Apple REIT Six to Merge with Blackstone Affiliate in $1.2B Deal

By Barbra Murray, Contributing Editor 

Less than one month after rejecting an unsolicited tender offer by a group led by MacKenzie Capital Management L.P., Apple REIT Six Inc. has signed a deal to be acquired by BRE Select Hotels Corp., an affiliate of Blackstone Real Estate Partners VII. The price tag on the merger agreement is a whopping $1.2 billion.

Since its establishment in 2004, Apple Six has amassed a portfolio of 66 select-service and extended-stay hotels totaling 7,658 guestrooms, focusing its purchasing activities on locales outside of the country’s leading hotel markets. The REIT has multiple properties in cities that are infrequently at the top of leading lodging investors’ list, including Anchorage, Alaska; Pensacola, Fla.; and Huntsville and Tuscaloosa, Ala. It appears that Apple Six’s strategy has been working well. Since its first distribution payment through October 31, 2012, the REIT has doled out shareholder distributions totaling roughly $7.23 per share, or $583 million, and it presently has a debt level of approximately 6 percent as compared to its initial capitalization.

As per terms of the definitive merger agreement, BRE’s payment will be made in cash and stock. Each Apple Six issued and outstanding unit will be converted into holders’ right to receive consideration valued at $11.10 per unit in the form of $9.20 in cash and one share of 7 percent Series A Cumulative Redeemable Preferred Stock of BRE Select.

“It’s clearly good for Apple REIT Six holders, they get liquidity mostly, but it’s also pretty well-structured from Blackstone’s perspective, David Loeb, senior research analyst with asset management and private equity firm Robert W. Baird & Co. Inc., told Commercial Property Executive. ” Blackstone, of course, will have to put capital into the hotels and there will be disruption; the capital will make the investment size larger and the disruption will make the near-term returns lower, but the returns will be much better in the long run,” he said.

In terms of the cash portion of the payment, Loeb anticipates that Blackstone will secure approximately $800 million of debt on the predominantly unencumbered hotel portfolio, thereby reducing the company’s cash output to roughly $200 million.

In the current market, Loeb added, transactions like the Apple Six-Blackstone merger are wise ones. “When you buy one or two select-service hotels, the cap rates tend to be in the 8 to 10 range but what we’re now seeing is that the portfolios trade at anywhere from 50 to 150 basis points lower cap rates, so in the 6 to 8 range. So we think [the deal] is a validation of the thesis that we’ve had that there’s more value in a portfolio of select-service hotels than there is in individual assets, which means the aggregators of assets are well positioned. They’re creating value by assembling portfolios.”

The Apple Six merger will not mark the first time this year that Blackstone entered into an agreement to acquire a major hotel portfolio. In May, the global investment and advisory firm, acting through Blackstone Real Estate Partners VII, committed to buying a 1,102-property portfolio of economy and extended-stay lodging destinations in the U.S. and Canada, from Accor for $1.9 billion.

The hotel industry may very well see an increase in the pace of such transactions in the near future. “The reason we’re looking at [the Apple REIT Six agreement] from Blackstone’s perspective is we’re trying to figure out if it would make sense for private equity to look at Summit Hotel Properties’ portfolio or Hersha Hospitality Trust’s or any of the other large select-service portfolios, or even the full-service portfolios,” Loeb concluded. “The answer we come up with is yes, this can be done and it makes sense. I know there are other deals in the market, so I suspect there will be other announcements over the next year–but maybe sooner.”