PALM BEACH, Fla.–Cerberus Capital Management and Chatham Lodging Trust reached an agreement to sell their Innkeepers joint venture for $1.3 billion. Northstar Realty will acquire Cerberus Capital Management’s 89.7 percent interest in the joint venture, and Chatham will retain its 10.3 percent ownership stake. The joint venture will acquire 47 of the 51 hotels for a gross purchase price of $958.5 million, a net cash purchase price of $933.9 million or $153k per room. Chatham will acquire four of the hotels outright for $341.5 million.
Completion of the transaction is contingent upon satisfaction of certain conditions, and closing is expected by the end of the second quarter. Based on the net purchase price, Chatham would recognize a gain of approximately $77 million or $2.90 per share. Chatham’s gain will be rolled tax-free between the basis of Chatham’s investments in the joint venture and the four Silicon Valley hotels.
“The Cerberus/Chatham joint venture has been a great partnership and has proven to be a highly successful investment, turning our initial $37 million investment into distributions of approximately $114 million and profits of approximately $77 million or $2.90 per share in less than three years,” highlighted Dennis Craven, Chatham’s chief financial officer.
“We look forward to a successful partnership with Northstar in this joint venture,” Fisher emphasized. “We share similar outlooks regarding the health of the hotel industry and performance expectations for the portfolio. Our long-term interests are aligned with a solid capital structure that we believe will provide strong, risk-adjusted returns for our shareholders.”
As part of the transaction, Chatham will acquire four Silicon Valley Residence Inn hotels from the Cerberus/Chatham portfolio, comprising 751 rooms, for a net cash purchase price of $272.6 million or approximately $363k per room. The transaction is comprised of the gross purchase price of $341.5 million less reserve credits of $15.1 million and allocated gain from its promote interest of approximately $53.6 million.
Chatham plans to partially redevelop and expand all four Silicon Valley Residence Inn hotels, increasing the room count by 36 percent to a total of 1,023 rooms. The 272-room expansion will include a new lobby and public spaces in each location with an estimated cost of approximately $59.0 million or $217k per room. On a pro-forma basis, the all-in cash cost for the four hotels would be approximately $331.9 million or $324k per room. The expansion/upgrade would take approximately 12 months in each location, but given the campus layout of the sites, disruption is expected to be minimal.
The purchase price for the Silicon Valley portfolio represents a 2014 capitalization rate of approximately 7.2 percent on the hotel’s projected net operating income. On a pro-forma basis accounting for the partial redevelopment and expansion, the 2014 projected capitalization rate would be approximately 10 percent.