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RLJ eyes fund merger for IPO

The Bethesda, Maryland firm, co-founded by Robert Johnson (pic) and Thomas Baltimore, is talking to LPs about consolidating its Urban Lodging Fund II and Fund III for a possible IPO as a public REIT.

RLJ Development is considering merging its two opportunistic hospitality funds to take them public in an IPO.

The Bethesda, Maryland fund manager is currently in talks with LPs about consolidating its Urban Lodging Fund II and Urban Lodging Fund III into one platform ready for a possible IPO as a public REIT, according to fund performance documents from the State of Connecticut Retirement Plans and Trust Funds. Those talks are still continuing, people familiar with the matter told PERE. RLJ declined to comment.

Merging the two vehicles, which raised $743 million and $1.2 billion in commitments respectively, into a public REIT could prove an exit strategy for RLJ, whose returns have been hit in the wake of the credit crisis.

Connecticut revealed the two funds had an equity multiple of 0.8 as of the end of the second quarter 2010, with net IRRs of -10 percent for Fund II and -38.3 percent for Fund III. Net time-weighted returns for the funds were -23.4 percent and -17.6 percent in the year to the end of June 2010, the pension added, although it added that Fund III had “significant” equity to invest.

“For investors, public REITs obviously provide greater liquidity,” said Jason Myers, counsel in the New York office of Clifford Chance who focuses on REITs. “But from a management perspective, there is much more potential for growth in terms of investment opportunity. In addition, as a public REIT, a company has better access to capital – from equity to debt to the preferred markets – as well as the investment banking community.”

Debt, however, could be an issue in taking the vehicles public. Fund II has employed leverage of 88.2 percent, a factor that has already seen the fund manager restructure $478 million in loans affecting 32 assets. Fund III has a current LTV of 74.1 percent, according to Connecticut documents.

For more of the story, read the February issue of PERE magazine.