American Hotel Income Properties REIT (AHIP) delivered a fairly standard Q1 2024 earnings report: positive RevPAR growth driven by occupancy gains, persistent margin pressure from labor costs and insurance, ongoing strategic dispositions, and a confident outlook. Yet, beneath the surface, AHIP may be engaging in a subtle, but potentially impactful, valuation strategy. The company repeatedly emphasizes a perceived "disconnect" between its unit price and private market valuations for hotels, a message seemingly aimed at attracting private equity buyers. But is this a genuine opportunity or a risky gamble?

AHIP's current unit price, trading at a mid-to-high 8 cap rate on 2023 NOI, paints a picture of undervaluation compared to the private market, at least according to AHIP. Their recent dispositions seem to back this claim. The two Harrisonburg and Cranberry Township hotels, sold at an 8.6% cap rate (6% including CapEx), and the upcoming Amarillo dispositions, at a 6% pre-CapEx cap rate (4.5% post-CapEx), suggest a significant spread between public and private market valuations.

AHIP is clearly broadcasting this discrepancy, likely hoping to pique the interest of private equity firms hungry for undervalued assets. They're not alone. Several competitors have also announced dispositions at seemingly attractive cap rates, amplifying the narrative of a potential buying opportunity in the public REIT space.

However, a closer look at AHIP's financials reveals a more complex story. Their debt-to-gross book value has inched up to 52.3%, and their debt-to-trailing 12-month EBITDA stands at a concerning 10.5x. These metrics highlight the financial strain AHIP is under, particularly in the face of expiring interest rate swaps that have added an estimated $5.2 million in annual interest expense.

Facing a wall of upcoming debt maturities – $22 million in Q2 2024 and a hefty $58 million in Q4 2024 – AHIP is forced to walk a tightrope. They're relying on a blend of dispositions and refinancings to meet these obligations, but the pressure is undeniable.

Here's where the strategy gets interesting. AHIP's emphasis on the "disconnect" serves a dual purpose. First, it attempts to attract private equity buyers who might be willing to pay a premium for assets they perceive as undervalued by the public market. Second, it creates a narrative of inherent value, potentially boosting investor confidence and, hopefully, AHIP's unit price.

However, this strategy hinges on a crucial assumption: that private equity will bite. If they don't, or if the offers received fall short of AHIP's expectations, the company could be left scrambling to meet its debt obligations, potentially leading to further dispositions at less favorable terms.

AHIP's "whisper strategy," hinting at their attractiveness to private buyers without explicitly stating an intention to sell the entire company, is a calculated risk. It's a bet on the perception of value, on the willingness of private equity to step in.

The stakes are high. If AHIP wins this gamble, they could unlock a substantial value premium for their unitholders and navigate their debt hurdles with greater ease. But if the gamble fails, the consequences could be significant. The coming months will reveal whether AHIP's whisper strategy will be their salvation or their undoing.

Hypotheses and Numbers:

AHIP's repeated emphasis on the valuation "disconnect" is a deliberate strategy to attract private equity buyers.

Recent dispositions at seemingly attractive cap rates compared to AHIP's unit price. Similar disposition announcements by competitors, reinforcing the narrative of public REIT undervaluation.

Private equity buyers acquire assets at a premium, deleveraging AHIP and unlocking value for unitholders. Private equity offers are insufficient, forcing further dispositions at less favorable terms and potentially exacerbating AHIP's financial strain.

Debt Maturity Schedule

Q2 2024 - $22 million - Disposition of one non-core hotel and refinancing with the remaining three hotels. Q4 2024 - $58 million - Combination of asset sales and CMBS refinancing. 2025 - $181 Million - Combination of asset sales, CMBS refinancing and extension on revolving credit facility.

AHIP's Financial Performance

"Fun Fact: AHIP was originally named "InnVest REIT" before changing its name in 2015 to reflect its focus on the U.S. hotel market."