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Aspen’s St. Regis Will Become US’ First Public Single-Asset REIT


Stephane De Baets’ Elevated Returns, a New York-based asset management outfit, may be riding an express chairlift into the history books.

The firm, which acquired the St. Regis resort in Aspen, Colo., in 2010, won approval from the Securities and Exchange Commission late last month to spin off the property under the ownership of a newly formed real estate investment trust (REIT) called Aspen REIT. When it does—and after its New York Stock Exchange initial public offering later this month that aims to hawk 1.675 million shares at $20 each—the trust will become what De Baets said will be the first single-asset REIT to trade on an American exchange.

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Elevated Returns plans to retain 51 percent of the shares, bringing equity investment in the property to $68.4 million. Those stakes combine in the capital stack with a $119.4 million mortgage to bring the St. Regis’ total valuation to $187.8 million.

The structure pioneers a novel configuration of real estate ownership, allowing anyone with a brokerage account to buy a piece of an individual commercial asset for no more than the price of a dinner entrée.

“It’s a democratization of the investment model,” De Baets said. “We’re enabling the man on the street to, point to point, invest into a particular asset and to enjoy 100 percent of the economic interest.”

The concept is not unheard of. In the mid-1980s, in an arcane, convoluted transaction that allowed the Rockefeller clan to skirt a tax liability for liquefying its real estate holdings, the family created a single-asset REIT assigned to collect interest on mortgages on Rockefeller Center in Midtown Manhattan.

And in 2013, an upstart called ETRE Financial was poised to zip several different commercial properties, in Boston, Washington, D.C., and Philadelphia, into discrete single-asset trusts available to shareholders to trade on the Nasdaq exchange.

Both of those endeavors careened toward the gutter. By the end of 1995, Rockefeller Center Properties was deeply distressed, suffocating under the layers of debt it had taken on to protect shareholders and buying back bonds that were set to convert into equity in the future.

And ETRE Financial fizzled before launch, postponing a series of IPOs in the wake of what analysts speculated was lackluster investor interest.

Michael Rotchford, who co-leads the capital markets group at Savills Studley, mused that concern in particular would be an obstacle for any single-asset trust to confront.

“Single-asset REITs for certain assets are a great idea, but I think that liquidity is going to be of great concern to individual investors,” Rotchford said.

When asked about concerns over the vibrancy of the proposed REIT’s secondary market, De Baets was upbeat, explaining that Aspen will employ a market-maker, Citadel Securities, to promote liquid trading in the stock.

“The market-maker is very incentivized to keep the market liquid,” he said. “If the first [single-asset REIT] is successful, there’ll be 20 of these.”

The hotel, at 315 East Dean Street in the ritzy Rocky Mountains town, is nothing to shake a stick at. Two blocks from the lift lines for the Aspen Mountain ski resort (also known by its former moniker, Ajax), the St. Regis boasts five restaurants—including one that serves dishes from chefs Eric Ripert and Mario Batali—a full-service spa and even butlers available to meet guests on the tarmac at Aspen-Pitkin County Airport to carry their luggage.

De Baets may also have an ace up his sleeve in the form of deep relationships with Asian investors. In addition to his role at Elevated Returns, the Belgium native also serves as a managing director for OptAsia, a specialty investment bank with offices in Bangkok. In that capacity, De Baets lived in Thailand for 20 years and said he believes that an emerging investor class in China and throughout the eastern part of the continent is hungry for recognizable American properties in which to park their cash.

When considering mainstream U.S. REIT opportunities, “most of my investors in Asia say, ‘I don’t know, this REIT has 500 different assets,’ “ De Baets said, “ ‘It’s complicated for me to understand if it’s a good deal.’ ”

With Aspen REIT, “you only have one set of numbers,” he added. “The underlying value of the asset is easy to understand.”

The pitch to foreign retail investors will be bolstered by the tax advantages that real estate investment trusts enjoy abroad.

