Members of the Industry Real Estate Financing Advisory Council don’t believe there’s much more consolidation ahead for real estate investment trusts, but there’s still time left for owners to make deals.
NEW YORK—The acquisition of Starwood Hotels & Resorts Worldwide by Marriott International kicked off this cycle’s round of consolidation. The acquisition of FelCor Lodging Trust by RLJ Lodging Trust has fueled further speculation of consolidation in the real estate investment trust space, but hotel industry experts aren’t so sure.
Members of the Industry Real Estate Financing Advisory Council at this year’s NYU International Hospitality Industry Investment Conference believe that while the RLJ and FelCor deal will go through, they don’t think it’s the start of further consolidation. They do, however, see further transaction opportunities for owners to prepare themselves for whatever comes next.
M&A activity among the REITs
The RLJ and FelCor acquisition will receive its votes from shareholders, said Michael Bluhm, managing director and global head of lodging and leisure at Morgan Stanley, but it will be close. The boards and their management teams had a view on what they wanted to accomplish, he said, but he doesn’t think that overlays to the broader industry. Both companies didn’t have great earnings, he said, and RLJ will now be a greater owner of those poor earnings.
“The stock took a pretty good hit post announcement,” he said.
When asked about Pebblebrook Hotel Trust’s stance on the acquisition, Chairman and CEO Jon Bortz said that type of acquisition wouldn’t have made as much sense for a company like his. FelCor doesn’t have the kinds of assets and locations Pebblebrook has focused on strategically, he said.
Investors have been looking for consolidation, he said, and now they finally have it, but now they don’t like it.
Investors typically like to make their own investments, Bluhm said, making decisions about segment and geography. With this transaction, RLJ has said it’s full-service and limited-service now, he said.
“If you were an investor with a clean exposure to select-service, now that’s changed,” he said.
Mike Goodson, head of hospitality at Abu Dhabi Investment Authority, said he doesn’t foresee the consolidation activity people are expecting to happen. RLJ and FelCor will get done, he said, but that’s it.
“The euphemism ‘social issues’ gets in the way,” he said. “Too many agendas.”
Buying and/or selling
With respect to growth opportunities, there’s a group of REITs well positioned to capitalize on what is predicted to be the next downturn, Bluhm said. There are also some companies that, if they are successful in some strategic moves, will have more value creation than others. Park Hotels & Resorts is working through its balance sheet and making structural changes, and James Risoleo, president, CEO and director of Host Hotels & Resorts, has “an interesting science project “in figuring out how to position Host in the future.
Some REITs are buying, but not every REIT, said Mark Elliott, president of Hodges Ward Elliott. There’s still some international activity, but China and the Middle East have slowed down while Germany has increased. Private equity is more active now than in the last couple of years, he said, and a new category has emerged: Large private offices or a consortium of private family wealth offices.
Pebblebrook’s approach to capital “is not rocket science,” Bortz said. It’s about risk and return at the end of the day, the industry is eight years into the recovery cycle and is closer to the end than the beginning. The company would prefer to be a seller to take advantage of current pricing, he said.
“At least for us, as a potential buyer, it doesn’t provide the returns we’re looking for with the risks we see,” he said.
The company is selling assets in its portfolio and using the capital to bring down leverage to prepare for the beginning of the next cycle, he said.
Hersha Hospitality Trust is both buying and selling, President and COO Neil Shah said, but it will end up as a net seller this year and then reinvest the proceeds in buying certain hotels in certain markets. It’s a challenging time to underwrite hotels, he said, because publicly traded REITs don’t have leverage benefits, so it’s about driving earnings before interest, taxes, depreciation and amortization.
“We bought some this year,” he said. “We expect aggressive (EBITDA) growth for those, but they’re hard to find.”
With independent hotels, there’s often a little more room to run on them if they were not run efficiently in the past, he said.
The highest returns in the industry are through development, Elliott said, and that’s where his company puts its money.
“If you can build a new product in a market of 30- to 40-year-old hotels, you become a category killer,” he said.
Blackstone Mortgage Trust looks to finance in markets with dynamic demand, CEO Steve Plavin said. Suburban hotels in markets without that are difficult to get excited about financing or owning, he said. His company prefers select-service hotels in areas with barriers, he said, but he’s learned there are no barriers to build new, especially in New York.