Thursday, April 15, 2010

A VERY interesting IPO on the horizon....

According to Bloomberg, Jeffrey Fisher will be raising (hopefully) $150million from a new initial public offering of Chatham Lodging Trust.

Details on Fisher's background:
Jeffrey Fisher, the investor who reaped a fourfold gain for shareholders by selling his hotel- property fund at the height of the real-estate bubble, is returning to the equity market.
Investors earned 316 percent in Fisher’s Innkeepers USA Trust from the company’s September 1994 IPO through its sale to Apollo Investment Corp. in June 2007, just before property prices started to tumble and wiped out 78 percent of the new owner’s value. With the U.S. economy improving, theBloomberg REIT Hotels Index has climbed 33 percent this year.
With that in mind, I usually look skeptically at an IPO like this, because you don't want to "take the other side of a trade" with this guy. Meaning his timing has been impeccable, so watch out.

The important difference here is that this Chatham IPO is a "blank check" for Fisher to go buy some depressed hotel assets on our behalf. We can be comforted by the most important aspect of a good IPO...the management is investing alongside the rest of us, as Fisher will purchase 500,000 shares at whatever the IPO price is:

From the recent filing:



The company will be a Real Estate Investment Trust, paying out 90% of earnings to shareholders as dividends. One caveat of this structure though, is that the REIT cannot operate the hotels...hmm a problem? I don't think so. Management's strength here is identifying attractively priced assets, and they will have a management-affiliated entity manage the hotels. That's some extra $$$ for Fisher, but he's still invested alongside us in the REIT.

On to the details of the properties. The single most important number in this filing is the shrewdly cheap price paid per room, highlighted along with other positive attributes of the properties:
"Our purchase price of $90,406 per room represents a substantial discount to our estimate of replacement cost."
More details on the properties being purchased:
We have entered into an agreement to purchase six high quality, upscale all-suite extended stay hotels located in attractive markets from wholly owned subsidiaries of RLJ Development, LLC for an aggregate purchase price of $73.5 million. Each of these initial hotels, which we refer to collectively in this prospectus as the initial acquisition hotels, operates under the Homewood Suites by Hilton® brand. The initial acquisition hotels contain an aggregate of 813 suites and are located in the major metropolitan statistical areas, or MSAs, of Boston, Massachusetts; Minneapolis, Minnesota; Nashville, Tennessee; Dallas, Texas; Hartford, Connecticut and Orlando, Florida. The upscale all-suite residential style Homewood Suites by Hilton® brand caters to travelers typically seeking home-like amenities from a hotel when traveling for several days or more. Each spacious suite typically offers separate living and sleeping areas and a fully operational kitchen to satisfy guests’ needs for comfort, flexibility and convenience.
We have identified and are in various stages of reviewing and negotiating a number of additional potential hotel acquisition opportunities. As of April 5, 2010, we were actively reviewing potential hotel acquisitions having an aggregate transaction value in excess of $145 million, based on our preliminary discussions with sellers and our internal assessment of the properties’ values. Our management team sourced these potential acquisitions through their extensive relationships with hotel owners, management companies, franchisors, banks, insurance companies, public institutions, fund managers, REITs, private investors and developers.
This deal necessitates a large amount of faith in management. I'm comforted by Fisher's side-by-side investment in common shares, as a commitment to public shareholders. All too often, "blank-check" investing structures leave so much confusion that investors stay away, worrying about conflicts of interest and confusing subsidiaries. Management purchases of the same securities should alleviate some of these concerns.

After this transaction, the company will still have a (small) war-chest with which to go after yet more attractive properties:

Upon completion of this offering and the concurrent private placement to Mr. Fisher and following our purchase of the initial acquisition hotels, we expect to have approximately $73 million of cash available to invest in additional hotel properties and we will have no
debt.


We'll have to see where this IPO opens at, before buying shares. But from what I've read so far, it could be a great chance to invest alongside some talented hotel investors at attractive terms.


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