Selective Hotel Strategy

For privately held RLJ Development, the move to acquire 100 hotels from White Lodging Corp. for approximately $1.7 billion marks a strategic shift. Instead of targeting full-service hotels in large urban markets, an approach that RLJ has followed since 2000, this mega-deal will net the company 90 select-service hotels, primarily in the Midwest.

RLJ is one of a growing number of companies that view select-service hotels as favorable yield plays. According to Jones Lang LaSalle Hotels, the average cap rate on select-service assets in the Midwest and Great Plains registered 9.50% in 2005 versus just 7% on a national basis. Lagging growth in the manufacturing and auto sectors has tempered pricing on many hotel assets in the Midwest, reports Jones Lang LaSalle. RLJ declined to disclose the going-in cap rate on the deal.

“This is one of the best hotel portfolios that we've seen in a long time,” says Tom Baltimore, president of Bethesda, Md.-based RLJ Development, the nation's largest African-American-owned hotel investment firm. Black Entertainment Television (BET) founder and billionaire Robert L. Johnson founded RLJ in 2000, which closed on 63 of the hotels in June. RLJ expects to close on 24 more hotels this month. The remaining 13 hotels in the acquisition are in the development pipeline.

“One reason we liked this portfolio is that there has been a much broader acceptance of select-service hotels from both a consumer and investor standpoint recently,” says Baltimore, adding that one-third of the assets are less than 3 years old and located in recovering markets. The 90 select-service hotels are chiefly Marriott and Hilton-branded properties.

The acquisition will more than double the dollar value of RLJ's hotel portfolio (see table). RLJ is one of a growing number of hotel owners vying for select-service hotels, defined as mid-priced properties that offer limited meeting space and dining facilities. Courtyard by Marriott and Hilton Garden Inn are among the most prominent select-service chains.

Jones Lang LaSalle reports that $3 billion worth of select-service hotels traded hands in 2005, an increase of more than 30% over the previous level in 2004. The Chicago-based brokerage also expects 2006 to meet or exceed that sales volume. Widespread room demand that is no longer narrowly limited to the full-service segment has also bolstered the select-service market, which posted an 8.8% RevPAR increase last year, up from 6.7% in 2004.

“For the past few years, there has been an incredibly strong market for full-service hotels, but most of it was going into the luxury end of the sector,” says Al Calhoun, managing director of the select-service division at Jones Lang LaSalle Hotels. “That's why I thought that the RLJ acquisition [of the White Lodging portfolio] was so surprising.”

Calhoun says that the deal proves that investors are disillusioned by puny yields for higher-end assets. Indeed, several large investors have moved into select-service. In 2004, Blackstone Group bought select-service operator and owner Prime Hospitality for $790 million.

The following year, Encore Enterprises bought nine Hampton Inns from Mercury Investments for more than $100 million. Blackstone then returned again to the select-service market earlier this year when it spent $3.4 billion to buy LaQuinta Properties Corp.

Based in Merrillville, Ind., White Lodging has 40 new hotels in the pipeline. Under terms of the deal, White Lodging will also continue to manage the 100-hotel portfolio that it recently sold to RLJ. “The timing was right to sell these properties,” says Judy Bronowski, White Lodging's vice president of business planning. “More investors see the true value of these assets now than they have in the past.”

GROWTH SPURT

RLJ Development has raised its hotel profile considerably by agreeing to acquire 100 hotels from White Lodging Services for $1.7 billion. The majority of the hotels are Marriott and Hilton-branded properties.*