Hotel real estate investment trust executives predict a stronger transaction market in the second half of this year.

The U.S. hotel deals environment has been slower in recent quarters, as the cost of capital and uncertainty over interest rates have led would-be buyers to pull back.

However, REIT executives speaking during their recent earnings calls said that while many investors have been waiting to see whether the Federal Reserve lowers interest rates this year, there are other factors at play that should spur more deals in the coming months.

"So I think there was a fair amount of anticipation among the brokerage community that we would see a pickup in transaction activity as the Fed moved to lower interest rates. We haven't seen that happen yet because of where the Fed is sitting.

"However, I believe that there are some owners out there who will be sellers now because they just can't afford to wait any longer and for a lot of reasons. I mean, they haven't invested in their assets over the course of the pandemic. They may have loans coming due, and they're going to have to refi them into a higher interest rate environment.

"So we're hearing a little bit of chatter that we might see a more active [mergers and acquisitions] market in the second half of the year. That said, we don't sit around at Host and wait for marketed opportunities. We really prefer to continue to work with our long-standing partners [and] relationships that we have, and that's how we got the Nashville deal done.

"You may recall that we also bought the 1 Hotel South Beach from Starwood Capital. So we're very happy that Starwood Capital and Crescent have the confidence and faith in Host as an owner to give us this [1 Hotel Nashville] deal on an off-market basis.

"And we're talking to a lot of other folks out there and I'm hopeful, certainly not assured, but hopeful that over the course of the year that we'll be able to get additional transactions completed. We're in a unique position, and we're going to take advantage of the position that we're in. We don't have to go to the debt capital markets to get a deal done. Even post-Nashville, we're sitting here at 2.3x leverage.

"We have $1.7 billion of available liquidity. The investment grade balance sheet is very important to us. We certainly intend to maintain our investment-grade rating. That said, with a leverage ratio of circa 3x roughly, we have the ability to acquire another $1.1 billion of assets this year. So that is our focus."

"Regarding asset sales, we've sold in all conditions. Think back to the pandemic when we sold two assets in early San Francisco at record pricing in the middle of the pandemic.

"So it's — we're not a distressed seller. We've set a target of at least $100 million in asset sales this year. We're confident that we'll achieve that. We'll be thoughtful about it. Clearly, uncertainty is the enemy of sort of decision-making. And for both buyer and seller until the Fed sort of makes its final decision, we think we all want to believe that the tightening cycle is over. And at some point, the Fed will begin to lower rates. That certainly will help the debt markets. But I think there's so much liquidity out there that you'll start to see, I think, more activity here in the second half of the year on the transaction side."

"I think the uncertainty, and I think everybody continues to wait for what the Fed is going to do. I would tell you, as we started the year, the investor sentiment was pretty strong. I think there was kind of a spring to action.

"I think that, that's somewhat been delayed as people wait for the Fed to pivot. I think that there is debt availability, but the debt is expensive and that's impacting pricing.

"So I still think at this point, there's some pricing discovery out there, but I think that in terms of actual volume of transactions, I think that's going to continue to be somewhat stalled or delayed until we see some real movement in terms of the base rates."

"We were very successful last year with the seven transactions that we had. We generated over $330 million of sales proceeds. Certainly, as we look, as [Thomas Fisher] mentioned, with the Fed keeping the rates up, it's likely to reduce the number of transactions that are going to happen this year, including for potentially us. We'll still be active and look at that, but to just think things are maybe take a little bit slower now given everything that's going on with the interest rates and the Fed."

"I will say is that it's difficult to buy what's really not available to be bought. I would say that there really wasn't a lot of urban product in the market in the last few years that was appealing to us. There were some high-quality product, but candidly, I would say the pricing was a little rich, either per key or on cap rates or [in a place that] really required a strong view on recovery that could be three to five years away.

"I think as [Chief Operating Officer Justin Leonard] and I think about it now, I think we're getting to that point where we're a little later into this cycle that you're starting to see more stress on some of these owners or assets that will probably start to shake more loose in the next six to 12 months.

"I think we look at it very similarly in the way that we think about resource is it's all a risk-adjusted return. The resorts, the benefit they have right now is ... they produce a lot of cash flow today and currently.

"Really from a total transaction volume, we've seen very little change in that area. The bulk of the deals that we're underwriting today are with groups who are exploring a potential sale either because of pending financing, either specific to the asset or their larger portfolio or, in some cases, upcoming renovations. So that has been less of a driver to date than we had anticipated it would be.

"We continue to feel that will bring additional assets to the market in the near term. But total transaction volume continues to be low across the industry.

"If you look at our performance over the past 12 months, we've taken more than our fair share of total transactions and certainly, continue to view ourselves as well-positioned relative to potential competition. With the pullback in our share price, and the relative valuations that we're doing, we also see value there.

"Looking forward, we continue to underwrite a number of potential transactions for assets that we feel would be meaningfully additive to our portfolio. And I think we'll continue to see how that plays out as the year progresses. We're fortunate given our strategy to have a broad palette to paint with. And I think there are a lot of markets where we have interest and a lot of assets that would fit our investment criteria.

"So given the appropriate cost of capital, I think we could continue to be meaningfully acquisitive in the current environment."

"From a capital allocation standpoint, we continue to improve the overall quality of our portfolio and health of our balance sheet, including the disposition of three additional hotels subsequent to quarter end. In April, we closed on the sale of two wholly owned hotels, a Courtyard and SpringHill Suites at the New Orleans Convention Center, totaling 410 guestrooms for a gross sales price of $73 million. The sales price represents a 6.7% capitalization rate on the estimated 2024 [net operating income], including foregone near-term capital expenditure requirements.

"While New Orleans is one of the lagging markets we have identified as augmenting our growth profile, post-asset sales we still have ample exposure with six hotels in the market and believe our remaining assets are better located and have less near-term capital needs.

"We also sold one non-core hotel in the GIC venture: the 119-guestroom Hilton Garden Inn College Station for $11 million at an all-in cap rate of less than 8% on estimated 2024 NOI. In total, over the last 12 months, we have sold nine hotels for a combined $131 million at a blended capitalization rate of approximately 5% inclusive of approximately $44 million of foregone capital needs based on the estimated trailing 12-month NOI at the time of each sale. The combined [revenue per available room] for these hotels was approximately $87, which is nearly a 30% discount to the pro forma portfolio."

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