus' 89.7% interest in the joint venture, while Chatham retained its 10.3% ownership stake without any additional cash investment via the tax-free rollover of $22 million of the gain. Per its joint venture agreement with NorthStar, Chatham also has the ability to earn a promoted interest based on achieving certain returns in the future.

Island Hospitality Management will continue to operate the hotels. Island Hospitality is 90% owned by Chatham's president and CEO, Jeffrey H. Fisher.

Noting that the transactions are expected to have a significant impact on Chatham's outlook for 2014, Chatham's Fisher says, “Chatham has been one of the top lodging REITs at driving Adjusted FFO per share growth since 2011 and these transactions are expected to create significant growth for us in 2014 and looking ahead to 2015 based on current industry forecasts. Our long-term stated goal is to build Chatham into the premier, select-service and upscale, extended-stay lodging REIT. To date, we have successfully created significant value for our shareholders by making, in our view, disciplined acquisitions at attractive pricing. With historically low interest rates and our belief that there is still running room in this cycle, we will continue to look at opportunities to grow our hotel portfolio with the right balance of leverage and equity capital.”