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Positive reception for Western Alliance's hotel finance biz buy


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Positive reception for Western Alliance's hotel finance biz buy

's deal toacquire General Electric Capital Corp.'shotel franchise finance business drew praise from analysts and sent the bank's sharessoaring in trading after its announcement.

WesternAlliance announced its agreement to purchasea portfolio totaling about $1.4 billion after the close of trading March 29. Thoughfinancial terms of the transaction were not disclosed, the company said the transactionwill be immediately accretive to earnings.

About35 employees already based in Arizona and focused in the space will join WesternAlliance, the company said in its release.

WithGE Capital continuing its efforts to offload its well-respected finance businessesto avoid SIFI designation, investors and analysts endorsed Western Alliance's moveto grab a piece of that portfolio and a regionally-based team.

"Welike the transaction and expect it to be meaningfully accretive to [earnings pershare]," Joe Morford, who covers Western Alliance for RBC Capital Markets Corp.,said during an interview. He reiterated his "outperform" rating on thecompany in a note to clients and estimated that the deal could be 5% to 10% accretive.

"Theysaw an opportunity to add some experienced people, and a way to lever some of theircapital and liquidity into some higher-yielding flows in the hotel franchise financeniche," Brad Milsaps, managing director with Sandler O'Neill & PartnersLP, said. "It looks like a pretty good deal," Milsaps added, also sayingthat he estimated the deal would add about 10% to the company's earnings estimates.

Theverdict in markets was positive as well, as the company's shares jumped to $33.92in the first trading session after the deal announcement, up from a close of $31.00on March 29.

Thoughthe deal eats up much of the company's excess liquidity — Milsaps says in his notethat pro-forma the addition of the portfolio would have lifted the bank's loan todeposit ratio to 104% at December 31, 2015 — Western Alliance said it will be ableto fund the deal with more deposit growth. "They've talked about having verystrong deposit growth in the first quarter. Obviously we don't know what those numbersare yet, but they believe they can fund it internally with deposit growth in thefirst half of the year," Milsaps said.

One concernraised by some analysts, however, is that the bank is making a deal for a lendingline that often is among the earliest to show stress in a credit cycle — just asmany in the banking industry predict that banks are set to see rising credit costs."Investors are usually a little more skeptical of hotel CRE in loan portfolios,as the asset class typically under-performs other CRE segments through a creditcycle," Brett Rabatin, a senior research analyst who covers Western Alliancefor Piper Jaffray & Co., told clients in a note following the deal.

"Thebottom line is the addition of GE Capital's portfolio could add more fuel to concernover the implications for WAL's portfolio in a recession-type scenario," Rabatinadded, though he reiterated his "overweight" rating of the shares, liftedhis long-run earnings estimates and said he had a "solid conviction" thatthe company would outperform peers on profitability, earnings per share and tangiblebook value generation.

Still,potential credit concerns seemed to give markets little pause. Part of that optimismprobably comes in part from the fact the portfolio has no nonperforming assets,according to Western Alliance, which said it will keep the concentration of theline at about 10% of its entire portfolio.

Milsapssaid that company executives did not go into great detail on the portfolio's metrics— they did not disclose loan to value ratios in the portfolio, nor the size of thecredit mark during a discussion of the deal. They did stress that Chairman and CEORobert Sarver has experience in the space because of his real estate businesses,though, and said the company did a "deep dive" into the portfolio.

"That,along with the fact that [GE Capital] was a SIFI institution and had a lot of regulatoryoversight, made Western Alliance more comfortable with the deal," Milsaps said.

"It'sa higher risk business, but some of that is mitigated by the fact that [WesternAlliance Chairman and CEO Robert Sarver] has extensive experience in working withthe asset class; they're limiting the concentration to about 10% and they're bringingon the team that has the track record," Morford said.

Eventhough an economic downturn could drive losses in the portfolio, he said that "itstill looks like an attractive risk-reward opportunity."