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RLJ Lodging To Enter Miami

Zacks Equity Research

Bethesda, Maryland-based RLJ Lodging Trust (RLJ), a real estate investment trust (:REIT), recently inked a purchase and sale deal for the acquisition of Hilton Cabana Miami Beach for $71.6 million. With this acquisition of the top-class property, RLJ Lodging is set to debut in Miami.

The property first opened as a hotel in 1950 but was demolished in 2007 to be restructured into a condominium. However, the plan did not materialize and the current owner of the property purchased it in 2011 intending to develop a hotel under the Hilton brand. RLJ Lodging will acquire the hotel after the completion of the construction in the fourth quarter of 2013.

As per the deal, RLJ Lodging has committed to pay a deposit worth $7.2 million, which is refundable in case of non-completion of the property. The company has not assumed any construction related risk.  The hotel acquisition is also subject to other conditions, along with the customary closing conditions. This includes significant completion of the property by a third-party developer within the contractual scope of the agreement.

Miami has one of the strongest lodging markets in the U.S, next only to New York, Oahu Island and San Francisco.  According to Smith Travel Research (STR), the Miami-Hialeah market reported a 14.1% year over year growth in RevPAR (Revenue per Available Room) in 2011. The strong trend has continues; the market posted a 7.9% year-to-date hike in RevPAR through September 2012. The STR expects RevPAR in Miami to increase in the range of 5% – 10% in 2012.

According to STR, there are just two Hilton-affiliated hotels, representing around 1% of total hotel rooms in the Miami Beach market. The 231-room Hilton Cabana Miami Beach hotel will be positioned on the beach along the 6200 block of Collins Avenue. Numerous properties along Collins Avenue and Ocean Drive area are historic. This notification creates a barrier to entry for new developments owing to strict market regulations. However, if completed, the hotel will benefit from Miami's progressively rising transient demand, strong convention activity and close connections with Latin America.

The booming lodging industry encouraged RLJ Lodging to enter the Miami market. However, the company should be wary of its competitor Host Hotels & Resorts Inc. (HST) which has a noteworthy presence in the market.

Currently, RLJ Lodging has been highly active on the acquisition front in key gateway markets of the U.S. like Washington DC, New York city and others. Last month, RLJ Lodging entered the Greater Boston market with the acquisition of Embassy Suites in Waltham, Massachusetts, for $64.5 million.

RLJ Lodging carries a short-term Zacks #3 Rank (Hold). One of its peers, Hospitality Properties Trust (HPT), holds a Zacks #4 Rank (Sell).

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