New Hotel REIT: RLJ Lodging Trust Files for IPO

by: Brad Case

RLJ Lodging Trust, a company newly formed by Robert L. Johnson's RLJ Development LLC, filed for an IPO as a publicly traded REIT. RLJ will consist of the hotel investments of RLJ Development and two of its private equity real estate funds, RLJ Lodging Fund II and III. According to the registration, the company will own 140 hotels in 19 states and DC totaling more than 20,400 rooms and operated under agreements with companies such as Marriott, Hilton, and Hyatt. (I first heard about the IPO in an SNL article by Zeeshan Murtaza, but there was also a John Kell article in the Wall Street Journal, which I accessed through Real Estate Investment SmartBrief.)

The size of the IPO is estimated at $550 million, and the equity raised will be used to retire debt totaling about $490 million; any excess will provide working capital and be available to finance acquisitions. As the company said in a statement,

We believe that the current market environment presents attractive opportunities for us to acquire additional hotels with significant upside potential that are compatible with our investment strategy. We also believe that current lodging market fundamentals provide significant opportunities for RevPAR and EBITDA growth at our initial hotels.

This, then, is an example of what I expect to become more common over the next couple of years: a private equity real estate investment fund seeking to tap the public equity markets for the purpose of repaying maturing debt, and then recapitalizing to enter the market for acquisitions. The competitive advantage of publicly traded companies in terms of the cost and availability of capital is just too strong for private companies to ignore.

I haven't analyzed the company's financial situation, so I can't comment usefully on whether it'll be a successful IPO or a good post-IPO investment. I'm interested in this situation on a personal level, though. Several years ago I was asked by my friend Russell Price to speak at a symposium about REITs organized by the business school of Howard University, one of the country's leading historically black institutions. The other speaker was a senior executive from the RLJ companies, and it was very striking how excited the students were to meet a successful African American businesswoman from a highly regarded company that is both owned and led by African Americans.

The real estate industry is like other sectors of the private economy in that most of its leaders look like me--that is, white folks, especially white men. If RLJ Lodging Trust becomes a successful publicly traded REIT, my sense is that it can be a real beacon to a rising generation of African-American business students, just as the current successful but still small group of women REIT leaders (e.g., Debra Cafaro of Ventas, Connie Moore of BRE Properties) provide a beacon to a rising generation of businesswomen.

Disclosure: I am long Vanguard REIT Index Fund and ING Global Real Estate Fund.

Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.