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News for the Hospitality Executive |
| By Jerry W. Jackson, The Orlando Sentinel, Fla.
Knight Ridder/Tribune Business News May 11, 2003 - Analysts looking at CNL Hospitality Properties Inc.'s proposed acquisition of another hotel real estate investment trust, RFS Hotel Investors Inc., say they expect RFS shareholders will go for the blockbuster deal proposed last week. "The price does appear to be fair," David Loeb, managing director and senior analyst in real estate research for Friedman Billings Ramsey, an Arlington, Va.-based brokerage, said Friday. CNL announced the deal, the nation's largest hotel REIT acquisition in years, late Thursday. Loeb said his own number crunching puts the estimated liquidation value for RFS at $12.58 a share, which is close to CNL's offer of $12.35 a share. "That's within striking distance," Loeb said, predicting that the $687.6 million deal is likely to close by the end of the third quarter as proposed. Boards of both companies have signed off on it. Wall Street applauded the proposal: RFS shares soared nearly 10 percent on Friday to close at $12.19, up $1.09 a share. RFS is based in Memphis, Tenn., and has 57 hotels in 24 states in its portfolio. Assuming the deal is consummated, CNL will grow to 120 properties in 35 states worth a combined $1.9 billion, making it the nation's fifth-largest hotel REIT based on assets. Including joint ventures with other companies, CNL will control about $3 billion in hotel assets. Nap Overton, another analyst who follows hotel REITs for Morgan Keegan & Co., a regional brokerage in Memphis, agrees that the deal looks good for both CNL and RFS. "It's an all-cash deal," Overton noted, which means that RFS shareholders will be able to take their money and run, rather than being forced to accept some of the payment in CNL shares. For CNL's part, it gets more geographic diversity, more brands, including Sheraton and Holiday Inn, and burnishes its reputation as a deal maker in a depressed market. Significantly, the acquisition would make CNL the largest hotel REIT that's not listed on a public exchange. Only a handful of REITs are growing, Loeb said, and those are the private or nonlisted ones such as CNL. That's partly because the publicly traded REITs have had their balance sheets stressed by the long downturn in lodging. "So they're selling at the worst possible time, to cut their debt," Loeb said of most hotel REITs. Companies with stronger balance sheets and borrowing power, such as CNL, are beefing up at an opportune time. Even the nation's largest hotel REIT, Host Marriott, is selling assets, Loeb noted. The Bethesda, Md., company recently reported a first-quarter loss of $43 million, or 16 cents a share. But don't look for Host Marriott's lone Orlando property, the Marriott Orlando World Center, to be among assets unloaded. "That's their crown jewel," Loeb said. Host Marriott boasts $8 billion in assets, more than three times larger than CNL's current $2.3 billion portfolio, including joint ventures. Orlando is the nation's top hotel market in terms of rooms, and the amount of hotel construction in the Orlando area is "staggering, compared to other parts of the country," said Loeb, who recently visited the area. "You've got more going on down there than anyone else," Loeb said, such as the $600 million Grande Lakes Orlando resort, set to open in July. The property includes a 544-room Ritz Carlton and a 1,000-room JW Marriott. The rapid growth of Orlando's CNL REIT polishes the region's hotel reputation even more, from a business standpoint. Real estate investment trusts offer investors a way to own a slice of real estate without having to run the risk and incur debt of outright acquisitions. In some ways, REIT shares are like equity ownership in companies, but federal laws require REITs to pay out most of their earnings in dividends in return for tax breaks. REITs that trade shares on a market also offer liquidity, or the ability of investors to get into and out of the market. CNL Hospitality shares are traded but not listed on an exchange, making them less liquid. CNL Hospitality Chairman James Seneff said Thursday that the REIT still plans to seek listing on an exchange, such as the New York Stock Exchange, at some point, but not while the equities market remains in such a sluggish state because of the weak economy. "We'll do that when it makes sense," Seneff said. Ironically, CNL will pull back on acquisitions by that time. The reason, Seneff said, is that when the stock market rebounds and the economy is humming, hotel prices will rise and competition for properties will be too great. "There'll be too many people bidding on assets" by that time, Seneff said. "We like to buy when there are difficulties in the market." SIDEBAR: CNL'S PLAN TO GROW
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