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Hotel REITs sell assets, strengthen portfolios

While hotel buyers are seizing the opportunity to acquire assets at a discount amid a softening U.S. economy, some high-profile REITs have become net sellers to pay down debt or redeploy capital.

Felcor Lodging Trust is more interested in selling some of the 85 hotels it owns rather than buying more, confirms Stephen Schafer, vice president of strategic planning for the Irving, Texas-based REIT. In fact, Felcor intends to put a half dozen properties on the market for sale by fall in order to deleverage its balance sheet.

The company's debt represents five times its earnings before interest, taxes depreciation and amortization (EBITDA), above the target of 4.5 times. “Given the current hotel environment, we're inclined to pay down our debt with the proceeds from asset sales,” says Schafer.

Other REITs have different reasons for pruning their portfolios. In early July, Chicago-based Strategic Hotels & Resorts sold off its 696-room Hyatt Regency Phoenix for $96 million to a California partnership comprising Di Napoli Capital Partners LLC and Pacific Coast Capital Partners. Strategic is using the proceeds to buy back $50 million worth of its own stock and finance $100 million in capital spending planned for its portfolio this year.

There were other reasons that Strategic felt compelled to sell. The Hyatt Phoenix required $20 million in renovations, and a new Sheraton hotel with 1,000 rooms will open nearby in a few months. What's more, the airlines have cut flights at the local airport.

Laurence Geller, Strategic's president and CEO, admits he took a haircut on the Hyatt Phoenix price, which represented a cap rate above 9%. If he had sold a year earlier, he reckons, the cap rate would have been around 8%.

There were other bids that came in higher, but Geller went with the Di Napoli group “because I have known them over a decade and am comfortable with them. With other bidders we weren't convinced they could raise their debt and come to the table.” Geller says that Strategic's profit on the sale — it held the Hyatt for 10 years and reaped a 12% unleveraged internal rate of return on the sale — was “just great.”

Sunstone Hotel Investors in San Clemente, Calif., unloaded its Hyatt Regency Century Plaza in Los Angeles in June. The hotel, which has 726 rooms, was purchased by Los Angeles real estate mogul Michael Rosenfeld and his Next Century Associates for $366.5 million. Sunstone plans to employ more than $100 million of those proceeds to buy back its own stock.

Most analysts pegged the company's net asset value above $20, but its shares in August were trading around $15. Another motivation for Sunstone: Rosenfeld paid a big price, equal to more than $500,000 a key at a measly cap rate of 7%. Rosenfeld wouldn't comment, but associates believe his payoff will come in building a condo tower someday adjacent to the hotel on surplus land.

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