NEW YORK—Today’s positive hotel operating cycle still has quite a bit of runway left, according to a panel of real-estate investment trust CEOs.
Speaking last week during the Bank of America Merrill Lynch 2012 Global Real Estate Conference, the top executives pointed to strong transient demand and a lack of supply as two reasons to be optimistic about how long the cycle will last.
“I believe the cycle has some significant legs left in it,” Jay Shah, president and CEO of Hersha Hospitality Trust, said during the session titled “Checking In or Out? Lodging REITs,” which was webcast.
Hersha Hospitality Trust
Business travelers and groups have returned to the road, the CEOs agreed.
“Business transient remains strong,” said Mark Brugger, CEO of DiamondRock Hospitality Company. “Leisure’s hanging in there as well.”
Ken Cruse, CEO of Sunstone Hotel Investors, also mentioned seeing strong business transient demand. “What we haven’t been seeing to date and now are starting to see over the last few quarters is group business,” he said.
Brugger said a continued low level of hotel supply will likely prolong the upturn. “The supply level is currently the No. 1 thing we’re watching,” he said.
He added, “We believe this cycle will be longer than the last two, but those kinds of things are impossible to forecast.”
Shah was asked what effect the U.S. fiscal cliff might have on corporate rate negotiations.
“The negotiations for corporate rate are always an interesting time of year,” he said. “Companies are always pushing back, it’s just what bullets do they have to support their appeal? We’re not expecting to feel an impending impact from fiscal cliff.”
Corporate negotiated rates at Hersha are likely to finish up by 2% to 3%. “Maybe the higher end of that range,” Shah said.
Shah said he expects performance of the hotel industry during 2013 will mimic 2012. “We don’t expect it to be significantly worse or better,” he said.
As industry operating metrics continue to trend upward, the CEOs were asked what the deals outlook is for their respective companies.
Brugger said his belief is that if you have the ability to buy an asset today, you should.
Referencing DiamondRock’s recent deal with an affiliate of Blackstone Group, Michael Barnello, president and CEO of LaSalle Hotel Properties, responded to that comment by saying: “Mark was telling me we have to do a (deal) with Blackstone because all the cool kids are doing it.”
Cruse said REIT transactions activity is closely related to the companies’ stock prices. “In order to transact, you have to have capital available,” he said.
He added: “The problem for us has been capital availability. A year ago, our stock price was much lower. … I feel, and I believe all of my esteemed colleagues feel, our stock is undervalued.”
Sunstone, though, has seen its stock climb back during 2012. Year-to-date, the stock is up approximately 42%, closing on Friday at $11.70 per share. Sunstone’s stock is included in the RW Baird/STR Hotel Stock Index, which closed Friday at 2600.96.
“I can’t recall a better time to buy assets that fit our profile at strong pricing,” he said.
Still, finding someone who’s willing to sell at the price the REITs are looking for is proving a challenge, Shah said. As performance improves in the hotel industry, sellers are wanting to squeeze every last penny out of deals.
That said, the quality of product that is coming to market is “slightly” better and there remain a lot of opportunities for REITs to be active, Shah said.
“Ninety-five percent of (hotel) assets are not owned by public companies,” he said.