With quality urban assets largely picked over, some REITs are expanding beyond their traditional sweet spots to acquire value-add opportunities in major markets.
LOS ANGELES—Hotel real estate investment trusts might go hungry as they pick over what’s left of the top-tier assets in the United States’ primary markets. The majority of quality urban assets have been gobbled up, which is leaving some major players to dip their toes into value-add opportunities, according to a panel of lenders and brokers during the “Transaction trends and the outlook” breakout session during last month’s Americas Lodging Investment Summit.
REITs only have themselves to blame, as they accounted for the largest share of buyers in the top 10 markets coming out of the recession. Most investment trusts typically are long-term holders, which means less turnover and opportunities in the near term, said Daniel Peek, senior managing director for Holliday Fenoglio Fowler LP.
But REITs, many of which are trading close to 52-week highs and boast an uncanny ability to raise additional equity, need some outlet to drive value to shareholders, said Louis Stervinou, managing director of Eastdil Secured.
“There are going to be opportunities where there’s not a lot of cash flow,” he said.
The REITs will stick to the primary markets, however, Stervinou said. And they won’t venture lower than 100 keys per trade. “For them, that’s definitely inefficient,” he said.
By the same token, they likely won’t dabble in turnarounds with more than 400 keys—a size that could prove too large and unwieldy, said Daniel MacDonnell, managing director of Cushman & Wakefield Sonnenblick-Goldman’s global hospitality group.
Those larger assets are usually branded as well, which leaves less upside than a struggling independent property, Stervinou said.
But not every REIT is going the value-add route. Many of the investment trusts are disciplined in their approach and will pass on an asset if it doesn’t check all their boxes, said Kevin Mallory, senior managing director at CBRE Hotels.
REIT speed bumps notwithstanding, the deals market improved dramatically during the past 12 months, panelists agreed.
“We have a great fourth quarter in terms of being able to execute on what we hoped would get done in the fourth quarter,” Peek said.
Uncertainty surrounding the presidential election and the fiscal cliff had “literally zero impact” on HFF’s ability to broker deals, he said.
“It was a great year for all of us on the podium,” Mallory said.
The panelists were less uniform in their experience dealing distress, however.
“It’s also in many ways the end of distress,” Peek said. While 80% of HFF’s sales volume was some form of distress previously, that percentage dropped to 20% during the past two years, he said.
But MacDonnell said Cushman & Wakefield will see more real estate owned volume this year than in the past as lenders continue to get aggressive and move hotels off their balance sheets.
“People were thinking 2011 would be very much a distressed-driven sale market, but it didn’t materialize,” he said.
“A lot of it depends on the size of the deal and the market,” Stervinou said.
When asked to characterize the pace of transactions during 2012, Mallory said “robust,” while Peek said “unexpected.”
The speakers agreed that 2013 will bring more progress, with Stervinou predicting the deals market would be “surprisingly active (with) a lot of transactions big and small.”
But deal activity could be curtailed from an unlikely source—the ease and availability of financing, Peek said.
“The financing market has become so efficient and attractively priced that the competition for the acquisition market is the financing market. We’ll see more situations in ‘13 that will probably go to market for sale that may in fact end up being refinancing,” he said.
Still, he expects the year ahead will show “progress with promise.”