ARC Hospitality to Sever Ties with AR Global Following Equity Infusion from Brookfield
An affiliate of private equity fund Brookfield Strategic Real Estate Partners II has committed to invest $400 million in American Realty Capital Hospitality Trust in exchange for certain corporate governance and approval rights and seats at the board of directors. The move will lead to the termination of the non-traded REIT’s relationship with AR Global – the successor business of AR Capital.
ARC Hospitality will terminate its existing advisory agreement with American Realty Capital Hospitality Advisors, its current external manager, and become a self-managed REIT. The transaction is expected to close in March 2017, at which time ARC Hospitality will change its name to Hospitality Investors Trust.
Brookfield will provide an investment commitment of up to $400 million in the form of convertible preferred limited partnership units of the company’s operating partnership, American Realty Capital Hospitality Operating Partnership L.P., on a delayed draw basis.
“We expect Brookfield’s investment commitment to enhance our ability to complete our property renovations on a timely basis and to close the Summit acquisition, which we believe will enhance our portfolio value,” said Edward Hoganson, chief financial officer of ARC Hospitality.
He added, “In addition, by addressing our near-term financing needs, the investment should provide the company with a more sustainable capital structure and an improved debt maturity profile. Moreover, we believe the company’s transition to self-management will allow us to operate more cost efficiently in better alignment with our peers as a best-in-class competitor.”
William Kahane is resigning from the board of directors, which will increase from four to seven members, and Robert Burns is likely resigning. Stanley Perla and Abby Wenzel will continue their roles as directors, and ARC Hospitality president and CEO Jonathan Mehlman will likely be added. It is anticipated that Brookfield managing partners Bruce Wiles and Lowell Baron will be appointed, with Wiles serving as chairman. Two new independent directors will be nominated by the company’s existing board and approved by Brookfield.
The REIT and its property manager, American Realty Capital Hospitality Properties, have agreed to reduce the property management fees and the length of the property management agreements with certain sale properties. The property manager and its affiliates will, in turn, receive consideration in cash and shares of the company’s common stock. The company said the exchange will result in “significant” annual savings.
Employees of the advisor and its affiliates currently involved in the day-to-day management of the company’s assets, including all of the executive officers, are expected to become employees of the REIT.
ARC Hospitality plans to use the initial $135 million convertible preferred unit issuance and follow-on issuances for working capital, contractual property improvements, and other general corporate purposes. The REIT will repay preferred equity interests held by Whitehall affiliates and debt to Summit Hotel Properties affiliates. The company will also complete the purchase of a 7-hotel Summit portfolio for $66.8 million.
The convertible preferred units will initially be convertible into common units of limited partnership interest in the OP at an initial conversion price of $14.75 per unit subject to anti-dilution protection, which in turn are exchangeable for cash or shares of the company’s common stock on a one-for-one basis.
The Brookfield transaction was unanimously approved by the ARC Hospitality board, and the transactions with the advisor and its property management affiliates were unanimously approved by the independent directors of the ARC Hospitality board. The board suspended the monthly distribution to stockholders payable in shares of common stock, and there is no assurance that the payments will resume in the future.
Brookfield Asset Management is a global alternative asset manager with more than $250 billion of assets under management. Brookfield’s flagship global opportunistic private real estate fund, Brookfield Strategic Real Estate Partners II, closed in April 2016 with total capital commitments of $9 billion.
ARC Hospitality focuses on acquiring stable, institutional quality and strategically located select-service lodging properties in North America branded by premium national hotel brands. The REIT’s offering went effective in January 2014 and suspended sales activities in November 2015 after raising $911 million in investor equity, according to Summit Investment Research. As of the third quarter, the company’s portfolio was comprised of 142 properties with a total investment cost of $2.4 billion.
