24-hotel portfolio of assets for US$802 million in cash, the third in a series of deals that shows Hyatt is committed to developing the extended-stay and limited-service portion of its portfolios.
Hyatt acquired three Woodfin Suites’ properties in May, recently announced a joint-venture development deal with Noble Investment Group, and just Thursday announced the LodgeWorks acquisition.
Hyatt executives were not available for comment this morning, but a spokeswoman detailed the positives the deal brings to the company.
“All of these transactions are part of Hyatt’s strategy to build its select-service presence in order to become the preferred brand in that segment. In that sense, (the moves) are complementary,” Hyatt spokeswoman Farley Kern told HotelNewsNow.com in an email. “The LodgeWorks assets are young, averaging only four years old, with many less than 2 years old and another two that are under construction … the acquisition is a strong indication of our commitment to becoming the preferred brand in the extended-stay category.”
The acquisition of LodgeWorks, a private hotel development, ownership and management company, includes 24 hotels and related assets, including management, franchise and intellectual property rights. The hotels are branded under the Hotel Sierra (17 hotels), AVIA Hotels (four hotels), Hyatt Summerfield Suites (two hotels) and Hyatt Place (one hotel) brands. Following the transaction, 16 Hotel Sierra hotels will be branded as Hyatt Summerfield Suites, increasing the number of hotels in that portfolio from 38 to 54. Five properties, including the AVIA Hotels, are expected to be converted to full-service Hyatt brands.
Key members of the LodgeWorks management and development team are expected to join Hyatt as part of the transaction.
“It was a mutual undertaking,” Tony Isaac, president of LodgeWorks, said of the two sides getting together. “We were partners with them with 10 hotels having their brands, and we had a great relationship. We had a great group of Sierras that fit with them, and they needed to grow.”
Isaac said the acquisition discussion actually started as a conversation about a joint venture nearly a year ago but evolved into acquisition negotiations when the companies realized how complementary LodgeWorks was for Hyatt.
“For as big a deal as it is, it was relatively painless to go through,” he said. “It wasn’t a sale where we were going to walk away after it was done, and both companies understood that we were moving forward with them once the deal was done.”
Growing the brands
Keefe, Bruyette & Woods analyst Smedes Rose said Hyatt’s acquisition of the LodgeWorks development team indicates the company would look to continue to develop these kinds of properties.
“I think strategically, if you’re a big brand company, you need something in full-service, upper upscale and you need something in luxury, and I think you need something in the limited-service arena,” he said.
This deal will help Hyatt compete with companies like Hilton Worldwide and Marriott International in the limited-service space, Rose added.
“One of the reasons they bought us is the pipeline we’re building out,” Isaac said. “It’s pretty robust, and they bought us as a growth vehicle.”
LodgeWorks is opening a Sierra Suites in King of Prussia, Pennsylvania, later this year. It will be converted to a Summerfield Suites as part of the Hyatt acquisition. Isaac declined to reveal additional specifics about the pipeline but said many of the potential projects are in the final stages of discussion.
“Extended-stay properties are more expensive to develop than Hyatt Place hotels, and most of them are located in highly desirable, high-barrier-to-entry, coastal markets,” Kern said. “There are also significant advantages to being able to grow our extended-stay portfolio by 16 hotels with a single transaction. We expect financial performance to improve over the coming years as the hotels continue to ramp up and as we apply our brands and enhance the group and transient business brought to each hotel.”
Terms of the deal
The key issue surrounding the deal likely will be the price. At a total of US$802 million, the deal price equates to 16-times expected 2012 adjusted earnings before interest, taxes, depreciation and amortization, or US$227,389 per room.
Goldman Sachs analyst Steven Kent said in a research note that Hyatt did not separate what the property earnings before interest, taxes, depreciation and amortization was from the additional overhead coming from bringing on additional employees, so he was not able to calculate what the multiple was on property EBITDA.
“The purchase price is a little on the high side for this asset class, but the acquisition of the brands and the development team pushed the deal price up a little,” KBW’s Rose said. “Hyatt could eventually take a limited-service portfolio and bring it to market as a way of recycling capital. I wouldn’t be surprised if they were to tap the debt market at some point.”
Hyatt said the hotels are relatively new, require very little capital expenditure and fit very well into the current portfolio. “LodgeWorks also has a significant number of hotel opportunities in its pipeline, and we will actively pursue those projects with a focus on working with third-party capital sources and, in a number of cases, with third-party development companies,” Kern said.
“We’re happy with the price,” Isaac said. “The real estate is almost all in primary markets, and the average age of the properties is about four years.”
HotelNewsNow.com staffers Shawn A. Turner, Jason Q. Freed and Jeff Higley contributed to this report.