Seeking to create clarity for investors by creating a company focused solely on the luxury hotel segment, Ashford Hospital Trust (NYSE: AHT ) announced yesterday it was spinning off eight of its properties into a new real estate investment trust to be called Ashford Hospitality Prime.
Where Ashford Trust services all segments of the hospitality industry, the new entity will target the luxury, upper-upscale, and upscale hotels that are expected to generate RevPAR at least twice the national average, or about $130 and higher.
RevPAR, or revenue per available room, is a key performance metric in the hotel industry that's calculated by multiplying a hotel's average daily room rate by its occupancy rate, excluding ancillary revenues generated from food, beverages, parking, and the like.
The initial portfolio will consist of the Hilton La Jolla Torrey Pines, Capital Hilton in Washington, D.C., Marriott Plano Legacy Town Center, Seattle Marriott Waterfront, Courtyard San Francisco Downtown, Courtyard Seattle Downtown, Courtyard Philadelphia Downtown, and Renaissance Tampa International Plaza. For the year ended Dec. 31, 2012, the initial Ashford Prime hotels had RevPAR of $140.
Ashford Hospitality Trust Chairman and CEO Monty J. Bennett said: "Over the past year, we have made a concerted effort to improve our transparency and communications with the investor and analyst community regarding our historical total stockholder return, our debt management strategy, and asset performance by debt pool. After analyzing several strategies to maximize stockholder value, the board decided to pursue a spin-off of Ashford Prime."
Post-spinoff, the portfolio of remaining properties comprising Ashford Trust will look similar to how it looks today, but with 115 hotels sporting a 2012 RevPAR of approximately $95, which is only $4 less than the pre-spinoff portfolio RevPAR. Also, the leverage level for Ashford Trust is expected to reduce slightly post-spinoff.
A conservative capital structure was also one of the key considerations in constructing Ashford Prime, which will emphasize low-leverage over time, with a target net debt and preferred equity/EBITDA level of 5.0 or lower.
Ashford Trust will spin off an 80% interest in the portfolio, retaining 20% for itself. It will continue to target all levels of the hospitality industry except for that area represented by Prime. The transaction will take the form of a taxable special distribution expected to be composed of common stock in Ashford Hospitality Prime that will occur sometime toward the end of the third quarter.
In addition to the eight initial properties, Prime will also enter into option agreements with Ashford Trust to acquire the Pier House Resort in Key West, Fla., and the Crystal Gateway Marriott in Crystal City, Va. Ashford Prime will have the right to exercise the Marriott option for a period of 12 months following a six-month lockout, while the Pier House Resort option may be exercised for a period of 18 months after the date of the distribution.
Ashford Trust will also enter into a right-of-first-offer agreement with Ashford Prime regarding certain other hotels that it currently owns that satisfy the investment criteria of Ashford Prime.
Bank of America Merrill Lynch served as financial advisor to Ashford Trust in connection with the spinoff.