Argosy Invests in Durham Hotel Portfolio

On December 13, 2012, Argosy Real Estate made a controlling equity investment in a partnership formed to acquire and renovate two select-service hotels in Durham, North Carolina. The portfolio includes a 96-room Homewood Suites by Hilton and a 98-room Four Points by Sheraton. Argosy formed the partnership with Peachtree Hotel Group (“Peachtree”), who will act as the operating partner. Peachtree has deep experience with note acquisitions, hotel development and hotel management, particularly in the Southeast. Peachtree will manage the redevelopment and ongoing operations of the hotel. Peachtree is also a 20% co-investor.

High barriers to entry exist in the market due to the lack of available select-service brands and the lengthy timeframe for obtaining municipal approvals for new construction in Durham. The properties are located approximately 5 miles apart and are in close proximity to the Research Triangle business park, downtown Durham, the University of North Carolina (Chapel Hill), Duke University, and the Southpoint Mall. Both hotels are being acquired in an off-market setting at meaningful discounts to replacement cost. The combined acquisition basis is approximately $14.0 million ($72,000 per key), and the combined all-in basis following renovations is approximately $19.1 million ($98,000 per key).

The 98-room Sheraton Four Points was acquired via the purchase from two lenders of first and second mortgage notes. The Partnership executed a friendly foreclosure with the borrower and took title to the property on March 4, 2013. The resulting cost basis represented a significant discount to replacement
cost and to comparable hotel sales in the market. The 6-story, 80,000 sf building was constructed in 2005 and is adjacent to the Streets at Southpoint Mall, a super-regional mall owned by General Growth Properties that is the largest mall in the Southeast. Although the hotel is in good physical condition, its
operating performance has historically trailed the competition due to management inefficiencies and competition from stronger brands. The Partnership intends to invest additional capital to upgrade the hotel and potentially reposition the asset to a premium select-service hotel brand. The upgrades would
include a significant renovation of the property to replace guest room furnishings, redesign common areas, and implement new brand design standards. A four-year loan was obtained from State Bank, providing approximately 56% leverage on the acquisition basis, plus additional loan proceeds to be drawn down when the renovation begins, providing all-in leverage at 65% loan-to-cost.

The 96-room Homewood Suites was acquired on March 21, 2013. The 4-story, 76,000 sf building is located at a major interchange of I-40, in close proximity to extended-stay demand drivers such as healthcare and educational institutions. Homewood Suites is one of Hilton’s top performing extended stay brands with over 300 hotels in their system. The product offers high-quality, residential-style lodging ideal for travelers who stay five or more nights, although it also attracts travelers staying for fewer nights who value the amenity package. The property has historically achieved strong occupancy and rates that outperform those of its competitors. 2012 occupancy averaged 84.0%, suggesting that there is considerable upside with future rate increases which would provide significant flow-through to Net Operating Income (“NOI”). The Partnership’s business plan includes renovating the property in 2013 pursuant to a franchise-issued Product Improvement Plan (“PIP”), which should further enhance financial performance. As part of the acquisition, the Partnership assumed a $7.7 million CMBS loan with an interest rate of 5.94% and approximately 3 years of remaining term.

This investment offers the opportunity to add two brand-diversified, cash flowing assets to the portfolio in the highly appealing Raleigh-Durham market, with an attractive risk profile and significant upside upon execution of the value-added renovation strategies. The combined portfolio is underwritten to be held for 5 years, with strong cash-on-cash returns projected to average over 15% annually. Over 73% of the equity investment is expected to be returned from cash flow during the five-year hold period prior to sale.