Blackstone Group LP (BX) earned about $260 million on distressed junior loans in Ashford Hospitality Trust Inc. (AHT)’s takeover of the 28-hotel Highland Hospitality portfolio, said a person familiar with the transaction.
Blackstone, the world’s largest private-equity firm, paid about $60 million for $320 million of Highland mezzanine debt last year, according to the person, who wasn’t authorized to speak publicly about the deal, and asked not to be named. The debt is now worth about its face value, the person said.
Ashford, based in Dallas, yesterday announced a $1.28 billion consensual foreclosure of the hotels, which include the Ritz-Carlton Atlanta and the Churchill and Melrose hotels in Washington. The portfolio, with 8,084 hotel rooms, is Ashford’s first acquisition since 2007, Chief Executive Officer Monty Bennett said today on a conference call with analysts.
“We have stayed away from highly marketed bidding wars for hotel assets, and have preferred a more disciplined approach,” he said. “The very attractive attributes of this joint venture and restructure of debt will be difficult for any competitor to replicate.”
Ashford and its joint-venture partner, a unit of Prudential Financial Inc. (PRU), converted to equity their debt on the portfolio, which had been junior to Blackstone’s, and made payments to other loan holders, making the Blackstone debt less risky, according to the person familiar with the deal’s terms. The New York-based private-equity company also is getting a higher interest rate, the person said.
Christine Anderson, a Blackstone spokeswoman, and John Chartier, a spokesman for Newark, New Jersey-based Prudential, both declined to comment. Tripp Sullivan, an Ashford spokesman, didn’t return a telephone call seeking comment.
Past Portfolio Investments
The real estate investment trust is investing $150 million cash and assuming $786 million of debt in the hotels, according to its statement yesterday. Ashford’s 71.7 percent stake in the venture reflects in part its past investments in the portfolio, the company said.
Senior lenders are providing $530 million of three-year financing with two one-year extensions on 25 of the hotels, Ashford said. The venture assumed first mortgages of $146 million on three hotels. Those loans mature in about two years.
Lenders that Ashford didn’t name are providing $419 million of high-interest mezzanine financing for all 28 hotels, the company said.
Negotiations With Creditors
Highland, based in McLean, Virginia, defaulted on $868 million of junior debt in August, the Wall Street Journal reported Jan. 21. Highland owner JER Partners, the investment firm controlled by investor Joseph E. Robert Jr., had been negotiating with creditors including Ashford and Prudential, the newspaper said.
Ashford and Prudential formed a joint venture in 2008 to purchase or originate mezzanine loans on hotels, and one of their first investments was spending $70 million for debt on the Highland portfolio, Bennett said on today’s call.
At the time there was $1.5 billion of debt senior to them on the properties, he said. As market conditions deteriorated because of the credit crisis, Ashford and Prudential bought some of the debt senior to them, Bennett said.
“This strategy enabled us to better protect our investment and open up the possibility of gaining control of the entire portfolio,” he said.
Recovery in Lodging
High-end hotels, such as the Hyatt and Ritz-Carlton properties in the Highland portfolio, have shown the biggest increases during the recovery of the last year. Occupancy at luxury hotels in the U.S. climbed to 66 percent in 2010 from 61 percent in 2009, according to Smith Travel Research Inc., based in Hendersonville, Tennessee. The upswing is boosting hotel sales, which are expected to jump as much as 25 percent in the Americas this year, Chicago-based Jones Lang LaSalle Inc. (JLL)’s hotel investment-services unit said on Jan. 4.
The purchase price for the Highland portfolio comes to $158,000 per room, according to Ashford. The hotels, located in 13 states and the District of Columbia, include the Hilton Boston Back Bay, the Hyatt Regency Savannah in Georgia, the Nashville Renaissance in Tennessee and the Renaissance Palm Springs in California.
Ashford shares rose 26 cents, or 2.6 percent, to $10.22 at 4:15 p.m. in New York Stock Exchange composite trading. The stock is up 76 percent over the past 12 months, compared with a 28 percent rise in the 14-member Bloomberg REIT Hotels Index. Ashford had the biggest one-year return in the index.
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