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Blackstone/Apple REIT Merger Signals New Wave of Private Equity Hotel Investment

Buyers On the Lookout for Deals In Gateway and Secondary Markets as Debt Financing Opens Up
December 5, 2012
Following its masterful purchase and disposition of the former Equity Office Properties Trust at the peak of the market, investors have a great deal of respect -- and interest -- in Blackstone's commercial real estate investments. So when the private-equity kingpin this week picked up Apple REIT Six Inc. for $1.2 billion to amass nearly 200,000 hotel rooms, or about 4% of the nearly 5 million hotel rooms in America, investors took notice.

Blackstone bought more than half of those hotel rooms, over 107,000, in May when it agreed to purchase the Motel 6 chain from Accor SA (AC) for about $1.9 billion, adding to investments such as Extended Stay America Inc. and Hilton Worldwide.

Following Blackstone's lead, hotel investment analysts predict more of the same through 2013 as private equity takes advantage of an improving debt market for hotel acquisitions to snap up value-add properties, including portfolio deals like the one announced Friday by Apple REIT Six, Inc., a non-publicly traded REIT that owns 66 extended stay and select-service hotels under such brands Hilton Garden Inn and Courtyard By Marriott.

The REIT agreed to be acquired by BRE Select Hotels Corp., an affiliate formed by Blackstone Real Estate Partners VII, for $1.2 billion, including transaction costs and debt. It is anticipated that the merger will close in the first half of 2013.

McGuireWoods LLP is acting as legal advisor to the Company and Wells Fargo Securities provided financial advisory services to the Company in connection with this transaction. Simpson Thacher & Bartlett LLP is acting as legal advisor to BRE Select Hotels and BofA Merrill Lynch and Citi are acting as its financial advisors.

The strong second half of 2012 puts the hotel investment market on pace to reach $15 billion this year, holding steady with 2011 levels, and should lead into another heady year for transaction volume in 2013, according to Lauro Ferroni, vice president of research and strategic advisory of the Americas for Jones Lang LaSalle.

Private-equity buyers like Blackstone will continue to be the most active group into 2013 as the debt markets for hotel investment continues to improve, Ferroni said during Jones Lang LaSalle’s recent National Commercial Real Estate Outlook, with REITs expected to be the second-most dominant investor type, buying up the mostly established, well-located hotels in core markets. Offshore investors will continue to compete for properties in gateway cities.

Debt availability for acquisitions is expected to reach its highest level since 2007, with loans available from a variety of sources, including commercial banks, CMBS, mortgage REITs and debt funds, Ferroni said.

Following the huge Blackstone buy in May of Motel 6, recent months have seen an uptick in large hotel transactions, including at least three big deals so far this week. RLJ Lodging Trust (NYSE: RLJ) Monday announced that it has agreed to buys the 231-room Hilton Cabana Miami Beach for $71.6 million, or approximately $310,000 per key.

Loews Hotels & Resorts, a wholly owned-subsidiary of Loews Corporation (NYSE:L), agreed to buy the 356-room Madison Hotel in Washington, D.C. from Jamestown Properties for an undisclosed sum in a transaction expected to close in January. The hotel company continues to aggressively seek hotels in gateway cities and resort destinations and expects to announce further acquisitions in coming months.

Also on Monday, Washington, D.C.-based Modus Hotels announced it acquired the 97-suite Brookshire Suites, its first hotel in downtown Baltimore and its third hotel acquisition of 2012. The company will invest several million dollars to renovate and re-concept the property.

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