US REITs will be active again in 2011

• There will be more competition for hotel assets during 2011 due to the wider availability of debt.
• The financing flexibility of REITs puts the investment companies in a good position.
• Expect to see more bank-owned assets come to market this year, which will increase the number of potential REIT targets.

REPORT FROM THE U.S.—There might be increased competition for assets as more debt flows into the hotel sector this year, but real-estate investment trusts are expected to again lead the acquisition charge.

Jones Lang LaSalle Hotels this week forecast 2011 deal volume in the Americas of US$13 billion during 2011, with REITs being among the most active buyers. Total volume for 2010 is expected to be US$10.5 billion.

• Read “JLLH: 2011 Americas deal volume of US$13b.”

During 2010, REITs accounted for 50% of transactions and 80% of that total dollar volume, said Rod Petrik, managing director at Stifel Nicolaus. Greater availability of debt will bring in additional hotel suitors, such as private equity investors.

Rick Smith CEO FelCor Lodging Trust

“There are challenges; there is a lot of competition,” he said. “We looked at a number of assets in New York and D.C. A lot of these assets we couldn’t get to.”

Still, even with more debt available for potential suitors, REITs have a great amount of financing flexibility, which includes equity along with debt. This should help REITs keep up their acquisition pace.

FelCor, despite the increased competition, is expecting a strong deal-making year, CEO Rick Smith said. An improving economic outlook helps.

“People are mostly over their fears of a double-dip,” Smith said. “I look for 2011 to be an up year.”

Looking at stock price data for the REITs, it appears investors also are largely optimistic about the companies’ prospects with one-year percent increases seen in most of the stocks.

Pebblebrook Hotel Trust is particularly active of late, spending a combined US$245.6 million since 3 November to acquire three properties: the Skamania Lodge outside Portland, the Sheraton Delfina Santa Monica and the Sofitel Philadelphia.

“We continue to see a certainly healthy landscape,” CFO Ray Martz said. “There’s been a good number of hotels trading hands.”

Smith said he hasn’t set a quota as to how many deals he’s looking to get done this year. The REIT does, however, plan to look strongly at markets such as New York and Washington, D.C.

“If we got something done in New York, then not D.C., I’d be pretty happy,” he said. “If we got something done in New York and D.C., I’d be very happy.”

More bank-owned properties

Assisting in their hunt for deals, there will be more bank-owned properties coming to market in 2011, the REIT executives said.

Banks see hotel fundamentals improving and understand properties sold now will go at a higher price.

“Lenders are smarter this time around,” said Laurence Geller, president and CEO of Strategic Hotels & Resorts. “(Bankers say) ‘We’re waiting it out. We can see the economy (is improving).’”

Narrowing bid/ask spreads

One other reason for the anticipated uptick: The gap between what sellers expect and what buyers are willing to pay is narrowing.

Martz said buyers and sellers have become more “realistic” in what they’re expecting in a deal.

Said FelCor’s Smith: “It’s narrowed pretty considerably. The perception in the buyer’s mind changes as things come back. You can see the growth.”

Return expectations

In making these acquisitions, REITs generally are seeking double-digit returns, sources for this article reported. Pebblebrook, for one, is looking for unlevered returns of 10% to 12%, Martz said.

FelCor wants deals that will be long-term accretive to the company’s balance sheet. Though he did not detail a specific internal rate of return target, Smith said FelCor conservatively is seeking IRR above its weighted cost of capital.

Those companies focusing on short-term gains will get hurt.

“It’s looking at 10 (assets) to buy one. … We will find the deals that make sense,” Smith said.