REPORT FROM THE U.S.—Victims of the economic downturn, foreclosed hotel properties soon could be flooding the real-estate market and real-estate investment trusts are gearing up to take advantage.

Problem is, some REIT experts believe the flood might end up being more of a trickle.

Several REITs have notified the U.S. Securities and Exchange Commission during the past two months of their intent to sell securities, among them: Chatham Lodging Trust on 4 November; Pebblebrook Hotel Trust on 9 October; and Chesapeake Lodging Trust on 28 September. Chatham is seeking to raise US$230 million; Pebblebrook wants US$402.5 million, and Chesapeake is seeking US$250 million.

The goal of these REITs is to swoop in and pick off distressed hotel properties for a cheap price, with the belief that the properties’ value will appreciate.

“I could describe them as vultures and I wouldn’t be too far wrong,” said Marc Citron, resident managing partner of the Princeton, New Jersey, office of law firm Saul Ewing LLP.

Executives at Chatham, Pebblebrook and Chesapeake did not return calls seeking comment, but their filings outline their plans.

Acquisition hopes

Pebblebrook, for one, said in a Securities and Exchange Commission filing on 10 November that it is planning to acquire properties in major cities, particularly on the coastal areas, including Hawaii, southern California and southern Florida. Pebblebrook will focus on full-service “upper upscale” properties, and branded, upscale, select-service properties.

“We believe that these investments can produce attractive risk-adjusted returns because we expect to acquire properties at cyclically low prices in the current economic and financing environment and the properties we purchase will benefit from increasing business and leisure travel as the economy improves,” the trust said in the filing.

Additionally, Chatham in a 4 November SEC filing said it will invest in premium-branded upscale, extended-stay, upscale select-service and full-service hotels, with a “significant portion” of the company’s portfolio in the upscale extended-stay categories. That would include brands like Residence Inn by Marriott, Homewood Suites by Hilton, and Summerfield Suites by Hyatt. Also falling in the trust’s crosshairs could be brands such as Courtyard by Marriott, Hampton Inn and Hampton Inn and Suites.

Finally, Chesapeake said in a 6 November SEC filing that it will focus primarily in the upper-upscale space in business, airport and convention markets, as well as some premium, select-service hotels in cities or “unique” U.S. locations. “We believe current industry dynamics will create attractive opportunities to acquire high-quality hotel properties at prices well below replacement costs, with attractive yields on investment and significant upside potential.”

Dan Daniele, SR VP of acquisitions for real-estate development and investment company Corporex, said REITs have been adding to their war chests during the past year in anticipation of scooping up down-and-out hotels. In fact, Corporex itself is in the process of funding an equity fund to acquire foreclosed hotels itself.

“We believe there is an opportunity to buy distressed assets,” he said. “The momentum is building. It’s like a snowball going downhill. Six months from now, that little snowball will be three-quarters of the way down the mountain and it will be gaining mass and gaining velocity.”

Daniele declined to identify a target for how large the company’s fund will be, but did say fund-raising should be complete by the end of the first quarter.

Risks exist

But while REITs are champing at the bit for their shot at these properties, some in the industry say the REITs might end up being disappointed. Rich Conti, president of asset management and consulting firm The Plasencia Group in Tampa, Florida, said he believes the commercial mortgage-backed securities servicers are going to do all they can to negotiate with debtors. This could delay or prevent properties from reaching the market.

“Everybody’s been waiting for a landslide of foreclosed properties to come back on the market,” he said. “It’s not going to be a landslide.” He added that he doesn’t expect to see any significant acquisition activity until the second half of 2010.

There are other risks, too. For instance, REITs are not likely to be the only entities bidding on hotel properties. Hotel operators might want to get in on the action as well as other equity funds, such as the one at Corporex.

This could create a crowded marketplace.

“I do think we will see a few, but I don’t think we need to see several” new hotel REITs, said John Arabia, managing director of REIT consulting firm Green Street Advisors in Newport Beach, California. “There are already good management teams out there that can already take advantage.”

More bidders could push the price of these properties beyond what REITs, with dividends to pay out to expectant investors, are willing to pay, Conti said.