ARC Hospitality Gets a Helping Hand from Deutsche Bank

How does a hotel REIT finance a shopping spree? Well, in American Realty Capital Hospitality Trust’s case, it can be done with a new half-billion-dollar borrowing facility.
Jonathan Mehlman

Jonathan Mehlman, ARC

How does a hotel REIT finance a shopping spree? Well, in American Realty Capital Hospitality Trust Inc.’s case, it can be done with a new half-billion-dollar borrowing facility. ARC Hospitality just completed a $450 million term loan facility, put in place for the lodging REIT’s $739.8 million acquisition of three hotel portfolios totaling 44 properties.

ARC Hospitality has Deutsche Bank AG New York Branch and Deutsche Bank Securities Inc. to thank for the loan facility, the proceeds of which will allow the company to get its hands on a collection of hotels that fits its acquisition strategy to a tee.

“Our focus is on select-service and full-service hotels and we have specific criteria we look for when evaluating potential opportunities,” Jonathan Mehlman, president & CEO of ARC Hospitality, told Commercial Property Executive. “We look for hotels that are located in high-barrier-to-entry, supply constrained markets, that are located near stable and multiple demand generators, are affiliated with premium brands, that have been well-maintained and therefore, have minimal CapEx needs and of course, that we can purchase at a discount to replacement cost.”

The loan facility has a term of up to five years. Additionally, the borrowings are expected to bear interest at a rate equal to 30-day LIBOR and a spread ranging from 2.75 percent to 3.25 percent.

With funds in hand, ARC Hospitality is positioned to close the purchase of the portfolios, a process that is expected to involve seven individual closings over an eight-month period. The company will buy a group of five hotels from affiliates of Wheelock Real Estate Fund, L.P. for $92.5 million, and it will shell out $300 million on the acquisition of a 13-property collection from affiliates of Noble Investment Group L.L.C. The largest of the deals involves 26 properties, which ARC Hospitality will acquire from Summit Hotel Properties Inc. for $351.4 million. All told, the three portfolios encompass 44 keys with an aggregate 5,271 keys spanning 18 states.

When all is said and done, ARC Hospitality will have increased its holdings by more than 35 percent, resulting in a portfolio of 166 hotels, comprising 20,195 keys across 34 states. The REIT, which commenced its portfolio with the purchase of interests in a group of six properties in March 2014, is accustomed to building up its portfolio by leaps and bounds. In February, the company wrapped up the $1.8 billion acquisition of the 116-property, 13,744-key Equity Inns Lodging Portfolio. The transaction made history; it constituted the non-traded REIT industry’s largest acquisition ever.

There’s no evidence that the big buys will taper off any time soon–not that the company will grab just any large pool of properties.

“There is a wide scope of attractive acquisition opportunities within the U.S. hospitality sector and this allows us to remain highly selective as we choose to add to our portfolio,” Mehlman added. “We will consider assets that are being marketed. At the same time, we have established industry relationships and dedicated acquisition teams that allow us to identify many off-market transactions.”

The national hotel sector is faring well. According to a mid-year report by commercial real estate valuation and consulting firm Integra Realty Resources, the market continued its positive momentum through the first half of 2015, with occupancy increasing to levels higher than previously experienced, and ADR growth reaching a higher rate when compared to previous years.

Mehlman has the same take on the market. “We currently see both positive industry and macroeconomic factors supporting continued growth in the hospitality sector. The gradually improving U.S. macroeconomic outlook is constructive for the lodging sector given the high correlation between jobs and ADR growth,” he said. “Further, demand growth in the lodging industry continues to outstrip limited new supply, driving increased occupancy and rates.”

With desirable fundamentals in place, there is likely more to come from ARC Hospitality before 2015 draws to a close.