Hotel REIT execs expect deals environment to gradually open

The U.S. hotel transaction landscape has been a challenging one in recent years, with a wide bid-ask gap and high cost of debt giving investors pause.

Conditions are changing, however, and hotel-focused real estate investment trusts see the deals environment improving in the near future.

For commentary from hotel REIT executives on hotel deals and the transaction environment, read below.

"I would say that until the last 90 days or so, really both buyers and sellers have been on the sidelines. The bid-ask spread has just been too great, and everyone was in a wait-and-see mode for a couple of different reasons.

"I think the fact that we're past the election now will clear one hurdle for a lot of people. They'll be able to wrap their arms around what the economic policies of the new administration are likely to look like over the near term. And the debt capital markets have become much more conducive to transacting. Rates have come down, spreads have come in. [Single asset single borrower] financing is available.

"And I think that as we get into next year, you're likely to see private equity get back into the game and come off the bench. There have been some additional transactions out there that we have evaluated. Nothing has risen — has beat the bar for us. And we're absolutely delighted that we were able to complete the four hotels and three transactions that we did earlier this year.

"Our balance sheet is a differentiator, and it will continue to be a differentiator for us. I think that we would have more competition today if those assets were brought to the market. Clearly, there would be because they're all attractive properties, they're all unique and they're all in great locations and one-of-a-kind assets. So that said, relationships and reputation matter and will always, I think, continue to differentiate Host as we go forward. So, our ability to move quickly with no need for financing is always a differentiator for us.

"I expect that over the course of the — not the balance of this year so much but next year probably, I know you hold me to this if it doesn't come true, but I'm willing to go out on a limb and say that at [the Americas Lodging Investment Summit in January], we're likely to hear about additional transactions coming to market because I do think that people have waited a long time. And the good news is that the pressure to sell wasn't there, and that's because fundamentally, the business is very sound and resilient. Yes, we have our little bumps in the road along the way, but it's not like folks are rushing to exit at any price.

"So, I think we'll see an active transaction market next year. And from Host's perspective, we're likely to test the market ourselves with some of our noncore assets to really understand pricing, assets that likely will need heavy [capital expenditure] investments that we just don't see — good hotels but not a long-term fit for the portfolio given the direction that we have moved in over the last seven or eight years in terms of the types of assets we own and really with our focus being on free cash-flow generation as a differentiator going forward.

"So, we're likely to test the market. We'll see what pricing comes back at. If pricing is attractive, we'll sell. If it's not, we'll pull back and invest in the assets ourselves. We'll be hopeful to be able to be a continued net acquirer going forward. I mean, we sit here at 2.7x leverage today. We have a lot of dry powder. And it will either be -- well, it will always be continuing to invest in our portfolio."

“The overall setup for transactions has improved, acknowledging your point about lower interest rates, although we'll see whether or not how much more they are able to come down. The debt markets are open but still expensive, and so despite all of this, the transaction volume remains muted or constrained. Even with this environment of a slightly better setup, transactions are still choppy. They're taking longer to get done, and so the transaction market is not fully functional right now is the way I would sort of describe it.

“While we expect that to improve in 2025, given the fact that hopefully rates continue to improve, we're behind — the election's behind us, rather, supply remains muted and fundamentals remain stable, that should improve the environment, but right now it remains constrained and choppy.”

"From a capital allocation perspective, we remain laser-focused on our strategic priorities to dispose of noncore assets and recycled capital to unlock the significant embedded value in our core portfolio through accretive [return on investment] investments, while also opportunistically buying back stock at historically deep discounts to net asset value.

"During the third quarter, [Park] closed on two noncore assets, the Hilton La Jolla Torrey Pines and the Hilton Oakland Airport. We continue to reshape the portfolio and enhance our long-term growth profile. The sale of Torrey Pines closed in July, generated our pro rata share of gross sale proceeds of over $40 million and represented a nearly 12 times gross multiple on 2023 [earnings before interest, taxes, depreciation and amortization]. Additionally, the transaction helped to further improve our balance sheet with our unconsolidated debt balance reduced by approximately $17 million while net proceeds were used to partially fund repurchase of two and a half million shares or common stock during the third quarter of $35 million."

"There haven't been a lot of transactions out there. That's really been the struggle, I think, the last few years, quite honestly, is there's been, what, $4 billion or $5 billion of transactions each year for the last few years. It's probably 10% of what the industry used to do. And I think when you really drill into that, probably a third of that has been sort of these $400-million- or $500-million-plus transactions. So I almost say the depths of the transaction market is not really all that deep. I think there's definitely been a lot more I'll call it hope in the sense that I think the brokerage community is advertising that they're seeing more activity coming. So it does feel like it's on the verge of changing. I think there's a lot of desire out there to transact for both buyers and sellers."

“Post the rate cut in September, I think we've seen an uptick in interest, particularly from institutional buyers. We've certainly seen more interest in a number of our assets, those assets that we've marketed and deals where we've gotten some inbound interest.

“I think the election and the uncertainty around that also brought a significant amount of uncertainty to the market. And so hopefully, with that largely behind us here, we start to see continued tightening of that bid-ask spread and continued improvement, both in the financing markets and the transaction markets that rely on it.”

"We haven't seen a great number of opportunities that get us overly excited, but we think that's going to change over the next few years. And we certainly would expect to kind of get back to what we have historically done, which is growing the portfolio and growing it with assets that we believe are going to give us greater growth than what the current portfolio looks like.

"What you've largely seen us do in the past is potentially dispose of assets where there may be some [capital expenditure] needs, there may be some other elements that make us believe that the [return on investment] on those — on that [capital expenditure] and the future growth potential isn't quite there. So, we'll continue to evaluate the portfolio in that light.

"It certainly is our goal to continue to upgrade the portfolio over time, upgrade the earnings growth potential of the portfolio. And we think that there will be some more opportunities over the next few years. So just having more flexibility and having the great balance sheet and the strength of the balance sheet that we have is going to be beneficial to that."

“While the overall transaction market continues to be challenging, we have seen a strengthening private market for smaller rooms-focused properties and have been able to optimize that portfolio concentration within select markets through strategic dispositions.

"We continue to actively underwrite additional opportunities and are well-positioned to act where we can achieve attractive yields relative to other capital allocation opportunities.

“Our recent acquisition and disposition activity, along with our share issuance and repurchases, highlight our ability to adjust tactical strategy to account for changing market conditions, and underscore our long and impressive track record of seizing opportunities at optimal times in the cycle to maximize total returns for our shareholders.”

“We do think that while the transaction market hasn't maybe thawed completely, we do think we're beginning to see the signs of a market that's more conducive to transactions. The capital markets have improved dramatically. And I do think that seller expectations, broadly speaking, have adjusted for the condition where rates are today and some of the fundamental uncertainty that we've seen in the business even in the last 60 to 90 days.

"And so, we are — again, we were always — we try to always be active in the market. We try to always make sure we have an active pipeline. But we feel good about the transactions that we've executed to date. ...

"We've always talked about being kind of market-agnostic. I think if you go back and you look at where we've acquired since the pandemic — we've acquired since the end of the pandemic, we've acquired about $1 billion of assets. All of that has either been in the Sun Belt or in Mountain markets. And those assets have performed very, very well, I think where we've seen kind of near-term better fundamental growth.

"And I think the outlook is potentially better in the kind of the near to medium term is in some of these urban markets where we're seeing better growth on Tuesday and Wednesday nights. It's really being helped by the strength of group business and kind of this grind higher in business transient demand as we've described. We do think that those trends will continue to play out over the near to medium-term, and I think that creates some interesting opportunities in some of those markets.”

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