Transactions are slowing but not stopping, and hotel owners are pondering what that means for financing and the future of the REIT landscape.
NEW YORK CITY—The general consensus out of this year’s NYU International Hospitality Industry Investment Conference is that slow and steady growth will likely characterize the next few years.
Hotel owners on two panels dove deeper into the factors determining U.S. hotel performance today and what that might look like over the near and long term.
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Hotel owners on panels titled “To Own or Not to Own? That is the Question” and “A View from the Owner’s Seat” reached a general consensus that with debt markets stabilizing, hotel transactions are getting back on track.
“Debt capital markets were awful in Q1 and transaction volume was down 25%,” said Tyler Morse, CEO and managing partner of MCR Development. “When there’s a dearth of transactions, sellers get some religion and buyers move up a little bit. As debt markets improve, people get better debt quotes. I think (debt markets) are going to come alive in the second half of the year here, as the big institutional investors are generally speaking increasing their allocation to real estate.”
Daniel Hansen, president and CEO of Summit Hotel Properties, said stabilizing debt markets might bring back some larger buyers in the second half of the year.
“We’ve seen a slowdown in the big portfolio sales clearly,” he said. “We’re still seeing fundamental underwritten transactions, but they’re more one-off small portfolios. Cap rates have largely been very positive, and I do think that because of the industry being so fragmented, there will be transactions.”
Suril Shah, managing director for Starwood Capital Group, said he was “a bit surprised by some volatility in the debt markets,” citing 50-basis-point moves every couple of months. His advice?
“Shore up your lending relationships,” he said. “Go with your relationship bank. When the going gets tough, they’re the ones that help.”
Buyers vs. sellers
Hotel real estate investment trusts in general are net sellers at this stage of the cycle, and hotel buyers on the panels said lenders are being discriminating.
Morse; Mit Shah, CEO and senior managing principal for Noble Investment Group; and Michael Medzigian, managing partner for Watermark Capital Partners, identified their companies as buyers.
“We’re focusing on higher (revenue per available room) assets, and it is the same group of lenders that are active right now,” Medzigian said. “CMBS is not that reliable, and (these lenders) are focusing on quality in different ways as well. Underwriting standards have come in and lenders are being discriminating—that’s a good thing.”
Morse went further and said that flat or low performance can be beneficial.
“I actually hope we get to a zero percent RevPAR growth for this year because it’ll cause a lot of the mice to go back in their holes and create opportunity for those with more appetite for risk,” Morse said.
As for the bid-ask gap perception, most panelists agreed that it’s closing.
“Sellers are getting more realistic, and buyers are stepping up as they get more confident,” said Kirk Kinsell, president and CEO of Loews Hotels & Resorts.
Construction lending outlook
Some owners expressed concern that construction lending was falling off.
“The amount of construction lending we saw six months ago is starting to dissipate fairly rapidly,” Mit Shah said. “And these are larger lenders. It’s something to really pay attention to. It’s been a more recent phenomenon.”
Monty Bennett, chairman and CEO of Ashford Group of Companies, also said he noticed banks pulling back recently on construction lending, “which helps on the supply side,” he said.
Medzigian said he was surprised to see personally how much construction is still happening.
“There is still construction lending out there,” he said. “I’d like to see that spigot slow more than it has, and I think it will.”
Speculation abounded on both panels about the possibilities of REIT consolidation over the short term, and opinions were mixed.
Many speakers said conditions seem ripe for mergers-and-acquisitions activity to come to the REIT space, though capital could be a hindrance.
“It feels like consolidation should happen … it provides access to capital that ultimately can result in positive momentum,” said Nate Tyrrell, managing director of investments for Host Hotels & Resorts. “The lack of differentiation in multiples has been a hindrance though in REIT-to-REIT M&A.”
“These big transactions take a lot of debt,” Bennett said. “There just hasn’t been that capital for the big funds to do those take-privates.”
Mark Brugger, president and CEO of DiamondRock Hospitality Company, agreed that “the math is more difficult in our space,” though he said he expects to see some consolidation activity in the near term.
Morse summed up the M&A future for lodging REITs as “inevitable.”
“The other food groups in real estate have had intense consolidation over the last years—retail, mall, office,” he said. “I think it’s inevitable (for hotels) and should have happened a long time ago.”