REPORT FROM THE U.S.—Real-estate investment trusts appear to be slowly awakening from their four-month forced slumber after the U.S. capital markets collapsed in August.
While not prepared to go on a buying binge by any means, REITs are again kicking the tires on deals with which they’re presented, according to sources interviewed for this report.
Most recently, LaSalle Hotel Properties closed 3 January on its US$396.2-million acquisition of the 934-room Park Central in New York. Also in New York, Chesapeake Lodging Trust closed on its buy of the 122-room Holiday Inn New York City Midtown – 31st Street for US$52.2 million.
During a webcast of a session titled “Lodging REITs: Where Have all the Good Deals Gone?” at the Barclays REIT Conference in New York last month, top REIT executives said deal flow will increase in 2012 and that they are taking a careful approach when it comes to acquiring assets.
The W Boston, purchased by Pebblebrook Hotel Trust in June for US$89.5 million, was one of the real-estate investment trust’s purchases in 2011.
“It seems like it’s a better time to buy than sell,” Mark W. Brugger, CEO of DiamondRock Hospitality Company, said during the panel’s webcast.
Dust has settled
The erosion of REITs’ capital bases during the financial turmoil at the end of 2011 left the companies with no equity to inject into potential deals and caused the REITs to back away from the negotiating table.
But now that the dust has settled from all the capital markets wobbling of a year ago, REITs likely are looking to buy again, said Enrique Torres, an analyst at Green Street Advisors.
“I think investors are getting much more confident … We should see an uptick (in deals) over what we saw in the last four months,” he said.
There remains a disconnect over price between buyers and sellers when it comes to hotel deals, but activity among REITs is likely to pick up this year, Raymond D. Martz, chief financial officer of Pebblebrook Hotel Trust, said during a telephone interview.
“We’re kind of window shoppers right now,” he said. Pebblebrook owns 20 hotels (14 wholly owned) totaling 3,812 rooms and a 49% joint venture interest in six hotels totaling 1,732 rooms.
“But our chief investment officer (Thomas C. Fisher) remains active; he is relentless," Martz added via email.
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Raising cash, buying hotels
LaSalle is one REIT that is continuing to evaluate deal possibilities. The REIT during 2011 announced the acquisitions of three hotel properties (including the Park Central in New York) comprising 1,278 rooms for a total US$543.5 million.
During a telephone interview, president and CEO Michael D. Barnello said the company still has approximately US$250 million to US$500 million remaining under its credit facility that was recently expanded to US$750 million. LaSalle owns 37 upscale, full-service hotels comprising more than 8,700 rooms.
And, like other REITs, LaSalle spent time last year raising capital through the sale of common and preferred shares. In August, for instance, the company announced its board authorized a share repurchase program to acquire US$100 million of company stock.
“Our perspective is we’ll continue to look for assets,” Barnello said. “It’s a good part of the cycle to buy hotels.”
Still, challenges remain when it comes to buying hotels, Monty Bennett, CEO of Ashford Hospitality Trust, said during the Barclays REIT panel.
“We just don’t see how the numbers will work for us, especially with where our stock price is,” he said. As of 10:10 a.m. on Thursday, Ashford’s stock price had declined in value by more than 19% during the past year.
In addition to raising money through stock sales, REITs might look at recycling capital via asset sales in 2012, Torres said. “We definitely see that as an opportunity for the REITs,” he said.
Just as cautiousness is important in buying, the same will be required when it comes to selling hotels, Jeffrey Fisher, chairman, president and CEO of Chatham Lodging Trust, said during the Barclays panel.
“You have to have the discipline to know when to sit still and when to sell,” he said. “That’s what we did in the old days.”