RLJ Lodging Trust’s planned acquisition of FelCor Lodging Trust has some wondering if there could be more mergers and acquisitions among real estate investment trusts.
NEW YORK—RLJ Lodging Trust’s pending purchase of FelCor Lodging Trust remains the talk of the hotel ownership space, and many want to know if it’s a foreshadowing of further mergers and acquisitions.
But hotel executives involved in that real estate investment trust space speaking at the “REITality: Own it” panel during the NYU International Hospitality Industry Investment Conference said they don’t expect that to be the case.
Rob Hays, chief strategy officer for the Ashford group of companies, which includes the Ashford Hospitality Trust and Ashford Hospitality Prime REITs, said he wouldn’t expect to see Ashford make a bid for another REIT after failing in its attempt to acquire FelCor.
“That was a unique situation,” he said. “We’re not going to become the corporate raiders of the lodging REIT world. We’re just trying to focus on where we can create value.”
Hays said talks with FelCor spanned back as far as five years, and Ashford officials saw FelCor’s portfolio as a unique fit with Ashford’s strategy. Other M&A would not be as logical, he said.
“Recently, with the change in leadership there, we thought that was a unique opportunity for us and for them to build a better company together,” he said. “We had very friendly conversations with them, but they didn’t quite proceed as we had hoped. So we thought the best shot we had was to be more proactive, so we took a position in their stock and attempted to take things public, which is unique in our industry. It’s never been done before.”
He said his company was disappointed but not truly surprised by RLJ jumping in at the eleventh hour to get the deal.
“As what happens typically in hostile-type situations, you many times push them into someone else’s arms. And that’s what happened in that situation,” Hays said.
That said, he wouldn’t completely shut the door on possible M&A.
“We are extremely open to additional consolidation opportunities if those come about,” he said.
Consolidation, transaction possibilities
What there could be more of, panelists said, is properties trading among lodging REITs, like the $66.8-million seven-hotel portfolio sale between Summit Hospitality Trust and the nontraded Hospitality Investors Trust, or Summit’s purchase of a five-hotel portfolio from Xenia Hotels & Resorts for $163 million.
Executives from both Summit and HIT spoke on the panel and said those types of deals will be done as they make sense.
Daniel Hansen, chairman, president and CEO of Summit, spoke briefly about the deal with HIT.
“For us there was a unique opportunity to transact, which doesn’t happen very often but it does (happen), as our strategy shifted to higher RevPAR assets in secondary markets and suburban larger markets,” he said. “It created an opportunity for (Jonathan Mehlman, president and CEO of HIT) to grow his platform.”
Hansen said he’s not surprised to hear so many talking about possible REIT consolidation as it seems to be a topic of discussion every year.
“I think I’ve been asked the question every year for the last five years,” he said.
Ultimately, he doesn’t expect a significant reduction in the number of lodging REITs when the dust settles.
“I think there will be some but there are also new companies waiting in the wings to go public,” Hansen said.
One of the things that could get into the way of mass consolidation is investors that call for clearly defined asset strategies among lodging REITs, which could get in the way.
Mehlman said there could be possibilities for REITs keying in on select-service assets to amass greater scale given the assets currently available.
“I think that there is $12 billion- to $18 billion-worth of select-service, upscale type of hotels sitting on the sidelines with private equity shops such as Starwood Capital and Blackstone … that needs to find a home,” he said. “They can’t stay there without finding liquidity.”
He said the REIT space is currently like “Snow White and the Seven Dwarves,” with Host Hotels & Resorts clearly dominating the space in size compared to the other lodging REITs.
Hays agreed that someone will likely arise as the company that dominates ownership in the select service segment.
“I don’t think it’s a question of if but when,” he said. “There will be somebody who is an aggregator of select-service assets on a large scale.”
Hansen noted that people need to remember that the size of a company isn’t everything.
“Size is very important to investors, but so is execution,” he said.
He added that any lodging REIT would have a hard time in amassing enough scale to compare with REITs in other sectors.
“Even a $10 billion portfolio of select-service assets five years from now is still tiny in the public markets,” Hansen said. “That’s really the challenge. Size and scale that is meaningful is $20 billion, $30 billion, $40 billion, $50 billion, which is challenging to amass.”
Hays said that size of portfolio would suffer from a specific strategy in types of brands or geographies, which could ultimately hurt a company.
“The greater specification they can get with greater liquidity they can get, the better (investors) like it,” he said.
Impact of capital markets
Ownership groups are enjoying a period of favorable financing terms, and Mehlman said his company has refinanced $1.2 billion in hotel assets to take advantage of that.
“We have found over the past few months a considerable vibe in the marketplace, especially in the debt markets,” he said.
He said concerns about other real estate sectors, with retail in particular looking shaky, are making hotels look attractive.
“We’re seeing validation in the hospitality sector, especially in the select-service space,” Mehlman said.