ALIS update: The reshaping of hotel REITs
ALIS update: The reshaping of hotel REITs
21 JULY 2017 8:33 AM

Public-to-public mergers, private equity acquisitions and new entrants into the world of hotel real estate investment trusts are reshaping the landscape, according to panelists who spoke at the recent ALIS summer update in Boston.

BOSTON—The world of publicly traded hotel real estate investment trusts could be undergoing a shift, according to REIT executives who spoke at the recent Americas Lodging Investment Summit summer update in Boston. Panelists during the “Capital markets: A focus on REITs” session outlined three factors that could change the landscape:

  • merger and acquisition activity among REITs,
  • private equity buyers looking to take existing REITs private, and
  • new entrants into the REIT space that have a different makeup than existing companies.

Mark Brugger, president and CEO of DiamondRock Hospitality, said REITs don’t see the same level of benefits as brands do from mergers and growing scale, but that doesn’t mean there aren’t motivations for those types of deals. One such deal is already in place with RLJ Lodging Trust’s planned purchase of FelCor Lodging Trust.

“Boards and teams are trying to create value in a flat demand environment,” he said. “People are thinking about ways to create value. You don’t see it a lot, but I think we could see one more public-to-public deal.”

Neil Shah, president and COO of Hersha Hospitality Trust, said that beyond the possibility of buying an entire company or portfolio, the climate seems right at the moment for trading properties between REITs.

“There are diverging views on the marketplace,” he said. “Some management teams are more concerned than others. … For M&A to happen, you need divergent views on the world.”

Shah made that statement on the same day that his company announced the $135-million purchase of the Westin Philadelphia from LaSalle Hotel Properties.

Private interest
Panelists agreed there’s a level of interest in hotel REIT assets at the moment, evidenced by the recent SEC filing that revealed RLJ officials had been in discussions with an unnamed private equity buyer about a transaction that would take RLJ’s portfolio private and simultaneously nix the deal to acquire FelCor. But they noted it doesn’t necessarily mean there will be a wave of such deals.

“I think (RLJ’s situation) was more opportunistic given their stock was punished (for the FelCor deal),” Brugger said. “It’s nice to know private equity firms are thinking about it, but it doesn’t seem like it’s a big trend we’ll see this year.”

Shah said he expects to see “one or two privatizations” over the next year, in part because of the availability of money on the capital markets and because cash deals from private buyers might be more enticing to sellers than the stock deals typically seen for public-to-public deals.

But, ultimately, he doesn’t believe there will be fewer public hotel REITs on the market, because new ones are emerging.

“We’re seeing more IPOs,” he said. “They’re not straight hotel (REITs), but the gaming companies all have REITs now. Things are changing. The players might change a little bit.”

Jon Bortz, president and CEO of Pebblebrook Hotel Trust, said his company is seeing significant interest from private buyers for individual assets.

“We’ve seen a variety of buyers,” he said. “It’s a little deeper this year because of debt markets and a more optimistic view on the economy.”

Brugger said there’s been an uptick in foreign money.

“Of our last four deals, three were first-time Chinese buyers,” he said, noting those buyers came in 10% higher than other bidders.

Cycle worries
Panelists said the prolonged nature of the current cycle is causing some woes among the investment community.

“We’re eight years into the macro-recovery economic cycle, and that’s a long time,” Bortz said. “It could end up being a 12-year cycle, but we haven’t seen many 12-year cycles.”

Brugger pointed to anxiety over the unknown as a problem for the industry.

“The truth is we’re in a difficult business to forecast,” he said, noting the industry is still seeing flat business transient numbers despite improvements in the overall economy and corporate spending.

“We feel like things are steady, but we don’t feel like they’re improving,” Brugger said.

Shah noted he has a sunnier outlook than his competitors and believes there is plenty to believe in throughout the U.S. hotel industry.

“The U.S. has some unique fundamentals,” he said. “We have population growth and have built up urban centers, getting even more innovative every day. … People forget one of the greatest beneficiaries of globalizations are the great cities in the U.S. That gives us a general sense of optimism.”

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