Calgary’s Fairmont Palliser Hotel is among InnVest properties included in the deal.
Canada's largest publicly traded hotel owner is checking out early.
InnVest Real Estate Investment Trust set out to sell a few of its hotels as part of a larger corporate improvement strategy. Instead, it found a buyer for the whole business. Foreign-owned investment manager Bluesky Hotels and Resorts Inc. will acquire InnVest and all of the 109 hotels in its portfolio in a deal that already has public support from nearly one-third of unitholders.
The transaction was valued at about $2.1-billion, including the REIT's hefty debt load. The price of InnVest's units spiked on Wednesday and had a market cap of $946-million by the day's end.
This wasn't a deal many saw coming, since InnVest's rebuilding phase has gathered momentum after a turbulent past couple of years. In 2014, the REIT went up against activist shareholder Orange Capital LLC, which resulted in a board shakeup and new management. It took an intervention from real estate private equity firm KingSett Capital to smooth things over. Both Orange Capital and KingSett have said they will support this deal.
Rethinking InnVest's strategy seemed to be paying off. The REIT had about 19,000 hotel rooms in 2013, but now the portfolio is generating a higher operating income with a reduced 14,500 rooms.
Andrew Coles, who took over as chief executive officer in early 2015, has said in that the competitive market for U.S. assets and the lower value of the Canadian dollar was encouraging more foreign buyers to consider investing in Canadian assets. He hoped that would lead to a competitive process for the assets the REIT had up for sale. InnVest was planning to dispose of more than 10 properties not considered core to its portfolio.
Enter BlueSky, which is backed by capital from private investors in Hong Kong. The buyer intends to use InnVest as a platform to do other hotel real estate deals across North America. Chinese investment in global commercial real estate has increased significantly in the past five years as more institutional investors waded into alternative assets.
But it won't be a free ride for the new owners. The commodity downturn and depressed Alberta economy are taking a toll on the income flow from the REIT's few big hotels in the region. The deal also doesn't include KingSett's majority ownership interests in Toronto's Fairmont Royal York, which it acquired alongside InnVest in 2015, or some Courtyard Marriott properties.
Still, it is a big leap into the Canadian market for the recently formed BlueSky, which says it looks for "iconic luxury properties" as well as assets where it can make capital investments to improve value. Last year, InnVest took a stake in the Royal York hotel, bought one-third of Toronto's Courtyard by Marriott, acquired all of Regina's Hotel Saskatchewan, and then in 2016 it picked up the Ottawa Marriott Hotel. Combined, these deals cost about $230-million.
Meanwhile, InnVest has been investing in refurbishment its properties. Royal Bank of Canada analyst Neil Downey noted that last year "$42-million was invested into hotel capital improvements, including significant renovations of guest rooms at Fairmont Royal York and Hotel Saskatchewan."
Having a deep-pocketed backer could be a big help to InnVest, which has only begun to ratchet down its debt leverage below 60 per cent, with a target of reaching 50 per cent over the long term.
Mr. Coles, who came to InnVest from managing hotel investments at Oxford Properties Group, is set to stay on to head the business, after the deal closes in the third quarter of the year, pending regulatory and other approvals.