MHI Hospitality Files for $76M IPO

WILLIAMSBURG, VA-.MHI Hospitality Corp. has filed for an initial public offering through underwriter BB&T Capital Markets that could raise as much as $75.9 million. The locally based company hopes to sell 6.9 million shares for as much as $11 apiece and then trade on the NYSE under the ticker “MDH.”Upon completion of the offering, the hotel company would become a REIT and with ownership of six nationally-branded full-service hotels located in the Mid-Atlantic and Southeastern US and a leasehold interest in one resort property. Going forward from there, the company plans to make value-add plays, acquiring properties at “”substantially less than the replacement cost … or the acquisition cost of a market performing hotel” and then renovating and re-branding the assets.The existing company, MHI Hotels Services Group, reported 2003 net operating income of $2.8 million on revenue of $29.2 million, compared with net operating income of $2.8 million on revenue of $28.5 million in 2002. Four of the six hotels that would be in the public company’s portfolio would be contributed by this company, with the remaining hotels under contract to be acquired post IPO.In its filing with the SEC, MHI says it expects the offering price to be between $9 and $11 per share. It would need to sell all 6.9 million shares (including the underwriter’s 900,000 share over allotment) at $11 million to achieve its goal of raising $75.9 million. Not including the over allotment, the shares would represent a 61.1% initial interest in the operating partnership. The four hotels that would be contributed by MHI Hotels Services Group would be traded in exchange for 3.08 million common shares, $1 million in cash and the assumption of $35.5 million in debt. One of the other two hotels that the company would own is the Hilton Philadelphia Airport. It would be acquired for 732,254 units, $1.8 million in cash and the assumption of $15.2 million in debt. The price is based on a $9.50 per share purchase price. If the offering price falls below $9.50, the number of shares would be increased to make up the difference. The new company also would acquire the Maryland Inn for a cash payment of approximately $12 million. An affiliate of MHI Hotels Services will receive $500,000 in cash for its 25% interest in Accord LLC and West Laurel Corp., the entities that own the Maryland Inn. In addition, the new company would acquire from MHI Hotels LLC and its affiliate, MHI Hotels Two Inc., two space leases for the common areas of the Shell Island Resort, a condominium resort property located in Wrightsville Beach, NC. The new company would pay $3.5 million for the leasehold and then sublease the properties back to MHI Hotels Two Inc. and MHI Hotels LLC at a fixed annual rate of $640,000. The new company also will lease each of its initial hotel properties to a wholly-owned subsidiary of its taxable REIT subsidiary, MHI TRS. As part of the deal, the operating partnership would use $2 million of net offering proceeds to compensate MHI Hotels Services for the termination of existing management agreements relating to the five initial properties in the new company’s portfolio. The new company would then enter into a new management agreement with MHI Hotels Services that would cover all of its initial properties plus any future hotels managed by MHI Hotels Services. The new company also would enter into tax indemnity and debt allocation agreements with the entities that contribute five of our initial properties. The agreements would indemnify the contributors against tax liabilities in the event the new company sells the properties in a taxable transaction within 10 years. The indemnities would cover 100% of the tax liability for years 1-5, 50% for year six and then would drop by 10% per year.The principals of the existing company are president and CEO Andrew Sims and CFO William Zaiser, who are also executive officers and directors of MHI Hotels Services. Sims has served as President of MHI Hotels Services since 1995 after serving for seven years as vice president of finance and development. Zaiser has served as vice president of accounting at MHI since 1990 and is responsible for financial analysis, cash management, insurance, investment and reporting. Following the IPO, Andrew Sims would own a 6.5% equity interest in the new public company on a fully diluted basis and Zaiser would own a 1.6% equity interest.