Apple – no, not this Apple – (REIT Six) is raking in cash. And so is it’s top executive.
As announced recently, Blackstone struck a deal to acquire Glade Knight’s Apple REIT Six for $1.15 billion or approximately $150,000 per room. Apple REIT Six is comprised of 66 upscale, extended-stay and select-service hotels or 7,658 rooms of mostly Hilton (Hilton Garden Inn, Hampton Inn and Homewood Suites) and Marriott (Residence Inn, Fairfield Inn and TownPlace Suites) branded properties. We have them all in OpenComps: see the portfolio breakdown! So, after Apple REIT successfully exited its Apple Hospitality Two (sold to ING Clarion in May 2007 for $890 million) and Apple Hospitality Five (sold to Inland American Real Estate Trust in October 2007 for $677 million), Mr. Knight pulls out of The Great Recession unscathed… and actually with quite a few nickels in the pockets of his shareholders and, most importantly, himself.
Although the press release and general media relayed the purchase price as $1.2 billion, our scooping around the details gave us a $1,151,460,000 price tag broken down as follows: a) $1.075 billion in equity consideration based on $11.10 per unit (there are about 91 million outstanding units and an additional 5.8 million shares of converted Series B convertible preferred stock due Mr. Glade Knight; more on those later); b) $67 million in liabilities; and, c) $10 million estimate in closing costs. But it sure rounds up to $1.2 billion. (Feel free to send us a corrected breakdown!)
With purchases mostly in 2004-2006, Apple REIT Six spend $829.14 million purchasing these 66 hotels. Yes, it is also in OpenComps: see portfolio breakdown! We are sure with fund raising and fund running expenses Apple REIT Six shareholders ponied up $1 billion. By the looks of it, the shareholders mostly got their money back. However, since its inception some 8 years ago, Apple REIT Six states that it has paid approximately $7.29 per unit in distributions, or $589 million to its shareholders. Now, it looks like the shareholders made out with a 1.7x multiple return. Not bad!
But how well did Mr. Glade Knight, Chairman and CEO of Apple REIT Six, did for himself? Very smartly – and with the consent of the shareholders we assume – when he formed the company in 2004 he issued himself 240,000 Series B convertible preferred shares in exchange for a payment of $24,000. As we pointed out above, these same shares convert into 5.8 million shares of common stock for a very nice $64 million paycheck to Mr. Knight when the sale is completed. That’s $24,000 into $64,000,000 (2,666x!) magic we are talking about! This paycheck works out to almost $1 million bonus per hotel sold. Or $8 million per year! Is this comp excessive or well deserved?
We have thought of if two ways: If Mr. Knight were a typical 2/20 hedge fund operator, he could have claimed 20% of the profits (remember those $589 million in distributions), or $118 million. By this standard, he is “only” taking in a bit more than half of what he is due. Don’t rush in with the holiday bonus, however. Mr. Knight is not a hedge fund manager, but really a hotel REIT operator, albeit one that operates in the public, but (very importantly!) not-traded, realm. A look at the average executive compensation for public and traded hotel REIT CEOs (including base salary, bonus and equity) shows that it runs about $3 million per year. So, over 8 years, Mr. Knight would have collected “only” $24 million, or 38% of his current windfall. Perhaps, the positive 170% cumulative return of the Apple REIT Six is different than that of the other publicly traded REITs, which had to cut dividends and are still waiting to see their share prices reach the heights of the pre-Great Recession levels. One way or another, this $64 million bonus paycheck comes from only REIT Six. We didn’t look at how much he pocketed from Two and Five, lest we wait to see what he will collect from Seven, Eight, Nine and Ten.
In the glitzy hospitality world, most of the press focuses on the top CEOs of publicly-traded hotel operating/brand companies. Even, in a specialized industry gathering, where you might see people look up to the CEOs of the major REITs or management companies, Mr. Glade Knight remains out of the spotlight. But the “little” operation out of Richmond, Virginia, has produced some of the biggest riches in the hotel world. And Mr. Knight is not the only person making a windfall of this operation. Even less known in the hotel circles that Mr. Knight himself is the primary marketeer of Mr. Knight’s funds, David Lerner Associates. Yet, since 1993, David Lerner has “raised nearly $6.8 billion through approximately 122,600 accounts in 10 real estate programs”*. If you ever had a read through these offerings prospectuses, you will quickly realize that these guys make the IPO fees of fat-cat Wall Street firms like Goldman Sachs and Morgan Stanley look like special Black Friday discounts. At a conservative 10% cut on all money raised, David Lerner has collected more than $680 million in fund marketing fees. Yes, it is quite an effort talking 122,600 people into investing… never mind the SEC and FINRA constantly meddling in their high-powered pitch (here, here and here).
Yet, so far, Mr. Knight’s Apple REIT ventures have returned consistent returns to their investors who had the ability to stay through to the exit. So, all is good if it ends well (forget all the extra marketing fees and executive compensation vs. traditional public, traded REITS)?
And what’s in it for Blackstone? Besides buying in at an estimated 6.8% TTM cap rate, would there be any strategic reasons that may be announced down the road. Like transferring the third-party management of the Hilton-branded hotels to Hilton. Or, would we see an outright conversion of Marriott-branded hotels to Hilton brands or maybe a Motel 6 inspired launch of a new brand. These hotels are on average 2005 acquisition vintage, so the 10-year Marriott licenses may be up for grabs as they approach their expiration. Blackstone has largely left things on their own and just leveraging the portfolio in itself would yield Blackstone a 10% or more equity return a year, which in this low interest rate environment may not be a bad business on its own. Any strategic benefits that may come out of this transaction would be a plus. We will keep an eye.