RLJ Development Checks Out, Cashes In

BET founder Robert L. Johnson’s real estate investment company, RLJ Development L.L.C. (No. 8 on the BE INDUSTRIAL/SERVICE 100 list with $460 million in sales), recently sold 22 full- and select-service hotels to the Inland American Lodging Corp. for approximately $900 million.

The 4,061-room portfolio consists of high-end full- and select-service hotels primarily located in major urban markets including Boston, Baltimore, Chicago, and Washington, D.C. These assets, which are expected to net RLJ a profit of more than $300 million, are currently operated by industry leading brands, including Marriott, Hilton, and Hyatt.

“[RLJ] demonstrated very good skill in identifying properties that would appreciate rapidly,” says Paul Adornato, senior REIT (real estate investment trust) analyst for BMO Capital Markets. “There is more of an interest in urban real estate these days. If you are able to buy in a built-up city then you are protected from new competition to some extent.”

“As a part of our investment strategy we renovated a number of the hotels, changed management companies, and implemented a number of value-added strategies to create incremental value for this portfolio,” says Thomas J. Baltimore Jr., president of RLJ. “Inland approached us about buying the entire portfolio and made a very compelling offer that was too attractive to pass on.”

Although they had planned to hold those assets for five to seven years, the company was able to launch the RLJ Urban Lodging Fund, deploy their capital, implement their strategies, and sell the assets in less than four years, according to Baltimore.

“Four years is a relatively quick time frame, but not unheard of. The hotel market has held up pretty well, up until now,” says Adornato. “If the economy does poorly, then hotels generally do very poorly.” Hotels are sensitive to the economy, considering that the majority of their business comes from business travelers, notes Adornato.

“We were able to sign the contract in August before the credit crunch, and closed this transaction in February,” says Baltimore, explaining why the closing was profitable under present financial conditions. “We were able to take advantage of a very favorable environment last summer and maintain an attractive price despite the credit turmoil”

According to RLJ Development’s Website, the portfolio has outperformed its peers, returning a cash-on-cash yield of more than 20% to its investors. “To see a large portfolio [like this] change hands is noteworthy in this environment. These days the real estate market is slow in terms of the number of transactions,” Adornato says.

“In one sense, Inland may be betting that the economy won’t dip into a deep recession, and perhaps [RLJ Development] may have a more pessimistic view or just want to monetize some of the profits that they have built up in their portfolio while going into this uncertain economic outlook,” Adornato theorizes.

RLJ still owns 114 hotels and manages more than $2.5 billion in assets. Baltimore says the company has just launched its third private equity fund, RLJ Real Estate Fund III, which raised