Executives of publicly traded hotel real estate investment trusts say they're actively engaging in opportunities to both buy and sell, and the second half of 2024 could bring increased competition for assets as investors have more conviction to participate in the market.

Speaking during the recent round of fourth-quarter and full-year earnings calls, REIT executives said some investors feel "the worst is behind them" and are hopeful that if the U.S. Federal Reserve loosens interest rates after the first two quarters of the year, then more sellers will bring hotels to market.

However, many expressed that they're remaining careful with what the location and types of hotels they invest in.

Thomas Fisher, co-president and chief investment officer of Pebblebrook Hotel Trust, predicts that investors will gravitate toward smaller deals in markets that have recovered from the pandemic as "cash flow and debt yield" are king.

Though not many assets currently listed are of interest to Host Hotels & Resorts today, President and CEO Jim Risoleo said that's not slowing his team down and they are still engaging in conversations with companies "to try to kick deals loose that are Host-type assets."

For more comments from REIT executives about the transaction environment, read below.

"2024 may be a transition year where last year, there was a lot of interest but of lack of conviction. This year, I think it's probably transitioning to a lot of interest but building conviction. And I think part of that is given the fact that investors think that the worst is behind them in terms of that cost and that they can actually underwrite assets and underwrite that cost and hopefully improving debt costs from that perspective. Overall, it's become the market is getting better, but it's getting better from a financing front for cash-flowing yield assets with strong sponsorship.

"You'll continue to see a gravitation toward some smaller deals which, was kind of predominant [in] 2023, and also those assets that are in markets that have recovered, as opposed to those markets that are laggard markets that are still in recovery, because I think both from a lender's perspective and investor's perspective, it's all about cash flow and debt yield today. Then as it relates to our portfolio, I think we're happy with what we've done but we continue to look at and we would engage in opportunities if it makes sense for us for additional dispositions."

"In 2023, we acquired a total of six hotels and an associated parking deck for a total of approximately $290 million. As previously announced, in June, we acquired the Courtyard Cleveland University Circle for $31 million. In October, we acquired the Courtyard and Hyatt House Salt Lake City Downtown together with a corresponding parking garage for a combined total of $91.5 million. We also acquired the Residence Inn Seattle South Renton in October for $55.5 million.

"In November, we purchased the Embassy Suites South Jordan Salt Lake City for a total of approximately $37 million. And in December, we acquired the SpringHill Suites Las Vegas Convention Center for $75 million. We are pleased to expand and enhance our presence within these business-friendly markets that have seen significant economic growth and positive demographic trends in recent years."

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"We anticipate acquiring the Madison Embassy in mid-2024 and the Nashville Motto in late 2025, both following completion of construction. Our patience over the past several years has positioned us to be active in a market with limited competition where we can secure high-quality assets at pricing that meets our internal underwriting criteria."

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"Earlier [February], we sold a Hampton Inn and Homewood Suites located in Rogers, Arkansas, for a combined total of $33.5 million. We anticipate a portion of the proceeds from the sale of these two hotels will be used to complete a 1031 exchange, which will result in the deferral of taxable gains of approximately $15 million. The sales price represents an all-in 8.6% cap rate on 2023 year-end financials, assuming $5.4 million or approximately $22,000 per key in [property-improvement-plan] related capital improvements."

"Frankly, there just aren't a lot of properties that are currently listed for sale. Certainly not assets that would interest Host, but that's really not slowing us down at all. We are talking to our competitors in the industry, to our friends in the industry and others to try to kick deals loose that are Host-type assets. We are leaning on our relationships. We're leaning on our reputation on our ability to close deals all-cash that really gives us a very meaningful competitive advantage. And we believe this is the year to get the balance sheet to work.

"So we're working very hard to find the right sorts of assets to add to the portfolio. The assets that we like are those that have diverse demand drivers. With a combination of group, business transient and leisure. ... Now, I said that there aren't a lot of assets on the market today, but I believe and we believe as a team here at Host that under the assumption that the Fed is going to start loosening interest rates in the second half of this year, that that will spark sellers to bring properties to market and it's going to also spark competition for those assets.

