RPT-IPO VIEW-Summit Hotel REIT goes public, others may follow

Sun Feb 13, 2011 11:57am EST

* Summit priced below expected range

* Recovery's early stages are ripe for hotel IPOs

* Prospective IPO RLJ has 140 hotels vs Summit's 65 (Repeating item that initially moved on Friday)

By Helen Chernikoff

NEW YORK, Feb 11 (Reuters) - Summit Hotel Properties Inc (INN.N) did not get the warmest welcome from investors, but its ability to sell shares at all indicates that other lodging companies may also be able to go public.

Investors likely hesitated to buy Summit Hotel's shares because the real estate investment trust's initial offering was relatively small, at just $253.5 million.

Also, many of the hotels owned by the trust are in smaller cities, where lodging profits are not as stable.

The market will probably be more receptive to bigger offerings, said Dean Frankel, senior portfolio manager with Urdang Securities Management.

RLJ Lodging Trust, which on Feb. 2 said it intends to raise up to $550 million in an IPO, has 140 hotels including some in New York, Chicago and Washington, D.C.

"What do investors want? They want good assets in core markets priced attractively. They want a big enough size so that they don't have to worry that something is going to grow," Frankel said.

That may be why Summit Hotel Properties' shares sold at $9.75 apiece, below the expected range of $10.50 to $12.50 per share.

Nevertheless, Summit Hotel Properties is the first real estate investment trust with actual assets to go public since before the recession, analysts said.

"These guys pay good dividends and the assets seem to be appreciating. It's a good time," said Adam Weissenberg, a Deloitte vice chairman who advises tourism, hospitality and leisure businesses.

A smattering of other lodging REITs, which own hotels and are exempt from corporate taxation because most of their income goes to investors in the form of dividends, went public in 2010. They were "blind pools" that used the money raised in their offering to buy their first properties.

Summit already owns 65 hotels in 19 states, including Idaho and Mississippi, most of which operate under well-known brand names owned by big franchisers like Marriott International MAR.N and Hilton Worldwide.

Its properties are often based in smaller cities such as Boise, Idaho. Many of its hotels offer fewer amenities and services than those owned by other lodging REITs, like Strategic Hotels & Resorts (BEE.N), which holds upscale hotels in the top markets.

Investors considering Summit had to weigh the fact that the properties have relatively cheap prices and therefore higher potential returns against the risk that demand can drop in more far-flung markets, said David Rosenberg, an investor at CBRE Global Real Estate Securities.

Summit's closest competitor will be Chatham Lodging Trust (CLDT.N), some of whose hotels are similar in style and location to Summit's. Chatham has a dividend yield of about 4 percent.

Summit will offer a higher yield, both to better compete against Chatham and to compensate for the perceived risks of second-tier cities, Rosenberg said.

Investors like hotels right now because when demand rises, room rates increase quickly and profits grow. That makes hotels better able than other real estate asset classes to benefit from the early stages of an economic recovery. Offices, for example, typically carry long-term leases, so their returns can lag a broader economic recovery. (Reporting by Helen Chernikoff; Editing by Gary Hill)

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