Park seeks diversity with $2.7-billion Chesapeake buy
 
Park seeks diversity with $2.7-billion Chesapeake buy
06 MAY 2019 9:51 AM

Park Hotels & Resorts’ portfolio will have Hyatt Hotels Corporation and Marriott International properties for the first time since the REIT spun off from Hilton after it closes a deal to buy Chesapeake Lodging Trust for $2.7 billion.

TYSONS, Virginia—Going back to even before the company’s initial spinoff from Hilton at the beginning of 2017, Park Hotels & Resorts President and CEO Tom Baltimore Jr. has been very vocal about the need for Park to find brand and operator diversity.

With the announcement that Park will purchase Chesapeake Lodging Trust for $2.7 billion, the company filled that need.

“On a pro forma basis, this helps solidify our position as the second largest hotel REIT,” Baltimore said during a conference call with analysts to discuss both the deal and the company’s first-quarter earnings results.

The deal pays Chesapeake shareholders a combination of Park shares and cash for a total consideration of $31 per share, with a 0.628 fixed stock exchange ratio and $11 in cash.

Park and Chesapeake officials expect the deal to close by early in the fourth quarter of 2019, depending on approval from Chesapeake shareholders.

In the news release announcing the deal, Thomas Natelli, chairman of the Chesapeake Board of Trustees, described it as a “transformative event for the shareholders of both companies.”

“We believe the combined company will create a superior platform for delivering exceptional returns to Chesapeake’s existing shareholders, by improving diversification, increasing scale, lowering cost of capital and benefitting from combined synergies,” he said.

The deal helps Park expand well beyond its Hilton roots, as Chesapeake’s portfolio includes Hyatt Hotels Corporation and Marriott International branded properties, and even features the Ace Hotel Downtown Los Angeles. Baltimore said at the close of the deal, Park’s portfolio brand mix will be 84% Hilton, 11% Marriott and 5% Hyatt. The deal will also bring nine new operators in the fold for Park, which had been largely brand managed.

Baltimore said one of the more attractive parts of the deal is how it will provide his company greater flexibility when it comes to brands and operators, and he expects to make some changes along those lines within the new portfolio.

Asked by an analyst how the deal might impact the company’s relationship with Hilton, Baltimore said he didn’t expect it to, and brand diversification will be a positive in the long run.

“We think long term this is only going to sharpen the knife and make us more successful,” he said.

The deal is projected to bring Park’s overall portfolio to 66 properties across 17 states and Washington, D.C., with a combined enterprise value of $12.1 billion. Baltimore said that projected portfolio side accounts for plans for Chesapeake to sell two New York properties and Park to sell three noncore assets before the deal closes. The gross proceeds for those deals are expected to be roughly $300 million.

Park CFO Sean Dell’Orto said the company also expects to sell two more non-core Chesapeake properties following the close for roughly $170 million to $180 million.

Park officials also touted the fact that the deal brings them greater geographic diversity, adding a presence in Boston, Denver, San Diego, Miami Beach and downtown Los Angeles, but also further increases the company’s exposure in San Francisco, which has been a significant driver for results among Park’s portfolio.

Baltimore said Park will have roughly 4,200 rooms in San Francisco at the deal’s close.

The deal marks the beginning of “phase two” of Park’s long term strategy, Baltimore said. While the first phase was dedicated to proving out the company’s core strategy and improve performance among its existing portfolio, Baltimore said the company will continue to be active in trading assets now to continue to refine the portfolio.

“You’ll continue to see us recycle capital into higher growth markets,” he said.

The next stage of the process will include improving operations at the Chesapeake assets, Baltimore said, with the goal of adding roughly 150 basis points in group business across that portfolio of assets.

Baltimore said he expects to realize significant synergies in the deal, including roughly $24 million in savings in 2020 and $34 million in 2021.

Park officials said the deal carries roughly $120 million in transactions costs, and the merger agreement filed with the Securities and Exchange Commission notes the deal has a $38.5 million breakup fee that increases to $62.5 million after one month.

Park officials wouldn’t go into details during the call on why they structured the agreement that way. They also declined to discuss how the deal initially came together with Chesapeake until a proxy statement is filed with the SEC.

Asked by an analyst if his company took away any lessons from the back-and-forth nature of the negotiations that ultimately culminated in Pebblebrook Hotel Trust buying LaSalle Hotel Properties in late 2018, after an early deal with Blackstone didn’t come together, Baltimore said this deal is vastly different than that one.

“We don’t see a repeat of that drama and want to stay as far away from that as possible,” he said.

Q1 results
Park saw Q1 revenue per available room increase 4.5% year over year to $176.44, according to a news release from the company. Net income for the quarter was $97 million with adjusted earnings before interest, taxes, depreciation and amortization of $176 million.

RevPAR increased 1.3% across the Chesapeake portfolio during the quarter to $175.20, driven by a 4.1% increase in average daily rate. That company saw net income for the quarter of $8.3 million.

As of press time, Park’s stock was trading at $31.81 a share, up 23.2% year to date; while Chesapeake stock was at $31.24, up 27.6%. The Baird/STR Hotel Stock Index up was up 18.7% for the same period.

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