REPORT FROM THE U.S.—Investors’ expectations for leveraged rates of return finally have stabilized at previous norms.
“I think that expectations are back to where they were back in ‘05, ’06,” said Steve Hennis, director of STR Analytics, sister company of the Hotel Investment Barometer.
“Generally, return on investment is somewhere between 18% to 20%,” he added. “During the peak years, it’s obviously lower. When times are tough, say 2009, it’s probably more in the low 20s in terms of return expectations.”
The most recent “Hotel Investors Gauge” pegged averaged leveraged return expectations at 18.5%. A new gauge was sent to investors this past week, although Hennis said there were not enough responses in to draw any conclusions.
Hennis’ findings are in line with parameters set forth by Hersha Hospitality Trust, according to CFO Ashish R. Parikh.
“On a leverage basis, because as a REIT we’re fairly conservative with our leverage, we would look at (IRR in the) mid teens,” he said.
The Philadelphia-based REIT owns interest in 64 hotels with a total of 9,221 rooms, primarily located in major metro and urban centers along the Northeast Corridor of the U.S. from Boston to New York to Washington, D.C., and Miami.
On an unlevered IRR basis, Hersha targets anywhere from 10% to 13%, Parikh added.
“The times are so volatile that you have to keep unlevered IRRs between 10 and 13 with our cost of capital,” he said, adding those parameters have not changed much during the past few years because of persisting uncertainty.
FelCor Lodging Trust would target at least a 15% IRR on redevelopment projects, according to Stephen A. Schafer, VP of investor relations.
The Irving, Texas-based REIT owns interests in 66 hotels comprising 19,164 rooms throughout the U.S.
FelCor is not looking to bolster its portfolio, however.
“We are currently focused on the final phase of our value creation strategy—reducing leverage, partly by selling assets and repaying debt, lowering our overall cost of debt by refinancing high cost debt, and executing plans on the newly acquired and redeveloped hotels,” Schafer said.
But if FelCor was in the hotel-buying game?
“We would target a 12% unlevered IRR,” Shafer said.