NexPoint seeks added scale with Condor deal
 
NexPoint seeks added scale with Condor deal
22 JULY 2019 10:08 AM

Toronto-based NexPoint Hospitality Trust will more than double the size of its portfolio with a $318 million acquisition of Condor Hospitality Trust.

GLOBAL REPORT—Toronto-based NexPoint Hospitality Trust plans to significantly expand its U.S. portfolio with a planned $318 million acquisition of Condor Hospitality Trust, which is based in Bethesda, Maryland.

The deal, announced by the two companies Monday morning, would come in the form of cash and the assumption of Condor’s debt valued at $11.10 per share, which was 34% higher than Condor’s closing price on 19 July. The deal is slated to close in the fourth quarter, pending shareholder approval.

In a note to investors, Michael Bellisario, VP and senior research analyst at Baird, said the acquisition price is in line with his company’s calculations of Condor’s net asset value.

“We view this outcome of the company’s elongated strategic review process as a win for (Condor’s) shareholders,” Bellisario wrote.

In a presentation to NexPoint’s investors, company officials note the rationale behind the deal is based on added scale and a larger geographic footprint within the U.S., adding Condor’s 15 properties and growing into six states the company previously had no presence in.

“The transaction instantly expands NHT’s geographical footprint and balances (NexPoint’s) strategic value-add portfolio with durable, core, extended-stay hotels.” NexPoint CEO Jim Dondero said in the news release announcing the deal. “We believe the future for quality extended-stay and select-service hotels remains bright.”

Upon closing the deal, NexPoint would have 26 select-service and extended-stay properties with more than 3,500 rooms across 11 states and 18 markets and a combined enterprise value of roughly $700 million.

NexPoint officials believe the added scale will bring “durable” cash flow and better access to capital.

“Select-service hotels demonstrate higher (earnings before interest, taxes, depreciation and amortization) margins than other hotel segments providing stable cash on cash yields and ability to pay higher distributions,” the company stated in its presentation.

As Bellisario noted, if the deal successfully closes, it marks the end of a strategic review process Condor officials first announced in late 2018.

In the news release announcing the deal, Condor CEO Bill Blackham said he is “pleased with (the company’s) strategic alternatives process concluding with a transaction we believe is attractive for our shareholders.”

NexPoint “is acquiring our very high quality portfolio of outperforming select service hotels, and Condor shareholders are receiving a liquidity event at an attractive premium to our unaffected share price prior to the transaction announcement,” he said.

Blackham did not respond to an interview request from HNN.

Bellisario noted it’s unlikely the deal unravels before closing as outside influences in large part view the $11.10-a-share bid as a “fair and full” valuation for Condor’s assets. It seems unlikely, he wrote, that other bidders will arise at this point.

“Condor has likely explored all other strategic alternatives since its review process began in late September 2018,” he said.

Because of the relatively small scale of the companies involved, Bellisario does not believe this deal is indicative of broader trends for REIT M&A. He did note, however, that it is a positive sign for continued investment in the hotel sector.

“We believe the merger is further evidence that new/different pockets of capital are actively pursuing hotel investments, which should continue to support the hotel REITs' non-core disposition efforts. In particular, we are incrementally positive on APLE’s and INN’s implied valuations and their ability to sell slightly larger portfolios of non-core assets at attractive cap rates,” he wrote.

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