Tax reform, strong stock prices for publicly listed companies and the easy ability to refinance have changed some dynamics in the hotel industry, according to experts speaking during the recent Lodging Industry Investment Council meeting.
NEW YORK—Leverage has clearly shifted to the side of sellers in the hotel industry, according to members of the Lodging Industry Investment Council.
During a recent meeting held in conjunction with the NYU International Hospitality Industry Investment Conference, LIIC members said several dynamics are feeding into the current climate for transactions, including the ability for hoteliers to refinance at favorable terms instead of trading assets.
Mary Beth Cutshall, SVP and chief business development officer for Hospitality Ventures Management Group, said her company has purchased 15 hotels over the past six months. She said right now it’s a matter of keeping in tune with opportunities and being persistent.
“We hang around the hoop and see value sometimes that other people see or don’t see,” she said. “There’s a little bit of competitiveness. Some of the properties we’d been working on since the end of summer or last October but didn’t transact until April.”
In an informal poll of the LIIC members, not one called the current environment a buyers’ market. Instead, members either labelled it clearly a sellers’ market or a neutral market due to the favorability of refinancing.
Wall Street dynamics
The hotel industry currently is seeing major impact from the strength of hotel companies’ stock prices.
Initially, the C-corps saw a strong boost in relation to U.S. tax reform, but hotel real estate investment trusts have also been buoyed lately, noted Michael Bellisario, VP and equity research senior analyst at Baird. He said the performance of hotel REITs has largely been driven by investors moving out of longer-lease real estate classes.
He said investor optimism in hotel REITs could also be tied to signs of strong private equity interest in those assets, as evidenced by Blackstone’s pending deal to purchase LaSalle Hotel Properties.
“There’s been a big move for REITS tied to that shift in sentiment,” he said.
The ultimate fate of the Blackstone-LaSalle deal is still unclear as fellow hotel REIT Pebblebrook Hotel Trust continues to aggressively pursue LaSalle and its assets.
While some have pointed to the shared shareholder base of Pebblebrook and LaSalle as a sign that merger might be more likely, Jonathan Falik of JF Capital Advisors said it might work out as a negative for Pebblebrook.
“If you’re an institutional investor in both, then all of a sudden you may be overexposed and may not be as happy with that combined group,” he said.
But overall, the fact that Blackstone is interested in a public hotel REIT is seen as a positive for REIT valuations, Bellisario said.
“People are seeing Blackstone get aggressive, which they hadn’t been (in the hotel space) since selling Strategic (Hotels & Resorts to Anbang),” he said.
Bellisario said the increase in stock prices for REITs portends a strategy shift away from stock buybacks and into purchasing high-quality assets, which further bolsters the argument that it’s currently a seller’s market.
“Management teams are switching from capital recycling to an acquisitions mindset,” he said.
Host Hotels & Resorts, for example, recently spent roughly $1 billion on a set of three Hyatt Hotels Corporation properties.