“For foreign pension plans that are now recognized [by the U.S. government], they would be exempt from taxes on the dividends,” explained Kenneth Weissenberg, a partner at New York accounting firm EisnerAmper. “And a nonexempt holder can sell his stock in the REIT and not be subject to” the Foreign Investment in Real Property Tax Act, a law that charges income tax to foreigners who make money in American real estate.

Incentives for foreign REIT investors were further strengthened by 2015’s PATH Act, which lowered the rate of dividend withholding for foreign REIT investors to 21 percent from 30 percent.

But how well Aspen REIT will serve owners as an investment vehicle remains unknown. Trophy resort hotels have always been difficult to find investment comparisons for, analysts say, because their fortunes are so closely tied to local conditions. But single-asset REITs lack any precedent at all, leaving De Baets to play a guessing game for what the financing market will bear.

“We don’t know that the general public will be happy with the yield,” the asset manager said. “We’ve priced this offering with an entry yield that is so attractive that we know the asset will be in demand. Where will it settle once it’s trading? No one knows.”

Still, Elevated Returns thinks that the ski town’s prestige and the strength of the St. Regis brand will boost the REIT’s market with investors content to dampen their expectations for return.

“I would say that the difference between the sexy asset and the non-sexy asset would be the yield compression,” De Baets said.

The paperwork that Aspen REIT has filed with the SEC in advance of its initial offering of shares grants an intriguing glimpse into the finances of a luxury hotel adjacent to a destination ski area.

Occupancy is sharply seasonal. During the ski season—roughly from late December through the first few weeks of April—demand soars, and guests rent 80 to 95 percent of the St. Regis’ 179 rooms. The picture is similar over the summer, from June through August, when travelers mob the town for hiking and rafting, as well as a yearly two-month classical music festival.

Revenue follows a similarly lumpy pattern. In December 2016—the most recent ski season for which data are available—the average price for a night at the St. Regis peaked at $1,665. But in the October offseason two months earlier, rooms could be had for less than a quarter of that price.

Still, the St. Regis was able to charge consistently higher rates than its competitors throughout Colorado, its SEC filings show. In 2016, the hotel raked in just shy of $29 million in room revenues, or about 45 percent of the REIT’s planned IPO valuation.
On the whole, revenue from the hotel has grown 14 percent since 2015, supporting the REIT’s pledge to pay out a 5.8 percent annual dividend.

Given REITs’ surging popularity—May 2017 data from the National Association of Real Estate Investment Trusts showed that daily trading in the sector was up roughly 150 percent over the preceding decade—analysts say the time is ripe for new innovations in the vehicles.

“You have growing popularity of the real estate space as the primary alternative investment,” said David Blatt, the chief executive of New York-based CapStack partners. “Additionally, people are looking to diversity away from public equities and bonds to have noncorrelated assets. That, in turn, has really brought a lot of people off the sidelines.

“I think [the single-asset REIT concept] is sector agnostic, but I do think that you’re going to acclimate people far better utilizing something that has a brand,” Blatt said. “Coming to market saying you’ve got a fantastically well-located warehouse complex—I’m sorry, but I fell asleep after you said ‘warehouse.’ ”

On the other hand, with a market cap, at $68.4 million, only about a 10th as large as its self-identified competitors, Aspen REIT might appear to have an uphill battle winning investor attention amidst the clamor.

On that front, the hotel’s branding could be crucial to its success.

In exchange for using the St. Regis moniker and outsourcing its day-to-day operations to the brand, Elevated Returns pays Marriott, which owns St. Regis, an annual fee based on a percentage of the Aspen hotel’s operating revenue—$500,000 at a minimum.

The Bethesda, Md.-based lodging company did not respond to a request for comment.

“[St. Regis’] sales network is very strong and sophisticated,” De Baets said, citing the company’s “no-blackout, highly rewarding loyalty program. That’s something that has been very powerful for properties like ours.”