"So our point of view is, we have the balance sheet, we can do it all. We want to get out there and we want to get ahead of the pack. And I hope over the course of the next several months that we're going to be able to tell you that we've been a net acquirer early in 2024."

"We have focused on off-market transactions. Over the last several years, those transactions kind of go on their own timeline based on the individual owner's circumstances. So we continue to maintain an active pipeline of those deals. Given our cost of capital and the discount to [net asset value] of our stock, they have to be exceptional deals and continue to need to be exceptional deals to be able to do them.

"We are actively looking at things now, but we need to be sensitive to our cost of capital. We certainly have the dry powder and the balance sheet to do interesting deals, and we would hope to find one or two transactions this year."

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"Our opinion is the debt markets [will] continue to improve and that rates will be much lower next year than they are this year, or the end of this year. You're likely to get someone to stretch and pay a bigger number for a bigger asset if you have a little bit of patience. Our overall view is while we may test the market, it's more likely that those transactions will occur either at the end of this year, or sometime in 2025."

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"I think the consensus view — and again, I could be wrong — but between both lenders and owners is if you have a quality asset, you're more likely to get a higher price in the market at the end of this year or next year. And I think people are working towards that timeline versus bringing things to market now. There's not a lot on the market now.

"'Worst is first' is certainly a motto for now. The stuff that is coming in, I'd say the distress that's in the market, are really pretty terrible hotels that have things that are unfixable generally; we're not seeing quality assets come to market right now that are distressed."

"As we have discussed previously, we continually evaluate opportunities to optimize our portfolio, specifically trimming our lodging portfolio of lower-performing hotels that have been a headwind to overall [earnings before interest, taxes, depreciation and amortization]. After careful analysis, we have begun to market 22 Sonesta hotels, totaling 2,832 keys, for disposition, including nine Sonesta ES Suites, five Simply Suites, seven Sonesta Selects, and one full-service Sonesta hotel. These hotels have a net book value of $162 million and an aggregate reported negative EBITDA of $4.7 million during 2023. In addition, each of these hotels were slated for renovation in future years, which should reduce our overall CapEx spend. We expect that aggregate RevPAR and hotel EBITDA margins for the remaining hotel portfolio will improve with the removal of this subset of hotels. We also have one other hotel under contract to sell for $3.3 million that is part of our Radisson agreement."

"This is consistent with what the strategy has been over the last 12 to 18 months where we've been able to sell some lower-RevPAR, lower-cap-rate type of hotels, albeit and it's still what is a relatively slow transaction environment. A lot of what we've sold has had pretty significant CapEx needs going forward. I think in the near term, you can expect us to continue to use proceeds to pay down leverage and de-lever the balance sheet. We expect to be a net seller of hotels in the first half of this year, and want to make sure we're in a good position as we continue to make progress [throughout] the year to be positioned to be opportunistic on the acquisition side, as well."

"Keep in mind that uncertainty is the enemy of decision-making. I think part of what we're all waiting for, we believe that the Fed tightening cycle is over. I think we all expect that, at some point, whether you're in three reductions this year in interest rates, or is it four or five or six? You know, I certainly think people are looking for that to re-rate. And certainly would expect the debt markets to continue to open up.

"Banks [have] their own regulatory challenges. But there's certainly plenty of private capital, private credit capital in particular out there. So deals are getting done, albeit at a slower pace. I think in the second half of the year, you'll begin, as we get better visibility, to see that open up. There are a lot of people out there who believe that there's going to be tremendous distress. I think you'll see probably more of that on the office side than I think you'll see on the lodging side. There'll be some assets that need to be recapitalized. But listen, this is not the GFC and what we saw back in that period of time. We'll continue to be thoughtful. We'll continue to reinvest in our portfolio. We think we can generate higher yields there. And the gap remains between our share price and [net asset value]. We'll recycle capital and buy back shares. We're definitely not going to look to raise equity in this in this environment. Right now, given where we're trading, we're hoping that our continued outperformance will get noticed. And that we'll see begin to see that rating and our stock price."

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