PHOENIX—Real-estate investment trusts are leading the wave of transactions that has swept through the U.S. hotel industry in recent months.
Much of that has to do with the surprising quality of assets hitting the market. While the numbers are nowhere near what they were during 2006 and 2007, the swell during late spring and throughout the summer was surprising, panelists said during the “Red-hot REITs” panel at the 2010 Lodging Conference.
“I’ve been surprised to see just more and more single, institutional-quality assets hit the market,” said Neil Shah, president and COO of Hersha Hospitality Trust.
But REITs as leading buyers? It makes sense, Shah said.
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Michael Barnello |
“It speaks to our conviction,” he said. “REITs are true hotel owners and operators.” It’s also a matter of capital. While there are billions of private-equity dollars still sitting on the sidelines, REITs have better access to cash, can close quickly and are typically comfortable with the results, said Michael Barnello, president and CEO, LaSalle Hotel Properties.
Cash isn’t a prerequisite for deal-making, as debt financing has loosened up considerably in recent months. A checkbook does prove a knockout punch, however; to this point, LaSalle and Hersha have conducted only all-cash deals.
Dry powder
REITS aren’t the only players in the transaction market. A handful of private equity firms have been very active, Shah said.
And if they aren’t active yet, they’re bound to be sooner rather than later.
“There are multiple private equity funds out there with $1 billion plus dollars of dry powder,” said David Gutstadt, executive director of Morgan Stanley’s investment banking division.
For now, most of that powder has been percolating, waiting for a better selection of assets to hit the market. They are coming, the panelists agreed, as debt maturities loom ever closer. For now, though, the quality assets that are available have created some unexpected competition.
“You’re seeing some aggressive cap rates and you’re seeing some transaction activity, but this is just the leading edge,” Gutstadt said.
Shah doubts REITs will be able to compete with the approximately US$7 billion in private equity that’s ready to pounce, however. Thus, REITs are better to be on the front edge than caught in the ensuing free-for-all.
Rate of recovery
Improvements in the transaction market aside, recovery in the U.S. hotel industry is tied to a number of macroeconomic factors that lie outside of hoteliers’ control.
“The rate of the recovery boils down to fundamentals of (revenue per available room), which is going to be driven by corporate and consumer confidence, which is going to be driven by a whole bunch of macroeconomic indicators,” said Michael Hardisty, managing director of Paramount Lodging Advisors.
“Consumers are in a balance sheet clean-up mode where they’re really focusing on savings,” he added.
Barnello shared a similar sentiment. “Our industry is driven by (gross domestic product), job growth, corporate profits and consumer confidence,” he said.
Lest attendees leave the panel feeling weak and helpless, Gutstadt made an optimistic observation.
“Unlike so many other sectors … you didn’t see any of the public (hotel) companies go bust,” he said. “It’s a testament to a little bit of foresight in prior cycles to see the juxtaposition to how well the public guys weathered (the storm). … The hospitality industry is coming out of this pretty well.”